Startable – Healy Jones’ & Prasad Thammineni’s Blog

Those of you know me well have probably heard the news over the past few months, but this is more of a formal, general announcement: this Friday will be my last day with Atlas Venture. I’ve been having discussions with a number of people I trust in the Boston area technology startup and venture scene and think that this is the right time to exit the venture industry finally try my hand at something entrepreneurial.

Leaving the comfort of a venture/investing gig is a pretty big deal for me – finance is pretty much all I’ve known, and getting a VC position has been a career goal for a long time. When I was a baby investment banker in San Francisco at the tail-end of the dot.com boom I remember meeting with venture capitalists and thinking, “man, how do I get that job?” I worked my down the capital structure, doing some buyout investing at a small fund in San Diego and then later-stage technology investing at Summit Partners. As the end of my two year position at Atlas approached I did a lot of… soul-searching is not the right word, probably navel-gazing is more appropriate. Anyways, I realized a few things:

1. I spent my whole life learning how to be the best at finance, but the world of finance just committed harakiri (or as my friend says, “Harry Caray.”) It might be a good time to learn some new skills! One of my partners always says “is this the planet we want to land our spaceship on.” He’s talking about if we, as investors, want to get involved in a particular industry. Putting that same sort of analysis into venture makes me very afraid for the industry over the next few years. I think I’ll direct my spaceship away from Planet VC for now…
2. VC is less fun these days. I went into technology banking @ H&Q because I loved the idea of working with young technology companies. And I still love the rush of hearing about a new technology and working with an entrepreneur building a dream. These days, there is a ton of effort is being spent re-sizing existing portfolio companies and doing downrounds. Sure, some new investments are still getting done (and Atlas is in a very solid state to make new investments, with a new fund and committed partnership). But all the Excel cap-table anti-dilution modeling and nasty negotiations with co-investors over companies that aren’t meeting expectations just isn’t enjoyable, and it isn’t really why I got into venture in the first place. I’d love to spend more time growing companies, but given the pressures that any VC with an existing portfolio must be having right now the best place to help grow a business, for me, is going to be within an actual startup.
3. The best venture capitalists that I have interacted with have all helped grow businesses. They have a very different grasp of a company’s strategy. My finance training of “let’s look at the metrics” will hopefully be useful in the real world, but I know I’m lacking some of the experiences that would make me grow up to be a great venture investor. I’m not sure that I will want to be a venture investor in 10 years, but even if I do want to be one I need to broaden my skill-set.
4. My opportunity cost is very low. The venture industry is shrinking. Well-known fund after well-known fund is cutting the next fund’s size. There are going to be fewer VC positions out there, and I’m willing to bet that compensation has to come down. While headhunters have started calling again with VC jobs, I’m not yet convinced this just isn’t a head-fake.
5. This is the right time for me to take some smart risks. I’ve got a great sugar-momma in my wife, so we can afford for me to try to get something new running. And if I fail, well, let’s hope I follow my own advice and fail fast.
6. Most importantly, I’ve always wanted to help grow a business! My wife works at a great startup, Hubspot. In the morning, when our alarm clock goes off, I’m jealous of what she gets to do that day. It’s my turn to do something fun and crazy and emotional!

I know there is a very good chance I’m going to suck in the real world. I don’t have the hard skills or experiences to be certain that I’m going to succeed. I’m sure if you listen carefully next week, you’ll hear the none-too-gentle thump of me hitting reality, hard. Venture is a cushy job, probably in more ways that I currently realized. But it’s time for me to stop being a “thinker” and to become a “doer.”

I’m ready to step up the passion. Most of the really great investors that I’ve worked with have been amazing at dispassionately evaluating investments. Emotions can cloud the rational calculations and thoughts that go into deciding where to place your investors’ money. But, as a great entrepreneur Andy Palmer recently told me, startups run on emotion. You don’t convince great technologists and business people to leave comfortable/well paying jobs at big companies unless they buy into the excitement of changing an industry. It’s time to run through a few walls and try to accomplish something crazy!

This promises to be a very fun summer for me. I’m going to be doing a couple of interesting things while I sort out how I’m actually going to get/create a paying position for myself. I intend to help Prasad over at Pixily with his fundraising and his sales & marketing for a few months. Additionally, Shawn Broderick has invited me to hang out at a desk at Boston TechStars. Hopefully I can help the TechStars companies understand how to approach and interact with funding sources. It should be exciting!

Of course, once I’m out of venture I am no longer bound to keep all of the precious venture secrets. I think I’ll celebrate my status as a recovering venture capitalist with a blog on Monday on the real way VCs value startups…

*per a couple of people who pinged me, my going-forward email address is healy (at) startable dot com.

