Evening Tidings: 5-17-2010

Weekend Reading: 5-14-2010

Morning Read: 5-12-2010

Entrepreneur Survival Guide: Motivation, Courtesy of Uncle Nikolai

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This is part of my Series on Entrepreneurial Culture.

"I tattooed 'survive' on my hand the night before I went away to prison.
And I did. We do what we have to do to survive..."

Uncle Nikolai (25th Hour)

I've posted here about how to deal with massive and unexpected knockout-type punches as an entrepreneur. But there's another type of dangerous threat to an entrepreneur's well-being and survival:

It is the phenomenon of interminable waiting.

You see, entrepreneurs are always in perpetual motion, hurrying from one task to another, taking calls, having meetings, raising money, cajoling, selling, emailing, tweeting, blogging, hiring, partnering, selling some more, stressing, exhorting others, and so on and so forth. To the outside world it all seems like a dizzying whir of movement. Less visible is the fact that this is exactly how the entrepreneurial species waits. Waits? Waits for what exactly?

Think about it. You know what I'm talking about. It's that internal clock we have ticking inside that's coldly tracking the next milestone in our business amidst all the apparent chaos: private beta, first product release, first customers, first investor, Series A, hitting break-even, that big partnership, that first million in revenue, that first bad-ass hire, that first good piece of PR, that first big spike in traffic, and on and on. It never ends. We feed off of it- we live for it.

The problem is, most of these major milestones seem to take forever to materialize. There are always delays, endless obstacles, issues, difficulties, crises that delay our progress. We're fighting inertia, indifference, short attention spans and it's inevitable that moments arrive when our resolve, our will, our morale and in many cases our cash begin to melt away. That internal clock of ours so intent on progress gradually goes haywire and all this interminable waiting begins to cause despair. Thoughts of capitulation slowly creep into our minds...

How we handle and see our way through these moments define who we are as entrepreneurs and whether we survive or die.

That's why I recommend you rent and then watch a certain scene in 25th Hour several times. (Once my buddy Nate over at AnyClip posts it, I will link to it). It is the scene in which Uncle Nikolai describes to Ed Norton's character how he survived through his toughest moments in life. (Norton's character is facing seven long years in prison.)

Sometimes we entrepreneurs need some inspiration and encouragement and this scene will fire you up if you are out there now giving it your all- trying to survive. Let me know what you think.

Avoiding Typical Pitfalls with Founder's Equity

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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

Morning Read: 5-3-2010

Morning Read: Curiosities and Tidbits 4-28-2010

Harvard Business School Study Shows that Angel Investing is King

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This is part of my Series on Angel Investing.

In their recently published landmark study, Professors Josh Lerner and William Kerr were able to demonstrate that on the whole, angel-backed companies enjoy performance gains of 30-50% when compared to other non-funded startups.  Their paper is meticulously researched, invoking in one instance Hammurabi's Code itself to underscore the ancient provenance of individuals making equity investments in high-risk ventures. A great deal of the data analyzed was derived from the actual practices and outcomes of both the Tech Coast Angels (Southern California) and the CommonAngels (Boston).

Here is a summary of the study's findings:

  • Angel-funded firms are significantly more likely to survive at least four years and to raise additional financing outside the angel group.
  • Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent.
  • Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence.
  • Access to capital per se may not be the most important value-added that angel groups bring. Some of the "softer" features, such as angels' mentoring or business contacts, may help new ventures the most.

 

Though it's true that the "street-wisdom" of most entrepreneurs and angels could have already told you this without the benefit of such a study, it's nevertheless very valuable from a policy perspective to have the benefit of such empirical data. The next time some politician with no concept of the seminal importance angel investing tries to hamstring the industry, we will now have even more incontrovertible evidence to bolster our overwhelming case.

For the next post in this Series, click here.

Morning Read: Tidbits and Curiosities

Morning Read: Curiosities and Tidbits

Ten Types of Hair on Early-Stage Deals

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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.

