FullContact Is Solving The World’s Contact Information Problem

Innovation begins with divergence. As entrepreneurs develop new products they challenge the status quo by diverging from the old business model. While this iterative process is positive it can also lead to fragmentation, ultimately, causing confusion for the user. Every once in a while a product will diverge from the old business model and invent something that makes the user’s life simpler, converging the fragmented landscape. Evernote is a great example. Before Evernote my notes were scattered in various places and were in different formats.Today, my notes are located in one place, tagged with meta data and accessible on any platform.

I now have my notes are in order, but my contacts are a complete mess. I have different groups of friends/contacts on my various social networks, contacts on my phone, gmail contacts, work contacts, personal contacts, family contacts. In addition to these being inaccessible across networks my contacts have out of date information, mislabeled, duplicated and more. FullContact is solving the world’s contact information problem. They are building a web app which will allow me to take back the ownership of my contacts through convergence, making my life simple and organized. I love it. But the team isn’t only building an organizational tool. They have much, much, bigger plans. They have plans to build the technical infrastructure that changes the game.

I met Bart, Dan and Travis in early 2011. They were pitching Who Sent it, an email enrichment that relied on identity resolution. Chris Marks and I liked the idea but we had no idea of the technical difficulty involved in building the infrastructure. Bart often talks about the problem as “schlep blindness”. We really liked the founding team, they had a complementary yet diverse skill set combined with a passion to solve a really hard problem. Fast forward 6 months, the passionate trio was nearing TechStars graduation and had recruited a handful of School of Mines talent to build some solid core technology. In addition they were able to clearly express their business model and the disruption it brought to the market. The team re-branded the company to FullContact, raised their Series A (or series API as Bart likes to call it) with HCV as the lead, and didn’t look back. Over the next year the FullContact team has gone on to build some pretty impressive, cutting edge, technology that has the capability to replace the contacts app on our phones, desktops and CRMs. The API offering went live in January and the team learned a ton from the customers. In a few weeks, FullContact will launch the web app which will provide a viable solution to anyone with a contact management problem (aka. everyone). sign up for beta!

In short, the FullContact team has hit several product and business milestones which resulted in closing a Series B round led by Foundry Group. I’m excited announce our participation in this financing and would also like to welcome Foundry Group as an investment partner. We’ve co-invested with Foundry before, and we are excited to continue the relationship.

Congratulations to Full Contact team on raising the Series B round! I look forward to continuing the journey.

How Clean-Tech Innovation Differs From Software Innovation

This past Friday I drove up to Ft. Collins to check out the entrepreneurial scene in Northern Colorado. I did a quick tour of the Rocky Mountain Innosphere, which is a non-profit formed to accelerate the success of startups in the region. The Innosphere has hired new leadership and will be a meaningful resource to the entrepreneurs in the area. I plan to keep in touch.

The hidden gem of the trip was the tour of the CSU Engines Lab. Lab Co-Director Dr. Morgan DeFoot gave us a fascinating tour of the lab and showed us some of the intellectual property that was developed at the facility. More specifically, it was interesting to see how innovation in clean-tech differed from that in the software world.

Incremental Efficiencies vs. Market Disruption

As someone who invests primarily in software, I’m always looking for the product and team that is going to change the market. Market-changers are few and far between, and most of the time I get pitches focused on building a slightly different, yet better mouse trap: “Foursquare with automatic check-ins”, “Pinterest for pet lovers” or whatever other improvement you can think of. At High Country Venture we try and steer clear of software with incremental technology.

On the other hand, the CSU Engines Lab is all about creating efficiencies to the current infrastructure. A slight change in the efficiency of a disel engine can be worth billions in cost savings and have a significant environmental impact. Unlike software engineers who start from a blank slate these engineers are improving the current system. While this may not work in software, it’s a great model for clean-tech.

Why Does Incremental Innovation Work in Clean-Tech? 

It really comes down to distribution and switching cost.

The massive distribution of the energy markets makes an incremental changes extremely powerful. The folks at CSU Engine Lab are laser focused on use cases with large existing network, ultimately making a huge impact with one modification.

