Pop Quiz on the Airbnb Debacle

If you missed the whole Airbnb affair- (now referred to as #ransackgate), you should probably consider yourself lucky and should stop reading here. You probably don't rent your house out to perfect strangers too often so this piece of news passed you by somehow. Perhaps you were more focused on how the Syrian government just wiped-out 70+ civilians last night or how a nutjob in Norway savaged a similar number of people in a national tragedy. Maybe you're one of those people that knows there is a famine going on in Somalia even though it's not getting too much press.

Still here? Well- then you probably heard that a meth addict used an alias on Airbnb recently to rent a person named EJ's house while she was travelling and then proceeded to violate, steal, defile, destroy the victim's home. What happened to EJ's home is horrific and criminal. Anyone who's had something stolen from them has some sense of the outrage and sense of violation and pain that comes with this territory. The alleged offender is apparently in custody now and will hopefully be tried. If she is indeed found guilty- I hope she'll be convicted and jailed to the full extent of the law.

But we haven't heard much about this "alleged" low-life. Media coverage of the crime has instead focused either on Airbnb's alleged complicity in EJ's misfortune and/or their poor handling of the P/R aspects. The alleged felon who committed this odious crime is hardly mentioned. This is not surprising. Airbnb's success and billion dollar valuation make it a perfect target for this sort of criticism. 

Could and should the founders have handled the P/R aspects a lot better? Definitely! But who are we kidding- did they really have a chance?  The headlines here are simply tailor-made for generating eyeballs. I am not making these up:

Airbnb Pillage Victim Says Company Tried to Keep Her Quiet

A Billion Dollars Isn't Cool. You Know What's Cool? Basic Human Decency

The Airbnb Horror Story Continues

You read these headlines and it sounds like Airbnb is some kind of rich serial murderer on the loose- pillaging and laying waste to scores of innocent and kindly citizens in its path.

Much like the Craigslist imbroglio of past years, this entire Airbnb affair has again brought to the fore questions about where a company's responsibility (legal and ethical) to its customers' safety begins and ends. Rather than presenting a long opinion on the matter I've instead decided to ask some admittedly facetious questions. For the sake of brevity I've made them multiple choice.

When a car-maker manufactures a car what scenarios do they need to anticipate? For example, is it morally or ethically obligated to protect its customers against:

a) car-jacking attacks

b) hitch-hiking meth addicts that drivers pickup on the road and invite into their car 

c) damage caused by strangers to whom drivers lend or rent their car to for free or for a fee

d) none of the above (muttered under one's breath)

Should the car-maker be obligated to place disclaimers on the driving wheel of the car warning people that inviting strangers into their car out of the goodness of their hearts or for a fee comes w/certain risks?

a) yes- people are not intelligent enough to know this and need to be treated like children

b) yes- car-makers are greedy and want to save money. They should be monitoring all their drivers via video cameras and be able to intervene via installed speakerphones when their customers are making dubious choices

c) yes- we need to legislate this. I am calling my congressman

d) none of the above (accompanied by possible expletive)

Oh wait, carmakers are brick and mortar businesses. They don't count. What about if someone uses a fake LinkedIn Profile on the internet and invites me to become a connection with them because we share two business groups in common? Then that person wants to have coffee and they seem cool and I let them stay at my house while I am vacationing and they trash my house. Shouldn't LinkedIn vet these people? Wait- what if instead of trashing my house that person partners with me in a new business and then steals all the cash I put in the business bank account?

a) yes, LinkedIn sucks! They are too greedy and don't bother to vet people on their network.

b) yes, LinkedIn should actually pay for the damage to my house. Their business model doesn't really protect me enough. I thought this person was legit! I'm calling my lawyer. 

c) this is an outrage- the LinkedIn founders don't care about their customers. They've gone IPO and cashed out. I'm calling my congressman.

d) you know it by now :)

For Part 32 in in this Series, click here

Welcome to Venture Studio

As a new feature to my blog, I'll be posting my one-on-one conversations with entrepreneurs, hackers, founders, vc's, angels and others who comprise New York's vibrant tech ecosystem starting next week. Getting some great guests working on fascinating projects! Our parter organizations below will be helping with identifying guests and getting the word out about the show. Stand by...

For Episode 1 of Venture Studio click here

Co-Hosting Organizations:

           
                                                        The Startup Genome Project

Avoiding Typical Pitfalls with Founder's Equity

This is part of my Series on Entrepreneurial Culture.

In meeting after meeting with first-time entrepreneurs I see many variations upon the theme of what can charitably be called unfortunate decisions about equity splits between the early participants. It is of course always a relief when I'm able to catch the entrepreneur before he or she commits this typical sort of blunder. Sadly, all too often, it is already too late and there is hair on the deal.

