entrepreneurship

Good day

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The other day was a rough day.

One of our companies failed to find a buyer and let all their employees go.

Over dinner my dear friend Joey Hundert provided support and counsel while reminding me that as entrepreneurs our lives are full of peaks and dips.

He assured me it’s okay to be genuine in the emotions we feel when companies fail. And I was sad and disappointed.

Then yesterday I was reminded of the emotions when companies succeed.

And that is being proud of our entrepreneurs

  • Ryan Feit of SeedInvest (where I sit on the Board) and Jan Goetluck of Virtuix (where we are also investors) were on Jim Cramer Mad Money.   They were promoting both equity crowdfunding and the disruptive VR technology as they partner to raise one of the first Title IV of the Jobs Act deals from both accredited and non-accredited investors.

And just like that four of our entrepreneurs remind me of why I love what I do.

Yesterday was a great day.

Good day

The Dreaded Call

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Last night I called one of my favorite entrepreneurs.

And about ten seconds into the call, I could hear him crying.

At that point, I knew the Company we had invested in, that had pivoted with hopes of rising like a phoenix from the ashes, was actually much more likely to crash and burn.

Although we had spent the last six months trying to recapitalize and refocus the business after losing the co-founder, it became clear it wasn’t going to work.   It was now time to switch from being an investor to being his friend.

Money comes and goes, but the relationships with my entrepreneurs should last a lifetime.

So I immediately realized what he really needed was support, not beratement. He already felt horrible for failing and losing people’s money.

And I am a VC. We expect to lose money trying to innovate and build great companies.

Thus, we shifted our conversation to focus on what he needed to accomplish:

  1. Complete an acqui-hire so his team and product had a home and a chance to deliver on their vision
  2. Agree to take a job working at the new company, leading his team and providing him a salary and stability after a tumultuous period in his life
  3. Focus on getting mentally and physically healthy via a short vacation that includes silent meditation, self reflection and yoga
  4. Develop a 3-5 year plan of where he wants to be in life and as an entrepreneur

He mentioned that I was “The Dreaded Call.” I was the hardest person to tell he had failed, that the financing had fallen through and that the acquisition offer was 1/10th of the original price.

While all that sucks for the investment, he told me that it meant the world to him that I was treating him like a friend, helping him through an entrepreneurial valley, and making sure he knew I wasn’t mad.

I’ve talked often about the stresses of being an entrepreneur and how lonely and isolated it can be as a founder.   I’ve felt that way many times over the years as I’ve been building Scout.

So I am grateful that I was able to make him feel just a little bit better. Yes, the outcome is obviously not ideal, but having perspective is crucial when a company fails.

We should never frown upon an entrepreneur trying to build something truly special. Failures happen, it’s just part of the game.

 

The Dreaded Call

What I’ve Learned From Being There For My Entrepreneurs

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Last night, I had two great meetings scheduled back-to-back.

The first meeting was set up by an entrepreneur who I’ve known for about seven years.  I’ve been actively mentoring him to include recommending jobs that I thought would further develop his potential.  He asked me to meet with another entrepreneur whom he thought might be a perfect fit for one of our portfolio companies.  As he suspected, she is awesome, smart, articulate and happens to be extremely passionate about one area where we have both an investment and the potential opportunity for her to play a major role.

The second meeting was with a CEO of one of our portfolio companies where I am also on the board. Because I am involved in multiple ways, we spend a lot of time evaluating different strategic initiatives to grow the business. The reason for this meeting was to discuss an initiative that we both thought would be great for the business, but we had a disagreement on the execution strategy. I was upset because I thought he had initially cut me out of the process and was now asking me and my team to help him on certain things. These are things that would have never been an issue if we had executed the plan more inline with my original thinking. Turns out, there was a breakdown in communication and if we had simply had another conversation about the issue, we probably could have found a solution that worked better for both of us. I still love him, but it’s always good to have open and frank conversations to clear the air.

