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A nice little Brown Trout caught on the West Branch of the Delaware in Upstate NY

Thoughts on best ways to manage a VC round

We spent too much time raising money at Invite.  Raising money when running a startup is extremely distracting, because every minute you’re fundraising you’re not working on your product.  Sometimes I like to think about what else we could have done at Invite if we didn’t spend probably a third of our company’s lifespan fundraising, either full-time or part-time.

However, the flip-side is that if you’re building a startup there’s a pretty damn good chance that you’re going to need to raise money.  So, this post is dedicated to how you as the entrepreneur can best manage the fundraising process in order to accomplish two things: (1) get what you want, and (2) get it as quickly as possible.  Here’s what I learned:

1. Know what you want before you start the process.  This requires preparation, which often isn’t something entrepreneurs make time for when running a startup.  You have to force yourself to prepare for the fundraising process.  This includes a few things.  First, know how much money you want to raise before you start raising.  Don’t be put in a position where the VC is telling you how much you should raise and why.  This will require that you have done the necessary financial planning to know what the next big milestone/inflection point is, how many new people/resources it will take to get there, how much money those things cost, etc… There are all sorts of posts written on this preparation, including the golden rule of “take how much you think you need to raise and double it”, all of which should be taken seriously.  Second, and for example, you will want to know going in what kind of board structure you want after a fundraising process (since it will likely change).  For instance, do you want to keep the size of your board the same?  Do you want to add someone representative of your customer to your board?  Do you want one of your existing investors to leave the board for whatever reason?  Planning for what you want to get out the process makes things so much easier and less stressful.
2. Set goals/milestones, and track them.  This simply means that you want to set some sort of goal for key aspects of the process, and measure them, as you can’t improve anything you don’t measure.  For instance, talk with your board and management team (if applicable) around valuation expectations.  Setting negotiation tactics aside, this will help set context for various meetings you’ll have and what you’re expecting.  It’s well-known that negotiators who have goals ahead of time generally have higher and more favorable outcomes.  Also set goals and milestones around how long this whole process will take.  My goal at Invite near the end was one month of intro/get-to-know-you meetings, one month of (hopefully) pre-term sheet diligence, partner meetings, etc…, and then two months of post-term sheet diligence and closing (for a total of four months).  It may be different depending on what stage your company is at.
3. Manage the process using Excel.  I learned this one from Josh Kopelman of First Round Capital.  You’re most likely going to be talking to a lot of VC’s in this process, so you’re going to need to stay organized.  Start with an Excel sheet that has a column for the VC name.  Add all the VC’s you’ve talked to, one per row, and then add in the ones that you haven’t talked to but most likely will or want to.  This list probably shouldn’t be more than 25-30 to start.  The next few columns should include basic stuff, such as their location, who you know there, what stage they’re in (ex. seed-stage, late-stage, etc…) since you don’t want to waste your time with someone from the wrong stage, and then other logical columns such as who introduced you so you can keep it all together.  Then, also have a column for current status, such as “intro phone call setup” or “partner meeting setup”, as well as an “other notes” column.  Then, the most important column, have a “Bucket” column that assigns an A, B, or C rating to each row/VC, whereby A represents a VC who you are highly confident in seeing things progress positively, has a high likelihood (more so than others) of doing a deal with you, you liked the fit with the firm, etc…  B represents those who you haven’t written off yet but also aren’t highly confident that you could ultimately expect a term sheet from them either because you either don’t yet know enough or haven’t spent enough time with them.  C represents everyone else, which would include those who have said no, those that aren’t a fit due to stage or other reasons, etc… Generally speaking, you don’t want more than 5 in the A bucket and 10-15 in the B bucket (and the rest in the C bucket).  The point of this process is to be able to focus your time on the A and B group, and most definitely the A group, and as you learn more from a VC move them into the appropriate bucket.  This will help you manage your time and learn to say no.
