Startable - Healy Jones’ & Prasad Thammineni’s Blog

A few quick links today that you may find interesting:

MediaPost’s take on some recent news in the search engine space. Obviously Bing is getting some serious press; the demo video looks pretty cool. I personally don’t get the use case for WolframAlpha, but maybe I just haven’t played with it enough. I can’t imagine it is healthy for a single company to dominate the search market. I realize that data is very powerful in the search space, so there are to a certain extent some natural barriers to entry at scale, but can’t there be some alternative algorithms that also kick butt and return the best results quickly? If the average searcher is searching 4 times per search, then I can’t imagine that the war is won quite yet. 

A former colleague of mine from Atlas Venture has joined a new venture capital fund here in the Boston area. Eric Hjerpe has joined Jo Tango at Kepha Partners, a $100 million fund. Eric is a great technology company executive and I really enjoyed working with him at Atlas. (In fact, by working with him I really realized my major shortcoming as a VC, my lack of operating experience. And I say that in a very positive way, I just realized from being around him that I had a long ways to go if I wanted to grow up to be a real VC.) If you can take his money and get him on your startups board you should!

Fred Destin, another partner I worked with at Atlas Venture, has just put up a great post on his blog on the subject of “ignorant founders do it better.” I love the tone of Fred’s post and the premise - the best founders to not assume that their understanding of their startup’s end market and customers are prefect. Only by questioning and testing everything, and by being hyper-responsive to market feedback, can a startup be successful. Great post; check it out.

Finally, this one is tweeted everywhere but I think it’s very well written. Brad Feld lists 8 tips for interacting with venture capitalists in Entrepreneur Magazine.

Yesterday I attended a meeting of the Northeast chapter of the ACA, the Angel Capital Association. Holy cow. Angel groups are getting really sophisticated and I’m not sure most Northeast VCs are aware of it. These investors have great deal flow and the ability to completely fund companies with VC-type potential. Angel investing isn’t just for seed investments anymore. 

But enough about VCs, let’s talk about what this means for the startup founder seeking capital:

• I’ve said this before, you may not need venture capital. If you get the right angels involved you may be able to raise an appropriate amount of capital from angel groups, assuming you are building a capital efficient business.
• Angel groups are different than individual angel investors. These groups don’t write checks after a coffee discussion; they take steps to make sure your idea is seen by other members of the group and do due diligence on you and the company/product/idea.
• Angel groups very actively syndicate investments. This has a number of implications for the startup seeking capital:
  • If you impress an influential angel group you are likely to get a champion who can REALLY help you get in front of other angels for syndicate dollars. This should probably be your goal when first starting an angel fund raising process.
  • Angel groups talk with each other about deal flow. This is either their job or their hobby, and they like hearing what others in their community are doing. If you start to create buzz for your startup in the angel community you really increase the chance of investors mentioning your startup to each other. Just like in the VC world, a bit of excitement around your deal increases the chances of you receiving investment dollars.
  • They also share diligence findings, so take each angel investor’s diligence quite seriously. If you show badly for one it might easily get around to the others. 
  • Valuation. Actually, this deserves its own, free standing bullet point: Read the rest of this entry »
    

When I was a venture capitalist there were lots of reasons why we did not make investments in particular startups. My goal was to try to provide some honest feedback/guidance as to the reason for passing on the opportunity. Given the deep deal flow at my fund, this was not always possible, but if I had used up more than a few minutes of the executives’ time learning about their company I tried to give a little bit of the color behind the rejection.

This ranged from “the end market is too small” or “you need more user traction” or “it is too competitive of a market” or “we are not comfortable with this particular technology.” But the fact of the matter was, sometimes there were not great reasons for passing on a company. Many times these were just excuses hiding the real reason:

We didn’t like the founders

The real, untold, reason that most startup founders don’t get traction in their venture capital fund raising process is that the venture capitalists don’t think the founders can do it. Either they don’t inspire confidence in their ability to market the product, produce the technology, manage/recruit a team, think strategically… etc. VC’s are extremely picky in choosing who they work with.

But as a venture capitalist, you can’t easily say to an entrepreneur, “I love your idea and technology, but don’t think you are good enough to pull it off,” without coming across as a dick or getting into a confrontation. (Yes, I did try this a couple of times, and I’m pretty sure I just sounded, well, like a dick.)

VCs who like a company idea but who do not like a founding CEO will often try to feel out the founder to see if he/she is open to a different CEO coming in to run the business. This is usually done pretty subtly, for the main reason that this is a delicate subject and the venture capitalist does not wish to be offensive to the founder. These subtleties may be why founders don’t usually understand what the investor is saying. Or it could be that these particular founders are not great at getting subtle signals. Regardless, I think that VCs often talk past the founder and so the founder never ends up realizing that he/she is the real reason that the startup isn’t getting fund raising traction with the VC.