When it comes to physical infrastructure it is more efficient to improve vs replace. Financially speaking, physical infrastructure has already been recorded under capex and amortized over a set of years. What this means is that there is a specific lifecycle for things like engines, and most companies will elect to repair over replace. This means that retrofitting the existing infrastructure will have more of an immediate impact than attempting to build a new network. We’re talking about the switching cost. This is very different from the software world, where the switching cost from Sugar CRM to Salesforce only takes a few man hours.

A Clearly Defined Problem

Unlike software development the engine has baseline metrics and the sole purpose of the engineer is to improve upon these metrics. This requires a lab like atmosphere where you tweak, test, find a new solution, test, improve, test, change and test some more. Although software is becoming more data driven through Agile methodologies and A/B testing, the problem is less direct and it can often be interpreted differently. When seeking increased efficiency the mission is straight forward and success is almost binary. An engineer at the CSU Engines Lab needs to ask themselves “Have I improved efficiency by 10X?” If the answer is no, keep working.

CSU Engine Lab

Dr.DeFoot and his crew are an impressive bunch. They’ve made modifications to the large engines used to pump natural gas that had cost savings worth a billion dollars. They are researching the use of lasers in engines to increase efficiency. They’ve designed a low cost stove to reduce harmful emissions in the 3rd world and distributed it to millions across the world. They’ve built a test electrical grid used for simulating different power sources and so much more. The Engines Lab is arguably the state’s most impressive research facility for clean-tech innovation. Congratulations to the team and the progress.

The CSU Engines and Energy Conversion Lab‘s mission is to create innovative energy solutions and entrepreneurial models which benefit the human condition and achieve global impact.

Don’t Panic, Software is Still Eating the World. Time to Rethink Everything.

Facebook is $11.50 down from it’s opening price of $38.00. Fred Wilson wrote a great post with some perspective on the enterprise value of FB and how it’s value is appropriate based on the revenue and EBITA multiples. Paul Graham has also written a memo on the Facebook Fallout, which states that the Facebook IPO will lead to a difficult fundraising environment. I don’t disagree that the FB could have an impact on valuations in the later stage and secondary markets (per Fred Wilson), and I also believe that the effect will trickle through the market and have the biggest impact in the very early stages. The market has been frothy for some time, and a correction is expected. On the other hand, the “Facebook Fallout” will have next to no effect on the capital allocated in institutional rounds. Here’s why:

VCs invest consistently over time.

VCs worth their salt don’t try to time the market. The “flippers” who are looking to make  investment and sell quick aren’t real VCs and won’t be around for long. A true VC will take an active role in it’s portfolio companies and help build it into a company of value over. It takes several YEARS of value creation before an exit is feasible, making it impossible to time the markets. Fred Wilson has written a good deal about a consistent investment strategy.

VC dollars are close to equilibrium

VC fundraising is also up. In 2011, 181 funds raised $18.8B, compared to 2010, where 170 funds raised $13.8B. These VC firms will be looking to allocate this new capital over a 3 to 5 year period. It’s arguable but there is some indication that the equilibrium number for VC dollars raised and allocated is just under $20B/yr. Given the current level of activity I don’t foresee a huge disruption in the amount of dollars raised and allocated by institutional firms.

Why will there be lower valuations? And what is Paul Graham talking about? 

Valuations in the IPO and secondary market may be adjusted based on the Facebook market value. These lower values will force down values in the prior round which will eventually trickle down to the early stages. But it will be the angel round that takes the biggest blow as the number of active angel decreases.

Angels invest their own money, usually on a part time basis. Unlike a VC, who must allocate capital within a specific time frame, an Angel has no requirement to make an investment. When the market is “hot” and angels are getting big mark ups on subsequent rounds they invest more. The increase in activity has been prevalent over the last few years. Accoring to Jeffery Sohl, director of UNH Center for Venture Research “The significant increase in total dollars, coupled with the rise in the number of investments resulted in a larger deal size for 2011.” The cycle of angel investment activity unravels fairly quickly when a catalytic event occurs that resets market prices. This what Graham means when he says the markets are going to tighten up.

What should you do?

If you’ve raised money at a valuation higher than the upper end of normal, or skipped a step in the start up process, shame on you. There isn’t much you can do, you can’t control the market. But this doesn’t mean you should give up, it simply means you need to continue to build a company of value. The price of Facebook isn’t going to affect the execution of your startup or the happiness you deliver to your customers. Focus on building your business, hit your milestones, acquire new customers and prove out your business model. There is no need to panic, software is still eating the world, time to rethink everything.