What I didn’t expect was the overlap between these two entrepreneurs last night. It provided an interesting environment where the entrepreneurs were talking about the value that we create as investors, but in very different contexts. Being in this position and industry, I have seen just about every roadblock that start-ups and growing companies encounter and most importantly, how to get past them. There were a couple of thoughts and insights that I wanted to share with you:

(1) If someone isn’t a fit either with work ethic or company culture, you need to make a change as soon as possible.  Most entrepreneurs really struggle when filling key positions early in their company’s evolution- as they should.  So the thought of spending six months to recruit a VP of Engineering, COO or Head of Marketing, and then realizing two weeks into the relationship that you made a mistake, is very emotionally taxing and terrible for morale. But that’s where we come in – our CEO said that pushing him and his co-founder to fire someone had totally changed the morale and company culture for the better and removed a huge weight from the founders already stressful lives.

(2) We all make mistakes, so make sure you discuss your mistakes to ensure they don’t happen again.  Being an entrepreneur often requires you to make decisions about things where you may have little or no experience. While we try and always make ourselves available as a sounding board for our entrepreneurs, inevitably they are going to make some decisions without any input. And in some cases, these decisions might not be the right decision for the business. Don’t linger on the mistake, move on and focus on being better next time.

(3) Building an awesome company should be fun. As we’ve discussed in the past, the level of stress that most entrepreneurs feel can be overwhelming, especially when you’ve raised money from friends and family. But it’s important to remember that you can’t perform at your best if you are constantly stressed, yelling at your team, or trying to do everything by yourself. Great companies are born out of great leaders – so spend time developing a positive and healthy company culture with regular team activities outside of the office.

As always, I hope this helps.

What I’ve Learned From Being There For My Entrepreneurs

Will Your Company Survive the Next Crash?

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There’s been a lot of discussion recently about runaway valuations, unicorns and the impending signal that we are approaching another bubble that will come crashing down and crush the dreams of another wave of entrepreneurs.

For those of us who were in tech during the first dotcom bubble in 2000, as well as the second crash in 2008, this sounds like a familiar story. If you’re an entrepreneur today, it would be wise to start thinking about how your start-up will survive if history repeats itself.

In both of the earlier cycles, I recall seeing a presentation from Michael Moritz of Sequoia. In it, he said to act as if you won’t be able to raise new money, reduce your burn by 25% and eliminate all external consultants and non-essential personnel. This is advice I would give to my own entrepreneurs in a time of crisis, regardless of an impending crash or not.

Then last night, I saw this tweet from Marc Andreessen:

So what does this mean for entrepreneurs who are currently trying to determine their fundraising strategy?

(1) Figure out how much money you need to get to cash flow break-even.  At Scout, we tend to invest in businesses that can be capital efficient on less than $5M, but sometimes getting to profitability isn’t achievable within this range.  In these cases, its critical to make sure you have a deep understanding of the metrics needed to raise a follow-on investment.  In a down cycle, this is a very competitive process.

(2) Start your fundraising at least 6 months before you run out of cash.   The current environment has entirely too many early stage companies competing for the Series A and B rounds, so plan accordingly.

(3) If your initial set of conversations don’t go well, see if your existing investors have an appetite to bridge.  The best way to buy more time is to get more money.  If you are doing a good job and building something worthwhile, then your existing investors should have incentive to provide more capital. If they are not interested, you should ask them to be candid as to why not. They may have concerns that need to be addressed before you talk to any outside investors.

(4) Use your networks.  The best way to make progress is with warm intros from people who have stronger relationships than you.  It’s important to reach out to your existing investors, advisers and mentors early in the process to help expedite getting new money.

(5) Be smart with the capital you already have.  As we’ve said before, the number one thing that kills early stage companies is running out of capital.  So in a questionable environment, don’t waste money on things that aren’t core to your business or demonstrating metrics to get to the next level. You’ve heard it a million times, but try to exercise lean thinking in every stage and aspect of your business. If the bubble pops, we’ll all need those skills.