A few ways to tell if you aren’t getting venture funding because the venture firms don’t like YOU

Since lack of confidence in the founder is such a common reason for rejecting a venture investment, but yet so rarely effectively communicated to the startup’s founder, here are a few ways you can tell if YOU are the reason your startup keeps getting rejected by venture funds.

1. Lots of meeting, lots of rejections from those meetings. If you are getting a number of initial meetings with venture capital firms but funds are rejecting you this may be a sign that your end market is interesting but the investors are not digging your team. This isn’t a clear cut sign that the VCs don’t like the team, but if you see it in conjunction with the following signal then there is a good chance the team is the reason for the rejections.
2. There is no consistency across reasons behind the different VC firms’ rejections. If the funds all have different, inconsistent and seemingly poor reasons for rejecting you this may be a sign that the various firms did not like the team and are inventing various reasons in an attempt to be polite and to make you leave them alone. If you hear the same reason over and over from the funds, then they are probably rejecting your for that particular reason, but if you hear different excuses then it could be the team, and the stated reasons from the VCs are literally just excuses.
3. You keep hearing “what are your thoughts on the team.” This could be code for, “do you need to be CEO of this company.” Even less subtle is “what do you see your role being in the future.” If a venture investor asks you about the role you anticipate having in the company this is a clear sign that they are wondering if you are open to bringing in a  different CEO. 

A way to diagnose this problem is to say that you are open to having a different CEO come in and have you transition to a different role. If the venture fund you say this to begins diligence, when all others have passed, and starts introducing you to experienced CEO-types then you’ve found your answer. (I’m not saying you have to actually want to do this; I’m merely suggesting this as a means figuring out if this is the reason that you are not getting fund raising traction.) Of course, what you do with this answer is totally up to you. 

I realize that this post probably makes me look like a dick. However, I feel that it is such an important point that is so rarely disclosed that someone had to speak out about it. And, since I’m no longer a venture capitalist, I think that I can publish this truth without appearing to be such a jerk. Or at least I hope I can…

There is a pretty thoughtful discussion going on at Y-Combinator’s Hacker News on this post. If you are interested in hearing other people’s thoughts please check it out.

One of Pixily advisors, Karl Ulrich, send me his latest book to read, titled “Innovation Tournaments, Creating and Selecting Exceptional Opportunities”. Karl is a serial entrepreneur and Professor of Operations at Wharton. He has written a number of books on problem solving and his latest book is about using the wisdom of crounds to generate hundreds of ideas and identifying few winning ones.

The book lists 8 different ways to generate new business ideas. Having used a number of these in my own life, I felt the urgent need to share them with you. Here are 4 of these and the rest you can read from the book:

Read the rest of this entry »

Prasad and I had an interesting discussion with Siamak Taghaddos, co-founder of Grasshopper (formerly GotVMail.com), a provider of phone number and voicemail services to entrepreneurial companies. Siamak and his team have done a very impressive job bootstrapping Grasshopper into a successful company. He is known in the area as a very savvy marketer, which is why Prasad and I wanted to meet with him - he’s the guy who sent out thousands of chocolate covered grasshoppers recently. We were looking for any advice he might have on how to continue to increase sales at Pixily since he was able to grow his own sales so effectively without a big ad budget in the early days of his company.

His advice was pretty interesting, and is something that I think maybe needs to be reiterated in today’s go-go world of internet based marketing. I was expecting him to mention some sort of a viral online campaign or SEO tactic that really helped get things going back when his company was just a tiny startup. I was wrong. Instead, he said:

1. Figure out the right pricing
2. Get the positioning correct

Then worry about promoting/advertising the service. No one will sign up for your service if you can’t convince them they will get value for what they pay. He even went so far as to say that RAISING the price can be a good thing, if you can simplify your pricing structure. Customers don’t like to worry about overage charges or special fees, even if that means they pay a bit more - a predictable/stable bit more. And a higher price, in the funny world of the internet, can be a signal of quality. If it’s too cheap businesses owners may be afraid that the service is not up to par.

Of course, Siamak is totally right. And of course, his advice is totally obvious. But it was so refreshing to hear from someone who is walking the walk everyday that I thought I’d share it.

After having spent a couple of years as a junior VC, I think I’ve figured out the real problem facing the venture capital industry. It’s just too damn fun (and a bit too glamorous, in that geeky kind of way.) Too many people want to do it, particularly successful entrepreneurs. 

It’s funny. When I was a VC one of the questions I asked startup founders/entrepreneurs was what their long-term career goals were. Usually they responded something about growing and leading a large and successful company - the answer most VC’s want to hear. However, a not insignificant number of repeat, successful entrepreneurs often spoke of eventually selling their company and then, with a misty look in their eyes, “maybe getting into venture capital.” This happened regularly enough that I went through several stages of reaction to it during my time as a venture capitalist.