Weekend Reading

The Iconoclast Speaks: David Heinemeier Hansson on the Supremacy of Profit in Startups

This is part of my Series on Entrepreneurial Culture and Philosophy.

Every start-up entrepreneur should tune-in to this fascinating debate between David Heinemeier Hansson and Jason Calacanis on TWiST. For those of you who haven't heard of him, Hansson is actually the Danish creator of Ruby on Rails and a founder of 37signals. He's a truly original thinker and makes a consistent and compelling case for the supremacy of profits (not revenue!) as the ostensible goal of a start-up. He's completely outside the conventional thinking and if you don't mind some strong language here and there, this is definitely worth your time. For Hansson it's all about your best idea and "the work" itself and not about the startup "game" and all the baggage that comes with it. Great stuff!

Weekend Reading... a tad heavier than usual

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NY Times: President of Poland Killed in Plane Crash in Russia

(Immense tragedy and loss for Poland. I had the pleasure of meeting and hearing this fascinating gentleman and freedom-fighter speak perhaps one year ago at a luncheon sponsored by Baker McKenzie where he spoke at length without notes.)

WSJ: Senator Reed Again Pushes $30M Registration Rule for VC

(No doubt drawing upon his vast expertise [read: NONE!] with start-ups and venture capital)

Hargreaves: Hacking Venture Capital: A Taxonomy

James Grant: Greenspan's Just a Guy in a Suit

Fred Wilson: No Conflict, No Interest

Bijan Sabet: What is an East Coast Term Sheet?

Charlie O'Donnell: Why the Foursquare Acquisition Story Makes No Sense

NY Times: David Simon- Pugnacious D

(Great piece about the creator of The Wire & Treme)

Golfing-in-Exile (7): The Once and Future Kings Herald the 2010 Masters

This is part of my Series on Golfing-in-Exile.

The Honorary Starters Ceremony has been held at the Masters since 1963. In this ceremony, past champions of an earlier age have the distinct honor of leading off the tournament with ceremonial tee shots.  It is just one of many traditions that separates and distinguishes the Masters from any other golf tournament in the world.

See the footage below of two living legends of the game, Arnold Palmer (at age 80) and Jack Nicklaus (70) kicking off the 2010 Masters in grand style. Incredible champions, true gentlemen and worldwide ambassadors of the game. This ceremony never ceases to give me the chills.

Startups, Not Bailouts Create New Jobs? Wait, So the Emperor Has No Clothes?

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This is part of my Series on Entrepreneurial Culture.

People in the start-up and investment community understand from first-hand experience that when it comes to job creation- start-ups are where it's at. It's also great to have organizations like the Kauffman Foundation, (that actually study, support and promote entrepreneurship), around to back this up with some hard stats. Below, for example, is the staggering reality about new job creation in this country:

“Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less...” (Kauffman Foundation)

But here's the problem: People who are not in the start-up, investment or tech scene, (read: the majority of the American electorate), through no fault of their own, do not for the most part realize this fact. This is probably because much of the mainstream press does not focus on or cover this reality.  I see very little emphasis on how critical talented entrepreneurs are to the growth of our economy and to job creation.

I was therefore amazed and delighted to finally see someone from the 'mainstream press' actually step-up on the big stage and bellow-out a big unqualified YAWP for the need for our government to focus on policies that support start-ups and entrepreneurs instead of hurling taxpayer billions at bailouts. G-d bless Thomas Friedman! How often do you see a NY Times columnist writing stuff like this:

"Good-paying jobs don’t come from bailouts. They come from start-ups. And where do start-ups come from? They come from smart, creative, inspired risk-takers. How do we get more of those? There are only two ways: grow more by improving our schools or import more by recruiting talented immigrants."

I couldn't agree with Tom more and I've covered some aspects about how I think we can improve entrepreneurial culture in our universities here and here.