Peer To Peer Is Here To Serve You

2012 is said to be The Year of the Peer to Peer, and we are off to a great start. Every week I see a new peer-to-peer startup that is trying to capture the overcapacity in market via the “Airbnb business model” (also known as The Sharing Economy or Collaborative Consumption). This new breed of startups consists of everything from loaning money to purchasing imported candy. Why have these sites been created? Why now? And what are the attributes that make a good one?

Efficiency and social are at the heart of the sharing economy. If I have a fixed cost for something (empty office space or an empty seat in my car), I can receive incremental benefits by using the excess capacity. Since we are all socially connected on the marketplace, it’s much easier to find buyers for our offering. The peer-to-peer model is ingenious and works great for certain transactions, but is prohibitively difficult for others. Here is a list of the core components to launch a peer-to-peer marketplace.

  • Third Party Product and Economies of Scale
  • User Reputation
  • User Acquisition: Both Supply and Demand Side
  • User Experience
  • Physical Hurdles to a Transaction

From a technical aspect, standing up a marketplace is as easy as ever. This is primarily due to the vast number of third party technology services that lower the barrier to entry. In addition to the infrastructure as a service companies (AWSSoftlayer etc), services like Legal Zoom and Stripe make it easy and affordable to have professional solutions without getting too deep into the details. In addition to the low startup cost, your marketplace will standardizing the transaction process, bringing economies of scale and the burden of startup costs down to pennies per transaction.

eBayCraigslist and Amazon have paved the way with the consumer. People feel comfortable buying from strangers online, especially if there are some positive reviews or a reputation score. I realize that this crowd-sourced information is far from flawless, but I do believe that it solves the “Craiglist effect”, where every 2nd person is a scammer. If the marketplace owner adds some additional policing/guarantees in addition to the reputation score they will solve for the majority of the bad players.

Acquiring the critical mass of users is the hardest hurdle to overcome in the early stages. How does one ignite the supply side without any demand side and vice versa? How can one build a market that is dense enough to attract new users? Various tactics can be used depending on the offering, but it usually involves some type of viral game mechanic (credit for friends), geo-fencing (only available in Boulder/Denver) and/or seeding inventory.

Your success and the low technical barriers to entry will cause co-evolution in the space, aka. the rise of the copy-cats. These new entrants are trying to steal your market share and will create a lot of noise, confusing the consumer. Sure, you have the user today, but the new entrant is touting lower fees or some other incremental benefit. Basically, your offering has become commoditized, and it’s going to be hard to increasingly hard to differentiate. The best way to combat the copy-cats is through User Experience. This is the end-to-end customer experience. In the business model canvas it’s the customer relationship square. This is where most marketplaces fail because they don’t put in the hard work to understand the details of the transaction. Brian Chesky says it best in his interview, Airbnb.com: Necessity Begets Creativity:

I think that industrial design is all about user experience. You become a user, you become your own guinea pig, you learn to observe the world. It’s important that you put yourself in the shoes of the user and really use the product. I literally live in Airbnb.com…. Understanding nuances and learning how to empathize with our users. Also, improving the UX of site. As an industrial designer, you just have to consume it, you have to live it.

Since the marketplace is facilitating a peer-to-peer transaction, part of the customer experience is beyond your control. If a transaction in your marketplace has significant physical hurdles it’s going to difficult to succeed. An example of a physical hurdle is the transaction size: if an item is priced too low, it’s not worth the physical requirements (shipping cost, meet up, pickup etc.). Most of us have experienced a Craigslist sale where the buyer shows up 1hr late to buy a $10 item then he haggles you down to $8, or the hassle of packing and shipping a book on eBay for a whopping net gain of $3. Precise timing is another example of a physical hurdle that can hurt the user’s willingness to transact. In a ride-sharing marketplace people are very sensitive to the physical coordination required to fulfill the transaction, a 30min wait makes the ride share an inconvenient option.