4. Be upfront with your process and timeline.  This one can backfire if you’re an asshole, so don’t be an asshole.  Instead, be polite and upfront that you’re trying to minimize the amount of time you spend fundraising, which anyone can appreciate, and that you hope to complete this process on a timeline of X.  See #2 for my example of a timeline, which you can choose to make shorter or longer.  You may also consider telling them upfront exactly how much you’re looking to raise, which is generally a great idea and why you prepare (see #2).  This will allow you to not only keep them on their toes and organized (which they’ll appreciate), but you’ll also learn things faster.  For instance, when you tell them that you need to raise money by X date, you may learn that they can’t move that quickly.  Or, when you tell them how much you need to raise, they may tell you that’s out of their range or too small.  All of these are good things to know as early as possible.
5. Get the first term sheet.  This a well-known one.  VC’s generally act like high-school girls, whereby if one likes you they all do.  As such, you’ll be amazed at how much more and quickly other VC’s will start to like you once they learn someone else gave you a term sheet.  It’s literally a tipping point.  So, you want to put a heavy emphasis on getting that first VC to cross the line.
6. Make sure you manage each VC to be at similar points at similar times.  What I mean by this is, make sure you are giving VC’s a similar amount of information and access at similar phases and on similar timelines, so that when that first term sheet comes across you can call the other VC’s (again, setting aside negotiation tactics), hopefully all the ones in bucket A (see #3) and reasonably expect them to be able to act.  Term sheets are temporal things, so if the other VC’s you’re talking to aren’t “up to speed” and able to act (and believe me, they’ll always use the “we don’t have info info/data” excuse) then you may be stuck with just your one term sheet.  The same goes eventually for managing the M&A process.   This may involve slowing some VC’s down and speeding others up, which is fine and why you are managing this in a spreadsheet so you can keep track of it all.  Cross-track all of this against #4 (your intended timeline).
7. Don’t cross the streams.  A golden rule of fundraising.  Simply, don’t tell other VC’s which other VC’s you’re talking to.  Again, don’t be an asshole about it, but say very politily that “you’re having conversations with others” and feel free to (per #6) share what phase of the process you are with others.  Keep them on their toes and tell them if they’re too slow.  They’ll ask who else you’re talking to so that they may “compare notes” or whatever else, but at the end of the day you only stand to hurt yourself (read: collusion).  It also makes things more complicated, as VC’s have this funny tendency to want to “team up” and make complicated syndicates.  There’s a time and a place for those (and plenty written about it), so know if that’s something you want upfront and manage for it. 
8. Be upfront with the potential investors.  Taking money from a VC is a lot like getting married.  You’ll be going through good time and bad times together, and also spending a ton in a combustible room (board meetings, etc.).  Part of the fundraising process should be that you mutually get to know each other.  Not only do you need to raise money from them, but you need to be able to work with them if you do end up taking your money.  As such, be upfront with your concerns and ask them to do the same.  Are you concerned that they’re west coast and you’re east coast?  Are you concerned that the partner leading the leading the deal doesn’t have operating experience and that’s something you’re looking for?  Again, feedback delivered constructively is almost always a good thing.
9. Learn to say no.  You’ll need to do this more than you think.  This may include saying no to a crappy term sheet.  Or could include saying no to a meeting request from a VC who either isn’t a fit or is too late.  It’s hard to say no, but you’re going to need to in this process more than a few times.
10. Don’t over-optimize.  It’s very hard as an entrepreneur to leave money on the table.  But, on the flip-side, it’s very easy to blow up a deal over something that in reality is very marginal.  Look objectively at things you’re negotiating for or thinking about doing.  Is it really worth potentially burning a bridge with a VC who has given you a good but maybe not perfect term sheet?  Think about all of the costs involved, most importantly of which is your time. 
11. Get an adviser who’s done this before.  For better or worse, fundraising is very much an art and not something that can fully be taught/learned without doing it yourself.  As such, I think it’s very important that you get someone around you who has done it before.  They’ll be able to help you think through things correctly, recognize traps, help you maximize value and keep timing moving, and simple things like how to word an email reply to a curious question.  We used to joke that the fundraising process is hard for a reason, which is that if you as an entrepreneur can’t navigate the murky waters and get what you want, then how the hell are you going to do that in the open marketplace with competitors?  I’ve come to think that’s true and that it may be a good thing that raising money isn’t simple, but either way you should get an adviser who’s done it before.

I hope this helps.  I’m sure I’ve left very important things out, as this is one topic that can be approached in many different ways, and like any form of art is hard to exactly define.  Feel free to expand upon it in the comments.