When I first started hearing this desire my initial reaction was, “hey, I want to grow up to be a VC, and you’re probably going to be better than I am at it, why don’t you stick to being an entrepreneur and not take my spot?!?” After hearing this response from a number of entrepreneurs I began thinking something different, “dang, if all these people get into venture capital there is going to be a glut of venture capitalists.” Of course, I recently noticed that there ALREADY is a glut of venture capitalists and not enough good CEO/founder-types (yes, I’m a bit on the slow side; it’s probably been like this since before I started my career.)

When pundits talk about the problems in the venture industry, they usually talk about how the incentive model for venture capital funds is messed up, and how venture capital fund managers can grow rich off of the management fees. This is true, but Read the rest of this entry »

I had never thought about it before, but it seems that B2B publishers may be managing the transition to an online business/distribution model much better than their consumer focused brethren. MediaPost is reporting results of the American Business Media’s 2009 Media Financial Survey, and business publishers are somehow replacing a lot of their offline magazine revenue with substantial online revenues. 

While tota B2B publisher revenues were off about 2% from the 2007 to 2008, but this is much better than 16% decline in the traditional B2C newspaper and magazine market. From the report’s press release:

Online media benefited from the continued shift in ad dollars from magazines to online channels. Online display and search advertising, which accounts for more than 50% of total online revenue, gained 12.4% in 2008 versus 2007 and grew at a CAGR of 30.7% from 2006 to 2008. At the same, magazine net ad revenue declined (10.2%) in 2008 versus 2007 and fell at a CAGR of (4.9%) over the three‐year period.

Good for B2B publishers! 

I guess the real questions are: 1) what are B2B publishers doing right and 2) can this be applied to B2C publishers.

I hope that this isn’t just because business content users were never trained to expect to get free content like consumers have been…

Since this is my first post as a former venture capitalist I thought it might be interesting to answer a one of the more… opaque issues in venture financing. Two of the most frequent questions I got as a VC from entrepreneurs were “how much is my company worth” and “how do venture capitalists value my company?” The truth is that the answer has nothing to do with DCF’s or other business school theories, but instead is based around what the VC thinks/needs to return to their fund from that particular investment. The following is a bit of an over simplification, but is as close to a “rule” as I could gleam from my time in venture capital.

Series A valuations 

Series A* valuations are usually based on percentages - as in, how much of the company does the venture capital fund want to own. Most established venture funds have an established strategy of owning a particular percentage of a company after a Series A investment. A typical, good fund will look to own 20% to 33% of a company after the initial investment. I’ll ignore the rational behind this for a moment and cut to the chase: this means that during a normal two-VC, syndicated Series A investment your startup sells around half the company to the VCs. Raising $4 million? Pre-money of $4 million. Raising $6 million? Pre-money of $6 million. 

Getting a higher valuation

Strange as it sounds, this does imply that the more you raise the higher the valuation. I’ll get into the rational behind this “math” later in the post, but first I’ll mention a few things that you can do to try to command a higher valuation.

• Have a name-brand management team. CEOs/CTOs and founders who have been previously successful and previously venture backed command higher valuations for their companies. Recruiting the right one of these executives to your team will increase your valuation. It may very-well be worth the percent ownership in the company that you will have to give them to get them on-board. (Who knows, they may actually be able to help grow the business too…)
• Get multiple firms interested in your startup. VCs can get competitive. If they fear losing the deal to another venture firm they can become more aggressive around the valuation. Read the rest of this entry »
  

I would like to take this opportunity to wish Healy Jones all the best and a great success in everything he will do beginning 5 PM this evening.

If you are reading this, you may already know that Healy is leaving Atlas Venture to work with startups. You see a lot of entrepreneurs giving up startups and joining VCs but not the other way around. I am sure Healy is nervous but having known him for about 4 years and having worked with him on a number of different projects, I believe he will do fine and come out on the top.

I got to know Healy while at Wharton School when working together on building the Follies Set. He is one of those few people who once commits to something will give it his 100%. In the last 20 months since founding Pixily, Healy has been a great sounding board and a trusted friend. Even though he is (was) a VC, I never hesitated in asking him questions that people would rather not ask a VC. He always gave his honest opinion and objective input. If you have interacted with him, you will know what I am talking about.

In the last couple of months, he has been helping us at Pixily by working on some marketing initiatives. We enjoyed having him on board and I am looking forward to working with him everyday.

Healy, wish you all the best!

As I clean out my office, I am reminded of a lot of the really great companies I’ve met over the past two years. Wow, some of the people I’ve spoken with are really trying to make some serious changes to the way the world works. It’s getting me very pumped up!

However, it also reminds me that some of what I’ve learned will walk out the door with me. Atlas is better than many firms, in that there is a nicely built intranet portal, which allows good internal information share on deals that reach critical mass - this is critical to making good investment decisions within the partnership. I’m shocked that some firms exist with out this sort of a tool.

Some other funds are uber-diligent at memorializing ALL contacts with entrepreneurs and companies, and all conversations are carefully documented. These funds are like elephants. Anything you say to them is likely to be remembered for the life of the fund. I’m not trying to freak you out, but just keep that in mind when you speak with VCs. They may actually remember what you tell them!