When you get into to the details of the marketplace you begin to understand that excess capacity doesn’t always equal a market need. You can leverage third party services, seed the marketplace and be off and running in a few weeks. In the long run the difference maker is going to be the customer experience. It requires detailed planning and tight internal processes that enable your company to execute on the offering. The winning company will create raving fans. This involves thinking about everything from site design to the transaction process. It’s hard work and nearly impossible to replicate.

Before you launch your new a marketplace ask yourself if you want to build customer service company. Are you willing you willing to live it?

Baking Excess Genius

I recently read an article called Cultivating Genius in the 21st Century in Wired Magazine. The article references what statistician David Banks terms, excess genius.

It turns out that human geniuses aren’t scattered randomly across time and space. Instead, they tend to arrive in tight clusters…talent clots inhomogeneously…. The secret, it turns out, is the presence of particular meta-ideas, which support the spread of other ideas. Meta-ideas include concepts like the patent system, public libraries, and universal education.

The article then comes up with a blue print for the 21st century:

  1. The benefit of human mixing, which allowed a wide diversity of people to share ideas.
  2. The importance of education…. we need to encourage rampant experimentation in the education sector, whether it’s taking the Khan Academy mainstream or expanding vocational training. 
  3. Development of institutions that encourage risk-taking.

It’s interesting to examine how the use of technology has reduced the geographic barriers to create excess genius. One would assume that the use of daily tools to spread meta-ideas should dismiss the idea that “clotting” will continue to occur.

The blue print states that human mixing and sharing ideas sharing ideas is key. In 440 BC people had to be in the same place to share ideas. It’s obvious that technology has completely reduced the barrier discover and express new ideas. According to PEW Internet, the average user of social networks has a reach of 150,000 people. In addition to the various social networks (now over 200 with significant density), we now have multiple ways to communicate directly (Phone, Email, Text, Skype, Apps like HeyTell, Voxer and more). Lastly, we have asymmetric relationships to share ideas on Twitter, WordPress and Tumblr. Technology has allowed us access to a plethora of information and opinions. The presence of meta-ideas are everywhere, in the information economy it’s more important filtering the noise down to the ideas that matter.

If you have been following the startup world you’ll have noticed that the education sector is in serious reform. In April alone, VCs invested $72mm in tech companies aimed at disrupting the traditional educational model. Companies like Boundless, The Minerva Project, Codeacademy, Knowledge Factor, Lynda and Coursera are leveling the playing field, making educational tools accessible by anyone, anywhere, anytime.

The last point in the blue print is the development of institutions that encourage risk-taking. I would argue that our society accepts and forgives people who have taken a risk but have failed. Most of you have heard that it’s okay to fail as long as you fail fast. Agile development is a framework based on the assumption that you need to fail in order to understand. I’m don’t think there is a tech platform that encourages risk-taking but the framework of the lean startup movement encourages people to take action.

There is no question that technology has flattened the horizon, making us connected and informed. If meta-ideas can be conveyed through the use of technology vs. geography, one would assume that the “clotting” effect should cease to exists. Yet, entrepreneurial clusters are still forming and growing. Colorado is a great example, our small cluster is now ranked 4th for early stage VC investment. I believe that the items in the blue print are only a few of the ingredients needed to fully bake excess genius.  Clusters are continuing to form because of the other, geographically bound ingredients, that are required to bake the cake. These include community support, mentorship, competition, positive feedback loops and dozens of others.

What do you think the ingredients to excess genius should be?

The Startup Process

I meet with new startups everyday, it’s what I do. Every week I hear at least one pitch where the founder is trying to raise a large sum of money in the early stages of the startup process. The conversation usually sounds something like “we are skipping over the angel and seed round and raising a Series A of $3mm.” The amount of the raise is heavily correlated with the pre-money value of the company, which is correlated with the amount of risk in the business model. Early stage companies a have higher risk profile and a lower pre-money. A company in the early stages should seek to raise an amount that minimizes the dilution but allows the company to achieve the milestones necessary to raise a follow on round. A startup is a process and has a method that should be followed, skipping steps today will only increase the likelihood of future problems.

The purpose of this post is to go through run through lifecycle of a startup and correlate the capital raise with the stage of development. The secondary goal of this post is to use the Cynefin Framework to model each stage and illustrate the operations needed to achieve a scalable business.