Hope this helps.

Will Your Company Survive the Next Crash?

Is your Venture Capital Firm Having an Identity Crisis?

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Imagine this: you’re in front of a nervous young entrepreneur pitching their idea for the next Uber.  They are a first time entrepreneur whom you met at a cocktail networking event, an event you didn’t even want to attend.  They are trying to convince you that their $10 million dollar valuation is warranted.  Yet, they have no idea what a cap table is and no idea how they are going to monetize their business.  You are so tired of asking the questions they should have already answered.

And then you ask yourself: how did I get here? Why did I even agree to take this meeting?

Sound familiar?

You might need to take the same advice that you’ve given to your entrepreneurs: take some time and figure out what your specialty is and what you want to focus on. For VCs, this implicitly defines your investment thesis.

As most of you already know, an investment thesis is the formula of beliefs and criteria used to determine what investments to pursue and why.

What We Look For

From the very beginning of Scout Ventures, we’ve put heavy importance on figuring out who we were as individuals and who we wanted to be as a firm. As the Founder, I knew I wanted to build a firm that explored how technology enables consumers to connect “digitally” and then leverage the ubiquity of connectivity, viral distribution and social networks to experience exponential growth in their audience and/or monetization.

Investment Thesis 5-18-2015

Putting it in Practice

In order to explore and leverage these ideas, I knew we had to:

1) Put a process in place that would lead us to discover and invest in the best entrepreneurs and companies that fit with our own backgrounds and expertise, and

2) Figure out the best way we as a firm could then help these entrepreneurs and companies to evolve and grow into their potential.

Let’s talk about the process first. Over the past few years, we have established what we call ‘filters’. We refer to these when deciding to take a meeting and when we are considering investing. It is important to apply consistent filters across the board; for example, we know we don’t invest in HR based companies, so we would politely decline a meeting with one. Be sure to keep a growing list of filters to refer back to.

At Scout, we’ve identified over forty parameters that we use to evaluate a deal. These parameters range from highly quantitative statistics such as MRR and burn to more qualitative aspects such as founder balance and market structure dynamics. Through introspective analysis and reviewing our 55 investments, we have been able to develop pattern recognition techniques that identify what specific characteristics exist across our most successful portfolio companies.

If you are not established enough as an investor to be able to decide these from your own historical data, then start with qualitative filters. For example, we prefer to invest in seasoned entrepreneurs and in teams who we were introduced to via a trusted advisor, entrepreneur or friend.  Through the use of simple filters and parameters we make sure we don’t take on too much, don’t take on anything where we do not feel we can add value and most importantly, we make sure stay true to our investment thesis. 

If you are a new firm, don’t stress over this too much. It has taken years to truly establish our current base criteria for taking a call or listening to a pitch and deciding to invest. And don’t forget, your thesis and filters are also something that should be constantly evolving.

Investing More Than Money

I like to think that most VCs don’t just stop at finding the entrepreneur and writing a check. But that’s not always the case. Ever since I started investing years ago, I always found the most rewarding part to be what happens after the check has been written, and I’m not just talking about the potential monetary returns.

One of Scout’s key activities is adding value to those we invest in. We don’t just invest money; we invest time. We start helping the entrepreneur from the minute they walk into our office. When we feel that immediate connection and know that the chemistry works between our team and the entrepreneur(s), we’re already at work thinking about what we can do to help. The first thing we’ll do is open our rolodex and introduce them to people we know can help them in ways we might not be able to.

At Scout, we are entrepreneurs. Our venture just happens to be a venture capital firm. Because of this, we know first hand what struggles entrepreneurs are going through and will go through. And when we help you, we are not only taking into consideration our own experience building the firm, but also taking trends from the data we’ve collected on our 50+ investments. We’ve seen it all.