"Most of us young kids who play [online poker] at nosebleed stakes don’t really have any clear idea about the actual value of the money we win or lose,” Cates says. “Most of us see the money more as a points system. And because we’re all competitive, we want to have the highest score. But really, we don’t know what making $400,000 or losing $800,000 means, because we don’t have families or whatever. This blind spot gives us the freedom to always make the right move, regardless of the amount at stake, because our judgment isn’t clouded by any possible ramifications."

http://www.nytimes.com/2011/03/27/magazine/mag-27Poker-t.html?pagewanted=3&_r=1

SOTD: R.L. Burnside - Someday Baby (feat. Lyrics Born) →

Don’t assume people are smart

I learned this one from my co-founder Zach.  It may be a controversial/touchy post.  We were walking out of a meeting one time and he goes “Wow, that person was actually smart.”  I didn’t realize until someone had pointed it out, but he had grown by default to assume someone wasn’t smart.  His approach isn’t meant to be rude or arrogant, it is (in my opinion) a very simple and smart way to save time and avoid mistakes of working (or hiring) people who aren’t smart.  And he’s probably right, the majority of people probably aren’t what someone would define as “smart.”

All too often, people give other people (including us) the benefit of the doubt for being intelligent.  This post suggests that you should flip that thinking around and start assuming someone is not smart until proven otherwise.  Why is this important?  When you’re running or working for a startup (or many other situations), you’re going to get a lot advice and feedback from all over the place.  You’ll also be putting your company on the line with the people you hire (and we all know it’s all about the people).  You’ll be choosing to strike partnerships with other companies run by people.  You’ll be taking investment from people, and so on.

The truth is, not everyone is smart but way too many people are able to “fail upwards” and get credit when credit isn’t due, or are just really good at faking it.  I can’t tell you how many times someone assumes someone is smart because “they worked at company XYZ” or “went to university XYZ” or said “he invested in company XYZ, he must be smart,” or my favorite “he/she has an MBA.”  Bad advice taken seriously can be as dangerous as good advice that was ignored.  Hiring someone who isn’t smart can detract value from your company and bring down others who are.  Taking money from someone who consistently gives bad advice and direction at the board level can be down-right destructive.

I’m obviously not suggesting you use this strategy out in the open and voice your findings.  I’m suggesting that this way of thinking can be useful if you internalize it when judging and sizing up the people you’re working or interacting with, which we all do (and should do) in startup building.  When in meetings, second question things either to yourself or openly if the situation calls for it.  Dig into the numbers and data when available to validate something.  Get in a habit of double-checking references when it matters from people you trust (and not only for people you’re interviewing).  When interviewing someone, do your best to find out how much of their previous company’s success had to do with them, or if they were just in the right place at the right time.  I personally love it when an entrepreneur is pitching me as an angel investor and questions some piece of feedback I give and challenges me on it.  Like anything, as long as you do it politely and open-minded, it’s not a bad thing to fight someone on something to get to the right answer.

10 principles for startup recruiting

I’ve read a lot of interesting and well-written articles recently that cover best practices for hiring people into startups.  The first thing I’ll say is that, having done it, unsurprisingly recruiting into a startup is really really hard and equally as important.  It requires more attention than you could ever could have planned for, and if not done correctly is one of the easiest ways to kill your startup.

The below 10 principles on startup recruiting aren’t necessarily exactly how we pulled it off at Invite Media, although it would be how I’d do it again having learned a few things the hard way:

1. Make sure you hire “startup folks”.  For most roles at a startup, especially early on, you’ll often hear the term “startup person” thrown around.  A startup by definition is risky and undefined, and hopefully that risk is reduced as time goes on and progress is made.  People you hire into a startup early-on need to be the kind who will enjoy being in the trenches with you, can stomach the overall risk being taken, and doesn’t think too much about his/her salary not being guaranteed a year from now.  A guy at a big company down the street who has the skills you want on his resume but likes his 9-5 hours and cushy job lifestyle probably isn’t a great example of a startup person.  Getting a startup to the next life chapter is really hard, and it’s all about the people, so make sure you hire startup people.  After having done Invite, I’m even more convinced that “startup people” truly are different, whereby they couldn’t imagine working at a big company and live for the risks of startups.
2. Make sure the incentives and interests are aligned.  This has a few meanings.  First, it’s remarkable how much incentives matter, primarily monetary, so make sure the person is properly incentivized to go after the same things you are.  That is code for make sure they get an industry-standard (or better) equity package or compensation plan for their role.  There’s a reason great sales teams are built around very well thought-out and structured commission and compensation plans, so as to align goals (more on that later).  Second, be wary of the person who cares about the wrong things.  For example, all too often do people come knocking on startup doors looking for a fancy title and/or high base salary.  There are certainly times that someone may need a higher salary to make things work financially, but develop a good sniff test for someone’s true intentions/goals and if they’ll be in the same boat as you.  At Invite, not surprisingly many of our best employees were the ones who cared less about their title and current salary and negotiated hard for more equity and upside.  There are a lot of tactics and point-scoring you can do here to gauge probability of success of a hire.  For example, it’s probably worth something and a good thing if a potential recruit responds to one of your emails at 1AM (you’ll certainly be up at that time).
3. Spend a lot of time doing it.  One of my board advisors once told me that if I wasn’t spending half of my time on recruiting, I was doing something wrong.  Looking back, I couldn’t agree more.  I know of successful companies where the founder still interviews or at least approves every single new hire.  Don’t outsource recruiting, stay involved.  It’s fine to leverage resources to grow a pipeline of potential new hires, but you’re the keeper of the vision and culture and the one who should know best about who to hire (not to mention you will have to work with the person).
4. Don’t make big senior hire mistakes.  There’s a time and a place for big hitters and big name hires.  You see it all the time with startups “becoming official” by bringing on some big name guy from a big company who allegedly has “been there done that” and has a huge rolodex.  Those hires often work out great.  They also often go horribly wrong.  One of my favorite posts on this topic is by Ben Horowitz, and he also alludes to some things in #1 above with needing to be able to fit into a startup.  It no doubt depends on your industry and company, but at Invite we put this off as far as we could and never really made a big senior hire mistake, which I’m very proud of.  We made a ton of recruiting mistakes, but watch out for the big ones.  These kind of things get press if short-lived, are hard to unwind, and open up all kinds of risks.  For example, the person who by definition knows everyone (probably a reason you brought hired him) will all-of-a-sudden be telling everyone their side of the story.  This common recruiting pitfall also relates to the next thought.
5. Worry about glass ceilings.  We were taught this one by an employee we hired and learned it was the main reason he was leaving.  Turns out, this was the main reason a lot of our best folks left their previous jobs.  It’s also code for keeping things flat in terms of organization structure.  Now that I’m aware of this concept, I see it all the time in startups.  This problem need not be created by huge name hires, although that certainly can do it, but can be created by a simple “manager” hire or unneeded layer.  Essentially, your best and brightest startup employees run their day like their own CEO and handle the details themselves.  In return for this, they expect to gain responsibility (and of course upside from exits) over time.  The last thing they want is some manager or layer put above them that creates a glass ceiling for their career growth.  There’s a time and a place for management layers, and startups typically aren’t either.
6. Fix mistakes quickly.  If there’s a lesson we learned the hard way, it’s to fix hiring mistakes quickly.  It’s 100% true that a bad hire can actually detract value from a company by slowing down or distracting others, or also by just doing work the wrong way (for instance, implementing a feature in a way that obviously isn’t scalable).  The moral of your best and most important folks will also increase when you fire the bad person.  Like many things, it’s better for both to cut strings before it goes too far.
7. Fix mistakes yourself.  In other words, if you make a bad hire, it’s your responsibility to fire that person and to do so before the problem gets worse.  In terms of who does it, there are qualifications depending on the size of the company and all that, but fixing mistakes yourself will earn the respect of the company and help you grow as a manager.  You’ll also be more careful in hiring if you have to face the unfortunate consequence of letting go the person you shouldn’t have hired.
8. Focus on culture.  Don’t hire assholes, plain and simple.  Also, don’t hire folks who can’t handle the intellectual conversations of the company and can’t keep up, or people will lose respect on a number of levels.  Bring in people who instill the culture you want.  For us that was hard-working, detail-oriented, confident (you don’t want a bunch of scaredy-cats running around not bringing things up), smart, and hungry (both physically and figuratively).  Learn how to ask the right questions or look for the right things in interviews to gauge culture-fit.  Unsupplied reference calls are my favorite technique.
9. Be transparent.  I recently saw this in a post by Chris Dixon as well.  Put simply, transparency almost always wins and applies to recruiting as well.  When bringing in someone new, go out of your way to help them understand the value of the equity or compensation you’re giving.  This means being transparent (to the extent you can) about things like current valuation, realistic valuation expectations, outcomes, and what % of the company their share represents.
10. Get creative with the process.  I forget who told me this one, but I love it.  Instead of the standard interview and onboarding process, mix things up.  For instance, tell the person who’s coming in that for the first 60 days, their job isn’t guaranteed and that options (and maybe other stuff) don’t start vesting until after the 60 days.  Plan on a performance review after 60 days where it’s decided if both sides want to move forward (who says a performance review after A WHOLE YEAR later makes the most sense?).  There are risks to this process, but pro’s as well.  You’ll certainly lose some people who “feel like they’re above this”, but who knows, maybe those weren’t the people you wanted in the first place.