The are are 4 quadrants/ontologies in the framework, Chaotic, Complex,  Complicated and Simple. To get up to speed on Cynefin watch this video or go to the Cognitive Edge. The framework has traditionally been used for Agile software development but over the past few months I’ve been using it to think about scalability.

BootStrap

This is purely the ideation stage. It’s where you and your 2 to 3 founders identify a problem or market opportunity. The problem begins in the Chaotic section of the Cynefin Framework. Your team will spend most of its time white-boarding a hypothetical solution to the problem. The first cut at solving the problem is usually pretty rough, (turbulent and unconnected) but you hack away, iterating on the approach, until some form of the product is manifested. This is a paper version which is articulated in wire frames mission statements, or a business model canvas. Since your entire team is working on the same project scalability isn’t an issue. 

Friends, Family and Fools

The product and the business model have been mapped out and you can articulate the vision. You start getting out there to see if your value proposition connects with customers. It does, and while your mom is not a valid test market, she still decides to invest. She gives you $20k to get you through the next couple of months. The majority of the problem is still in the Complex Quadrant with many unknowns and variables, but your team is able to distil the big idea into a minimum viable product (MVP). The MVP prototype allows you to test some assumptions with your target market, think clickable wireframes. This effort aims to reduce the number of variables by probing the market, sensing for input and responding with a different test. This phase is also known as the customer development cycle.

Your team has done several iterations and has nailed the prototype. It’s been a long haul but it’s now finally time to start laying the first lines of code. You and your co-founders spend the next month or more building out the MVP prototype. You finish and launch in private alpha and start collecting user data.

Angel Round 

Your initial code has served you well. Customers like aspects of your product but have uncovered some significant issues with the user interface. Thankfully the basic value proposition is solid. A few tweaks here and there and you think you can get the core product to market. You are ready for some Angel money and you raise $300k on a convertible note that converts into the Series Seed round. You work with an entrepreneurial law firm to roll the Friends and Family money into the note, which brings the total value to $320k. You and your team are still working out of the same room, but you find that using tools like Pivotal Tracker or Agile Zen are helpful to get everyone on the same page. Much of the problem is still complex but parts of it are moving to the complicated region.

Series Seed

Congratulations, the hard work you’ve done to date has paid off and you’ve launched your core product publicly. It’s officially for sale, you begin to test a small vertical in the market. Of course this product is only the tip of the iceberg, the grandiose vision isn’t built yet, but the data points you are receiving from the market are positive and you feel like you are on to something big. An early stage institutional investor also believes in what your company is doing and you raise $1mm. The $320k note converts into the round at a 20% discount. With interest the total dilutive capital is $1.39mm. You use the  $1mm of new money to hire a couple of developers, a sales/marketing guy and an undergrad to help with admin. The team of three has now doubled in size and you start relying on documentation to keep the internal team aligned and the investors informed.

While there are still chaotic, complex and complicated parts of your business, documentation allows you to simplify some of the basic tasks. This frees up your time to make the most important business decisions while keeping tabs on the operations. This is the first step in building a scalable machine. You begin the process by expanding the business model canvas into a List of Objectives. These are your value drivers, imperatives, branding etc.  The Objectives guide the Product Roadmap which conveys the value proposition to the end user and differentiates your product from the List of Competitors. The Key Performance Indicators tell you about your customer’s perceptions and allow you to adjust the Product Roadmap. The Financial Reports allow you to understand the economics of the business model and your capital requirements which ultimately affects your Organizational Structure.

Series A

You’ve moved your core product offering forward and your solution is compelling. Although you still have some additional features you want to add to the core product, it is pretty solid (the majority of the product risk has been mitigated). On the other hand your “real” product just launched and you still haven’t fully tested the market. The customers in your small vertical love the product but you haven’t marketed it to the full set of potential customers. Your Series Seed investors love the progress you’ve made and think the company is in a good position, and decide to follow pro rata in the Series A round of $3mm. You spend the bulk of it on user acquisition and marketing, hiring a full sales team. The team creates a Sales Funnel Model which reports deals closed, deals in the pipeline and the ROI on your marketing spend. You gain a few customers, do some analysis and realize that your initial distribution strategy was wrong and your pricing model was a little off.  You go through a few iterations and end up figuring out something that resonates with the large market you are trying to capture.