In summary, if you think your firm needs a thesis overhaul, or even the creation of a thesis, be sure to base it on what your team is passionate about but also on what is practical for the size of your firm and fund. After all, this is how you differentiate yourself from the ever increasing number of firms. The entrepreneurs you attract and invest in will mirror the quality and authenticity of your thesis, so don’t rush it.

Is your Venture Capital Firm Having an Identity Crisis?

The Importance of Responding to Email

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There’s been a lot of discussion lately about the proper use of email since the Sony – North Korea incident.   In fact, Fred Wilson and one of our co-investors Gotham Gal got wrapped into the drama and Fred shared some great advice on limiting what you put in email.

I’ve been spending the last several years trying to examine how I interact with email and determine how this impacts my relationships, potential liability and in general, my communication skills.

It’s important to note that from my West Point and military background, it’s been ingrained that that you should always properly follow up with people whether that’s returning phone calls or emails.

I try to bring the same level of discipline to my work life.  While at AOL, I found it invaluable to always send a note and tell someone how nice it was to meet them.  This has served me extremely well and enabled me to build a very strong network of people in media and tech – many of whom have ascended to C-level positions.

Unfortunately, the flow of information is too much.    I’ve turned to tools such as SaneBox (thanks to Tom Katis) and Followup.cc (thanks to Ari Meisel).

While these tools help unclutter my inbox, I still try to invest the time into responding to entrepreneurs.  As an entrepreneur, I know how tiresome fundraising can be so I try to exercise mutual respect and respond.    Sometimes the inbound email doesn’t make it through SaneBox, so if I don’t respond, I might not have seen the email.

I think it’s important to touch on a point that Fred made in his post, which is that everyone should consider their emails as public information.   Whether you get hacked or not, if you limit what you write in email, you will be thankful in the long run.   I find this to be especially true when dealing with a legal matter, HR or any sensitive subject.  In most cases, its better to just pick up the phone.

The Importance of Responding to Email

Three Things That Kill Early Stage Companies

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As a VC, we spend a lot of time thinking about where we want to invest our money.   Last night, I was with my friend Pedro Torres-Pincon who recently presented “How to Build an Investment Thesis”  providing good insight into determining how and where you decide to invest your money.

But writing the check is the easy part.    The real challenge in entrepreneurship is to build a meaningful and sustainable company.   To that end, one of the things we like to discuss at Scout with our founders is how to avoid the pitfalls that can kill an early stage company.

(1) Don’t run out of money.    I know this seems like a simple rule but it’s amazing how many entrepreneurs under estimate how much time and money they will need to build their business.   In most case, we see financial projections that too aggressively forecast revenue growth, while underestimating the cost of building a scalable product.    The other issue that tends to crush entrepreneurs is not allocating enough time to raise the next round of capital; fundraising is time consuming and requires a focused effort.    So beware – forecast more conservatively and budget more time to raise your next round of capital.

(2) Don’t make a bad critical hire.   We often invest very early in a company when they haven’t hired all their critical team members.  In many cases, our capital is being used to expand the team and help the founders grow their vision.  If the Company hires a rock star then everything will get much better, but if they hire a dud then the Company is sure to suffer.   The two areas that are most often affected are  technology and sales.    If the company is in the process of building a new product and their new CTO drops the ball, then it’s almost impossible for the company to meet any of their deadlines or achieve the metrics necessary to secure the next tranche of capital.    Likewise, if the Company hires a revenue generator like a VP of Sales and they fail to achieve their revenue goals, it’s often a devastating blow to the company’s forecasts and thus also hurts their ability to raise additional capital.

