management

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

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?

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

Scout Ventures, 3 Comments

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

Teamwork

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The first ten years of my grown up life, I spent four of them at West Point and the balance in the Army as an Airborne Ranger.   The key principals that we focused on were leadership, teamwork and integrity.   These are also the core principals that the team at Scout Ventures believes is critical to strong management teams.

This week I’ve been working with one of our teams and they are struggling with teamwork.    Each founder is bright with unique and relevant experience, and they all compliment each other nicely.    Unfortunately, they struggle with creating their own support structure because they are weak in their teamwork.    I know this because when they have heated discussions about the direction of their product and business, they often can’t reach a solution without coming to me to help broker the negotiation between each other.

In large companies, we see a strong focus on teamwork within certain verticals – sales, marketing, product, technology etc – but these teams often don’t see eye to eye when they compete for required resources like budget, personnel, etc

In early stage start-ups, resources are much more limited and it’s often teamwork and shared resources that enable these businesses to get things done.

But when there are more than two founders it is inevitable that someone is not comfortable in their role.   This happens when multiple founders want or think they can be CEO or if they simply can’t agree on titles and responsibility.    This can become even worse when the Company is raising money and there’s a prospect of hiring new people.   In all cases teamwork often suffers.

How can we help make this better?

First and foremost, we believe in leadership.   This means that one person must be responsible for providing direction to the team.   This is the CEO.  And this is a critical piece for creating a strong team.

Second, the CEO needs to set an environment based on mutual respect.  This is so important for getting each and every member of the team engaged with the understanding that their opinion matters.

Third, the CEO needs to engage his team and have them work to solve problems.   This often requires asking people to provide their perspectives and having a constructive conversation exploring opposite points of view.

Fourth, regardless of the outcome of a specific debate, the team needs to all embrace the decision and move forward.   It’s critical that moving forward means each team member needs to support their peers even if they didn’t agree with the decision.

And last, the CEO needs to bring the team together to bond and move forward.  At Scout, we like to have a good meal or take everyone out for a night – either way our goal by the end of the night is to hear the founders saying “I love you man,” “I understand the decision,” “I got your back,” and “We’re going to be a billion dollar company”

That’s teamwork.

Teamwork