Series B and Beyond

You’ve got the product’s functionality down, the market is starting to pull and you simply need to add fuel to the fire. In order to keep up with the market demand and scale the larger team you’ve used structured documents to move your Chaotic, Complex and Complicated problems into the Simple Quadrant. You’ve succeeded in creating an organized scalable company. But this is only the beginning, you will require some growth capital to put your stake in the ground and own the market. Time for a bigger round of $5 to $20mm to improve the product and win the space.

Conclusion

  1. During each stage of development you reduce then amount of risk in the business and thereby increase its value. As a founder you want to minimize the cost of money by raising an amount that is correlated to your risk profile. Raising a Series A round when your business has a Friends and Family type risk will alter the financing lifecycle and has the potential to complicate financing the business in the future.
  2. Operating  an early stage business is much different than operating a mid or later stage business. As you grow leverage the use of documentation to move problems from the Chaotic/Complex Quadrant to the Simple Quadrant.

Scoring The Best Deal

The Stanley Cup playoffs have started! I truly love this time of year. To get in the spirit of things, I put on the blades and played a little pick up this week. I played goal in college but I’ve since retired the pads and now skate out. As a goaltender you are in a supporting role and your job is to react to what happens in front of you. As a forward you get the puck and take the play to the opposing team. It’s key to make smart decisions on the offensive attack, the best way to do this is to create options. Creating options takes work, it involves skating the puck, fancy stick handling (also known as dangling) and faking out the opposition. I’ve recently discovered how to be patient with the puck; faking a pass and taking two strides will often open up a new set of opportunities that are often much better than previously available. The point here is that with a little effort I’ve improved my position by creating a better set of options and ultimately improving my chance to score. This translates well to the world of business; to score the best deal you need to create options.

If you have taken a negotiation class in business school I’m sure you are familiar with the term BATNA (Best Alternative to Negotiated Agreement). What’s implied in this acronym is that you have an alternative, but it doesn’t mention that GOOD alternatives need to be created and creating them takes hard work. The first thing you should do when you receive an offer is convince yourself not to take it. Convince yourself that your company is worth more or your salary should be higher and keep pushing. It’s the key to getting the best deal. When you’ve worked hard to get your business or your skill set to that culminating point, it’s much easier to say “Yes, I’ll take it” versus “I’d like to take some time to consider the offer” and proceed to sell more customers or find new suitors to improve your position.

It takes years of hard work to grow your business to get it to the point where it can raise significant institutional capital or be sold to an acquiring firm. When you receive what appears to be a “good” offer it’s easy to take your foot off the gas pedal, but I urge you to keep pushing. Take two strides into open ice and see if you can create some options. I think you’ll be happy with the end result.

Venture Capital vs Wall Street, A Quick Comparison Of The Economic Impact

Cover of "Liar's Poker"

Cover of Liar's Poker

I read Michael Lewis’ book Liar’s Poker this weekend. It was an interesting read, the book was published in 1989 and was about Michael Lewis’ experience as a bond trader. It went through the creation of the first Mortgage Backed Security, the formation of Junk Bonds and the first Leveraged Buy Out. Lewis doesn’t hold back when he describes his perspective of life on Wall Street, he talks about the Culture, the ridiculous amounts of money managed by relatively in-experienced traders and the bank-client relationship. In the end, Lewis ends up defining the culture of Wall Street with this statement: “When you sit, as I did, at the center of what has been possibly the most absurd money game ever and benefit out of all proportion to your value to society, when hundreds of equally undeserving people around you are all raking it in faster than they can count it, what happens to the belief in money?”

I’d like to think the Venture Capital industry has a better contribution to society than the financial industry as described by Mr. Lewis. Some people refer to VC financing as Vulture Capital or compare it to Loan Sharks, and while I’ll be the first to admit that VC funding is expensive, a VCs equity investment in the future of a portfolio company presents an entirely different structure and relationship than that of a Wall Street middle man and his client. Lewis also describes the bond market as a “Zero Sum Game“, while VCs align themselves in the best interest of the portfolio company by funding entrepreneurs with passion to change the world, hardly a Zero Sum Game. High Country Venture Fund I is an example of how a fund can help the economy grow; I’m proud to say that the companies we’ve funded in Fund I have created over 400 jobs in the state of Colorado (Our second fund is still growing but still has created over 100 jobs to date). One may argue that the amazing entrepreneurs we’ve funded would have created these jobs regardless of our participation, but I’d like to think that an investment with our firm brings more than just capital to the table. I believe that having the support and experience of the right institutional investor can help mitigate some of the growing pains a young company may encounter.