(3) Avoid bad investors.   The early stage landscape is much different today than it was when I started in this industry as there is more seed stage money than ever before.   Accredited investors are jumping into early stage investing with angel groups, accelerators, and equity crowd funding platforms like SeedInvest. This coupled with significantly lower barriers to entry means that it’s easier than ever to start a new company and raise a small amount of capital. The resulting increased competition among early stage companies has created a shortage of follow-on funding as described by Josh Kopelman of First Round Capital.    But more hazardous than the shortage of Series A capital, is the impact inexperienced investors, often from other industries who are looking to dabble in venture as an alternative asset class, can have on an early stage company.    The worst case scenario for a young entrepreneur is to get lured by an investor who is offering capital but wants to add terms and provisions inconsistent with standard early stage venture rounds.    These terms vary greatly but the most dangerous are the right to ask to get paid back, asking for too much control and/or the need for the investor to consent to future financing, etc.    It breaks my heart when a young team is crushing it only to have a disgruntled early investor call their $100,000 note – which represents a significant chunk of operating capital.    Smart money is always the best way to go.

Three Things That Kill Early Stage Companies

Advisors

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As an entrepreneur and investor, I have also been asked to play the role of advisor.

The term “advisor” is often used without clearly defining the role and expectations of said advisor.  Many entrepreneurs think that adding a roster of high profile advisors to their investment deck will lead to greater credibility and thus ultimately help their fundraising efforts.

In my experience, many entrepreneurs including myself, have a deep and diverse set of advisors and mentors.   The key is to understand how to properly engage these people to create value and leverage their experience and expertise.

There are some simple guidelines to consider when engaging someone as an advisor:

  • Will there be a formal relationship or is the advisor really more of a mentor?  A formal relationship normally comes with some written letter or agreement outlining the advisory role
  • What will be the economic value exchanged for the advisory role?   It is important to clearly define the amount of advisory shares and/or cash compensation.  We normally see advisory shares in the 0.20% to 1.0% range and occasionally up to 2.0% depending on the role, seniority, deliverables, etc.
  • What are the expectations of the time commitment of the advisor?   Many entrepreneurs complain that their advisor was very active at the beginning and then unavailable.  It’s critical to discuss the advisor’s availability and how much time they will commit
  • Determine the focus and/or deliverables of the advisor?   This normally includes introductions to investors, help with commercial relationships, recruiting, strategic advice, corporate governance and a host of other areas where an advisor can help

Once you’ve properly framed the advisor engagement, then it’s time to work together to build your company.    I think it’s important to remember the principles of reporting when dealing with advisors.   It will provide a good framework to measure the effectiveness of the advisor and make sure both parties are happy with the relationship.

It’s also important that you maintain a way to terminate the relationship with the advisor if it’s not working out.  There is nothing worse for an entrepreneur than feeling like they gave up a bunch of equity and they aren’t getting value.    I often think there is a disconnect between entrepreneurs and advisors when they haven’t properly defined the advisor engagement.   Often advisors might think they are doing a great job and the entrepreneur is actually looking for a different contribution or better results.    The worse resolution of this situation is when the entrepreneur, who originally committed to giving a formal written advisor agreement, then decides 6 months or a year later that they no longer need to honor the verbal agreement.    This can then be exacerbated by the entrepreneur using excuses like “the board didn’t approve your options.”    If it’s not a fit, then own up to it and find an amicable dissolution.   Don’t be shady.

My key takeaway is that a solid advisor can materially help your business, provide critical experience and expertise, and increase your bandwidth.    But it’s important to take this relationship seriously and add the right pieces to make it successful.

 

Advisors

Reporting

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Reporting is one of the most important tools for any management team to effectively run their business.  But unfortunately, its a skill that most entrepreneurs lack.  This is the result of many entrepreneurs never working in an organization that stressed the importance of reporting and accountability.  It is also the result of most entrepreneurs viewing reports as a big time suck instead of a valuable tool.  Thus, entrepreneurs tend to avoid developing a consistent cadence of reporting with their teams, investors, and/or advisors.

