startups

The Dreaded Call

Scout Ventures, , , 2 Comments

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

Is your Venture Capital Firm Having an Identity Crisis?

Scout Ventures, , , , , Leave a comment

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

Scout Ventures, , , , , , 2 Comments

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

Advisors

Scout Ventures, , , 3 Comments

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

Teamwork

Scout Ventures, , , , Leave a comment

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