Most people cite connections as the primary reason they work with a VC. This is certainly part of the equation, but in the early stages of a companies lifecycle I think strategic direction is a key part of the partnership. An experienced VC has seen startups win, lose, struggle, he’s seen up-rounds, down rounds, good economic times and bad. To put it another way a VC’s sample size or “n” is larger. Most funds will make 10-15 investments over the first 3-5yrs of the fund. When the capital for the current fund is fully committed that same group of partners will raise a new fund and do it all over again. As the institutional knowledge within the firm accumulates the VCs have a higher value add to their portfolio companies. The High Country/Tango management team has been making early stage investments since 1998 and the institutional knowledge is deep. Compare this exposure to an entrepreneur, who has an n of 1.

Overall, I believe in the value creation of the Venture Industry supersedes that of the financial industry. While I do think there are some great and ethical people who work in finance, I don’t think the industry as a whole is aligned with the broader economy. Conversely, there are some bad players in the Venture Industry, but I feel that the best VCs are people that are passionate about supporting entrepreneurs who are transforming markets and creating lasting value. A clear win for society.

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Tips on Getting a Job in VC

There is no doubt about it, getting a job in Venture Capital is an uphill battle. For every job opening in VC there are hundreds of applicants and the competition is fierce. In short, VC firms are looking for an applicant with a network, startup experience and, despite what some say about MBAs, a good education. I’m often asked for advice on how to get into the industry so here are a few tips on navigating the unmarked road to a job in the venture business.

Tip 1: Know where you want to work. Job seekers often bucket early stage VC and Leverage Buy Out firms together, labeling them as Private Equity. Technically this is correct, but you need to understand that these two investment stages have a completely different strategy and require an entirely different skill set. In an LBO the investment firm will take controlling ownership of the company, while an Early Stage VC takes an equity interest in a portfolio company and views the relationship going forward as a partnership. An Early Stage VC’s daily job functions involve networking, sourcing new deals, listening to pitches, researching market trends, doing diligence on potential investments and helping their portfolio companies grow. A partner at an LBO will focus on financials, debt restructuring and creating operating efficiencies (note that I’m not in the day to day of this industry). An LBO candidate has investment banking experience and a VC candidate has entrepreneurial experience.

Tip 2: Get your story straight. I get it, the job market is tight, so why not interview for both LBO or VC and see what hits? This approach seldom works, I know because I tried. When I first graduated from business school, I ran around trying to sell my financial modeling skills to LBO firms, despite the fact that my passion is in early stage VC. It wasn’t until I became committed to startups that I began to gain traction, my passion for entrepreneurship was contagious and my story came naturally. I no longer had to fake my “excitement for making financial models in excel.”

Tip 3: Get some relevant experience. Go to entrepreneurial events, meet the players in the ecosystem, learn VC from books, events and blogs, volunteer your services to a start up. During my MBA I participated in our school’s business plan competition and the VCIC competition, I re-started the Deming Center Venture Fund, and I volunteered my services to Zetta Sun, a local startup. I did this while networking my ass off, I went to every event I could. I made my best effort to earn goodwill from people in the community, hoping my name would come to mind if a good job opportunity arose. After graduation, I crunched numbers for a local VC firm that needed some help and worked, unpaid, for a startup on the side. If you want to be an early stage VC you need to build a network and have an intimate understanding of entrepreneurship. Unfortunately, no one is going to hand you a job in VC for relevant coursework.

Tip 4: Do your diligence before you ask someone for help, and if they do agree to meet with you be flexible, responsive, and show your appreciation. If you’re trying to get a gig at a hedge fund don’t ask a VC to meet for coffee. It doesn’t hurt to send a networking email indicating your desire to work for a hedge fund, but asking for a face to face meeting is out of scope. If someone in your target industry is willing to help by meeting with you, be flexible with the meeting time and location. There is nothing worse than trying to help someone and having it take six emails to schedule a meeting. Lastly, if the person who you asked for help is kind enough to go back to their computer and type out an intro or some written advice, be incredibly responsive. Any introduction should be followed up immediately with the introducer bcc’d. Post-introduction radio silence is a serious insult and burning bridges isn’t a good way to get into VC.