If you are an entrepreneur launching a new company, you really have to think long and hard about who your co-founders should be and how to involve them. 

It is most likely the single-most important business decision you will ever make.

Here are some realities and rules of thumb to go by:

• Most poor decisions made in the allotment of founder's equity are made by first-time entrepreneurs in the atmosphere of euphoria created by 'taking the leap' and starting a company for the first time with so-called 'buddies'. If you are in this category- take heed!

• Blindly going in "50-50" with someone you don't know all that well is just ludicrous.

• In most cases you should only bring on one other co-founder, (at most a second), and that founder absolutely must offer singular value and expertise to the venture.

• If you do bring on a co-founder, make sure you put their equity on a vesting schedule. (Four year vesting with a one year cliff is standard).

• With this sort of vesting in place, if they end up taking off after a dispute or a change of heart, they don't end up leaving with a huge chunk of equity in your company! Your cap table thus will remain attractive to potential investors if you execute well.

• Only partner with co-founders that are as driven and passionate about making this successful as you are. Do not partner with people who enjoy just "hanging around the hoop". Remember, every founder must be totally committed to the venture.

For my video conversations with great entrepreneurs go to: Venture Studio

Ten Types of Hair on Early-Stage Deals

This is part of my Series on Venture Capital and Angel Investing. 

In the parlance of investors there is an oft-expressed and colorful turn-of-phrase, namely, "hair on the deal", that immediately signals the kiss of death for a company's investment prospects. There are of course grammatical and regional variations on this expression but the implication and import are always one and the same: that the company in question will not get funded. Among investors discussing a deal, the mere whiff of this hirsute quality will often suffice to end a discussion of the company's merits and shortcomings. In this post, however, I intend to delve into exactly what the range of characteristics exhibited by a company and/or its founders are that embody this dreaded state of 'hairiness'.

1. Legacy Shareholders:

The fact that a company has legacy shareholders in it is normal. If, however, they exhibit any of the following characteristics, the deal has hair on it.

a) Disgruntled: One or more shareholders is really peeved about something, (doesn't matter what because they'll try to interfere with the deal).

b) Missing: If a number of shareholders can't be tracked down, have moved out of the country and/or are generally unavailable, they will often come back to haunt the company in the future.

c) Too Many: You find out that in his best Max Bialystock imitation, the CEO has something like 50+ individual investors, several of them nonagenarians. Rounding them up will be like herding cats.

2. Unrealistic (Inflated) Valuation:

An example of this would be an angel-backed company touting a $15M pre-money valuation although they do not yet have any customers or revenue to speak of. How receptive do you think they are to a conversation in which you tell them their pre-money is $2M?

3. Irrelevant Founders Who Think They Are Still Relevant:

Sometimes it's time for a founding team to let go and make way for the "next phase". If they can't come to grips with this, the deal has hair on it. (This is a very common situation).

4. Founders Who Suffer From Delusions of Grandeur (Read: Unchecked Egomania):

This treacherous reef has sunk thousands of start-ups. Here the founder cannot deal with the realities of the market and is singularly focused on his/her own destiny as a magnificent and fabulously wealthy hero of some kind. This tragic flaw will color all the important decisions the start-up will have to make.

5. Unscrupulous Broker-Dealers:

I have already written about this common problem in a post entitled Eyes Wide Shut: Welcome to the Masked Ball.

6. Encumbrances (Lawsuits, Disputes, Debts):

If there are lawsuits afoot, disputes among the founders and previous investors (any combination of this), large debts and any other types of serious encumbrances, there is an overgrowth of thick hair on the deal through which no machete will be able to cut.

7. A@#holes:

This type of person of course comes in all shapes and sizes. The appellation can, for example, refer to founders who state their wish for investors' money to pay for a job for their spouse and perhaps a corporate apartment for themselves. It can refer to founders who, although successful in their business, treat their employees like dirt. In a nutshell, it refers to a mercenary, not a missionary.

8. Sloppy Governance:

The diligence process sometimes reveals poor record-keeping, lack of accurate accounting, incomplete documentation. This often signals a deeper mess that requires an archaeological dig to clean-up.

9. Obfuscation and Lack of Transparency:

This too can manifest itself in various kinds of behavior. For example, the founder seems defensive, as if there is something to hide. Their story changes over the course of several conversations. You can never quite get a handle on the financials, the technology or some other vital aspect of the company. I've also posted before about a few different types of white lies often told to investors.

10. Lack of Respect:

If the Founder/CEO is super-critical of others, dismissive of the competition and/or generally treats people poorly, they will most likely not succeed and working with them will be a miserable experience. 

I don't pretend that this constitutes a comprehensive list, so by all means, please weigh-in with more and with any juicy anecdotes to bolster your point.

For the next post in this Series, click here.