Hope this helps.  As always, feel free to share any links to other related posts you find useful.

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I remember seeing this card in a magazine when I was young.  It’s one of the first few Mickey Mantle baseball cards to hit packs (second only to the 52 Topps, the most expensive trading card in the world other than Honus Wagner’s original).  Finally got one.

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Awesome artwork of Hendrix using guitar picks (http://www.recyclart.org/2011/03/hendrix-portrait-with-5000-guitar-picks/)

SOTD: The Band - Atlantic City →

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What an awesome Masters Tournament this year.  5+ players at 10 under or better and within 2 strokes of the lead in the final few holes, and a (relatively) unknown player ends up the winner.  It’s kind of exciting when the same person doesn’t win every time.

The quality of the intro

When you’re trying to get introduced to someone, take very seriously who introduces you.  Often, and especially if you’re already a well-connected person, you may or could have multiple options to get introduced to someone you’re trying to meet. 

Probably for good reason, the person you’re trying to meet takes very seriously who introduces you to them.  I know that when someone gets introduced to me, I very much correlate the person sending the intro with the potential around the introduction.  If you get introduced by a close friend or colleague of the person that they trust, then they’ll be less concerned with you wasting their time and as such will be more generous with theirs.  If you get introduced to them by someone they hardly know or may not trust as much, you shouldn’t expect much in return.

In the end, if you don’t have a “strong intro” to someone you’re wanting to talk to, spend the time to get a strong intro.  Your chances of making it productive for both sides increase by doing so.

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Finally picked up my favorite basketball card of all-time, the LeBron James Exquisite Collection.  And it’s graded gem mint by BGS.

My all-time favorite SNL commercial →

The importance of being able to sell something

Besides being technical-enough and able to think up and build a product, one of the most important things you need in order to succeed as an entrepreneur, in my opinion, is the ability to sell something.  I love meeting someone who is starting a company and I know right away that they’ll be able to sell stuff.  I’m scared when I meet someone who is unable to convince me of anything and/or has trouble articulating what they’re working on.

There’s obviously a fine line, as you don’t want someone who comes off like a used car salesman.  You want someone who you (1) can trust, (2) is articulate, (3) delivers on what they say, and (4) is smart enough to think on their feet and not sound like an idiot.  The good news is that learning how to sell is something that a lot of people can learn and acquire over time, although you do need a certain personality for it.

The reason I think this is so important is that, as an entrepreneur, you’re always selling.  You’re needing to sell potential candidates on why they should work for/with you.  You’re having to sell internally your ideas and strategy.  You need to convince investors to give you money.  And most importantly, you need to convince customers to buy and use your product.  If you can’t sell, you run the risk of being out-maneuvered by your competition in any of these areas.

The IBM effect

Of the few things I actually learned in college, one of the things that stuck with me was “the IBM effect” from marketing class.  I’m not sure if there’s a more official codename for the concept, but that’s what I remember it as.  Essentially, the idea is a marketing strategy that IBM was successfully able to pull off, in that “you never get fired for picking IBM.”  Getting to that point continues to pay enormous dividends, and can be seen in countless other big companies as well.

The reason this is powerful is that business owners / CEO’s often forget who the person is on the other end and how they make their decisions.  Unless you’re dealing directly with the boss on the other side (and even then with their board), your customer reports to someone at their company.  Part of their decision to use you or one of your competitors will be their desire to “make the right decision” internally, so as to advance their career or depending on the situation make a critical decision that could decide their fate.  For instance, picking a supplier for critical hardware and software that will power your company’s infrastructure for the next 10-15 years is a really big decision that you can’t screw up as the buyer.

I wasn’t able to pull up some of the old commercials, but someone told me they explicitly called out that point in their advertising.  This allowed them to leverage their scale and successfully pitch against upstarts who couldn’t make the same claim.  Big Blue was able to turn around the image that being big was bad and make it a good thing, while also labeling their competitors as risky.  By going with their products/services, you were making the safe decision.