Tip 5: Have an opinion on the future of tech, but don’t trash a VC firm’s portfolio companies. You can elaborate on why the hypernet + hyperweb is the next big wave, or why peer to peer marketplaces are going to be huge. This shows that you are reading and thinking about the right things. But don’t ever trash another VC’s investment decision. Criticism from the upper deck or playing Monday morning quarterback isn’t appreciated. Remember that the industry is incredibly small and the other VC you are trashing is probably a friend.

By no means is this list meant to be a comprehensive guide to a gig in VC, rather it’s a few helpful hints to set yourself apart. Landing a job in VC requires luck, perseverance, and passion. Since there are no guarantees, you should find a job that you love doing today. The best advice I can give is to let your passion guide you.

Follow Your Gut, It Always Knows

Almost everyone has gotten burned before. Getting taken advantage of sucks. Especially when you figure out what’s happened. The purpose of this post is to share some of my dumb decisions, to explain what I do today to help minimize bad choices and to tell entrepreneurs that it’s okay to say “No” to the wrong term sheet.

Most people get taken advantage of when they are vulnerable, desperate, or lacking self confidence. At this time we tend to dream of the end result and ignore the details that our intuition is picking up. The key to it all is to listen to your gut, which is screaming “This is too good to be true, don’t do this deal or trust this person!.”

I remember shopping for my first condo in Chicago. My budget was $250k and I was hoping to get more than a studio. I must have looked at every place in my price range and finally came across a two-flat that was in a good neighborhood and was a pretty decent size. It was new construction and I liked the look and layout. I met the builder  and immediately realized he was a sleaze ball, the kind of guy who makes you want to take a shower after shaking his hand. It didn’t take long before I caught him lying about the smallest things. This set off my intuition, which told me to walk away, but I decided to ignore what my gut was telling me. Instead, I purchased the condo because I was desperate for square footage. I’ll spare you the details but I entered into a post-purchase nightmare where the builder was hiring people to finish the itemized list and wasn’t paying them, defaulting on taxes due (which are paid in arrears in Chicago) and much more….

Needless to say this is not the only time I did a bad deal. But as I reflect on my numerous dumb decisions I can highlight a few common themes:

  1. The counter party does something weird, such as telling small, insignificant, lies.
  2. My intuition told me to stay away from the deal, but I ignore it and go through with the deal anyway.
  3. I was desperate to get the deal done. I dismissed some facts and elected to believe the fairy tale the counter party had sold me. I simply wanted to close too badly.
  4. I’m forced to cope with the effects of my actions, which can often take a long time to resolve.
I now try to keep these lessons in mind when making decisions. I also think it’s important for entrepreneurs to think about them during their capital raise. At Tango/HCV we view our portfolio companies as partners and the post-deal alignment is extremely important to us. I’d like to think that all VC firms have the founder’s interest in mind when structuring a deal, but I realize that this is not always the case. So it’s up the entrepreneur to understand the standard terms for an early stage investment and to be willing to say no to a term sheet that strays way beyond these terms.
Here is a checklist of things you should think about before signing a term sheet:
  • Understand that taking money from an investor implies a 3-8yr partnership. Evaluate the investor with as much diligence as they are evaluating you.
  • Remember that good relationships are build on some degree of transparency, a foundation of trust that is established before the parties enter into a deal.
  • Listen to your intuition, if your gut is telling you something is wrong, don’t do the deal.
  • Start fundraising early, don’t put yourself in a vulnerable position that makes you consider a bad deal.
  • Don’t be afraid to say no to the wrong deal. I do realize that this could mean the death of a startup, but in my opinion it’s better to move on to the next thing rather than struggling through the next 3-8yrs with the wrong terms and/or the wrong people.
Good luck out there…

ps. What actually spurred the idea for this blog post was an OpEd that I read in the NY Times about Newt Ginrich. The post set off my intuition and bothered me all day, but I prefer to talk entrepreneurship and will leave you to make your own political decisions.