Here’s why reporting can make all of us better:

(1) It demonstrates an understanding of the metrics that drive your business and are critical to keeping the team focused on what is important

(2) Holds everyone accountable for their performance

(3) Sets a culture of openess and transparency

With that said, our portfolio company LeagueApps delivers a solid monthly report on the 5th of every month.    We like their format:

  • Health of businesss
  • Key Headlines
  • Summary of Performance Metrics
  • Financials
  • Investment / Capital Requirements
  • Business Highlights
  • Product Update
  • Technology Update
  • Personnel Update
  • Marketing, Press and Media Coverage
  • Areas that Need Improvement
  • Personal Updates on team, family, etc (ie founder has new baby)

We hope this helps.

Reporting

Is venture capital under attack?

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I am an early stage technology investor.   It’s what I love and I wouldn’t want to do anything else.

And with the job title of VC comes a few primary functions:

(1) Be great at finding, cultivating, and investing in amazing entreprepreneurs building disruptive companies.

(2) Successfully raise money for our funds from high net worth individuals/angel investors, family offices and institutional investors.

(3) Build profitable companies by providing advice, mentorship and access to our network.

(4) Have exits and distribute money to investors.

While that sounds pretty straightforward, it’s not.  It’s really, really hard and very few firms build enduring brands that survive multiple boom and bust cycles.   At Scout, our goal is to build a great firm that lasts.

Recently, there have been a lot of discussions about what value VCs really bring?   The discussions focus on two key areas: (1) Performance and (2) Access to Deals.

Unfortunately or perhaps fortunately, venture capital as an asset class is under attack. Organizations like the Kauffman Foundation are questioning the returns and structure of the industry arguing that most fund managers don’t beat the public markets and still charge management fees and carry.   In Kauffman’s May 2012 report “WE HAVE MET THE ENEMY… AND HE IS US” they state that they believe smaller funds (less than $400M) with partners that consistently beat the public markets and invest 5% of their own money are the right firms to back.

Furthermore, the very closed nature of venture capital is changing drastically with the emergence and expansion of accelerators, incubators, co-working spaces and online platforms.  Historically, VCs differentiated themselves through their “proprietary” access to the best deals.   But in recent years, entrepreneurs are experiencing an unparalleled level of access to potential investors through online platforms like SeedInvest and Angelist.   Additionally, accelerators and incubators have become masters of the overly produced “Demo Day” where I actually saw a pitch with dancers in silver sequenced dresses. Regardless, entrepreneurs and investors have many more ways to more effectively connect in person and online.   Again, another argument that VCs no longer have their unique closed access to deals.

While this might seem like a good thing, I’d argue that the more experienced, smart money is and will always be more valuable than money from some finance guy that thinks he is going to write 5 checks and find the next Google.    Often these investors have no idea how to value a start-up, how to structure a deal (equity or convertible debt) and more importantly they have no experience building early stage companies.  They simply lack the skill set and required experience.

The people with that experience – VCs.

Now, I definitely think there are some amazing entrepreneurs that sell their companies and become valuable early stage investors, but they are the exception.   Most angel investors simply are not that sophisticated and can’t add the same value that Fred Wilson can add.   Fred is one of the most knowledgeable and successful VCs and he spends a ton of time educating entrepreneurs and investors alike.    He can do that because of his years of experience as a VC.

Almost everyone knows that people are the key to making early stage companies great.  A common mistake that kills early stage ventures is hiring the wrong key people.   If you need a CTO, then obviously hire someone with technology and management experience.   If you need a great VP of Sales, then hire someone with a track record of building a sales team and growing revenue.

This seems obvious, right?

Then why wouldn’t the same hold true when entrepreneurs need money and guidance to build their company.   If you are looking for an investor – it has to be more than money.    You want someone with the experience and track record of building successful companies.  VCs have a tremendous amount of experience in building teams, building products, scaling businesses, securing subsequent rounds of financing, access to potential customers, partners and potential acquirers.

I am definitely not saying that I love VCs, because their are plenty of assholes in VC.   But if you are fortunate enough to attract a VC with a good reputation and track record – you should figure out how to get them involved with your company.

We can make a difference.

Is venture capital under attack?