About Healy Jones

Healy is a former venture capitalist with Atlas Venture in Boston and Summit Partners in Palo Alto. He is now the head of marketing for OfficeDrop. OfficeDrop is a cloud filing system, scanning software provider and document scanning service that helps small businesses manage paper and digital documents. OfficeDrop provides tools that sync businesses’ desktops and scanners with an online search engine and cloud filing cabinet. The affordable service saves businesses time and money by enhancing paper based collaboration and workflows, and by bringing paper to digital platforms.

June 10th there will be a good discussion on what it takes to raise angel funding by the MIT Enterprise Forum of Cambridge. Lee Hower of Point Judith Capital will be moderating a panel with some good speakers:

• Shawn Broderick, Director @ Boston Techstars
• Rob Go of Spark Capital
• Rich Miner of Google Ventures (I haven’t met Rich but have heard good things from my partners)
• David Friend, founder of Carbonite (among other successful companies)

If you are in the area and are thinking of raising angel funding you might find what these people have to say interesting!

I’m still putting together my thesis on why the technology IPO market is broken (see my post on the sorry state of VC exits & IPOs in Q1 2009). But I’ll give you a clue as to my initial thoughts: 1) the whole IPO market is busted, so as a side effect technology IPOs are broken; 2) the big buyers of small-cap technology IPOs have left the building – I’m not 100% sure why but I bet it has something to do with the fact that in the late 90′s a bunch of crap was sold to them; and 3) something about trading fees being too low to support research analyst coverage of $250 million market cap companies, thus making these small technology companies harder for mutual funds to actively follow.

To the last point, a healthy investment banking industry is critical to getting IPOs done. Michael Butler of Cascadia Capital (a well known boutique investment bank based in the Pacific Northwest – when I was at Summit Partner we did some work with them and they knew their stuff) has recently written a blog post on PEhub on the state of the investment banking market and why/how it is screwed up. One his points really caught my eye.

They (banks) began competing against their clients when it came to trading activities and traditional investment banking activities such as M&A 

The overall take-away: Fueled by public shareholder funding, investment banks essentially became hedge funds and PE/VC funds, and their core investment banking activities were relegated to secondary business lines. 

Michael is very correct. When I was a baby banker with H&Q, the sexiest group to be in was M&A. A major reason for this is that it was the most profitable group. Read the rest of this entry »

A friend from business school recently asked me to help him understand what goes into a venture capitalist’s investment memo. He is thinking of joining a startup and may ask some friends and family for seed financing, and so wants to be discuss the idea with them in the same way that a VC would. After this discussion I realized that most startup entrepreneurs probably don’t understand the inner workings of a venture firm or sophisticated angel group. In an attempt to help demystify a part of the venture fund raising process I’ll explain the typical VC investment memo. Understanding the documents that a VC uses to discuss a startup internally to get approval for (or socialize the idea of) an investment may be helpful to your startup as you seek funding. After all, knowing how a venture capitalist is likely to internally publicize, share and memorialize the investment in your company can help you anticipate where some of their questions are coming from.

I’ve worked for/interned for a few of funds, so feel like I have a pretty good idea of what is standard investment memo material. I am not going to talk about any “special” or unique things I’ve seen in any particular venture firm’s investment memos, only the sections and themes that are recurring across all the funds I’ve spent time with.

Keep in mind that the purpose of these memos really vary by firm. Some firms use the memo to educate the investment committee on the startup and the memo is an important part of the deal approval process. Other firms circulate memos as more of a heads up to the other partners, alerting them to the deal and seeking advice and introductions that can help with due diligence. Regardless, someone at the VC is consolidating the learnings on your company, market, technology and team and putting that information into a format that helps the the investment team efficiently reach a funding decision on your startup.

Typical contents of a venture capital investment memo

A. Intro/executive summary – This part is usually only a page long; it needs to very concisely summarize the opportunity; depth and discussion of diligence findings will be found later in the document in the respective sub-sections  

1. Business Summary – Couple of paragraphs to set the stage on the opportunity
2. Proposed Financing – $ invested; size of round/sources of capital; (go into more dept in the Deal Description/Details section) 
3. Pros of the Investment/Reasons to Invest – Bullets on why the investment is exciting. Usually mention management, market and technology differentiation. (If you don’t have these, why are you investing?)
4. Cons/Key risks – Highlight the key issues that could derail/destroy the company/the investment’s return potential. Holes in mgmt team, competition with deep pockets/stated interest in the space, etc.
5. Deal goals – Use of proceeds; milestones to be hit with the funds from this funding; alignment with management and other investors on goals and direction of company (if a complicated investment or many other investors may require its own section later.)

B. Market opportunity – After the introduction comes the meat of the investment memo. Read the rest of this entry »

The person who runs the CIC (Cambridge Innovation Center, I think it’s called) has a new idea for a shared office space in Cambridge. To be called the “Cambridge Co-Working Center,” it sounds like it will be a shared office where startups can rent shared desks or couches. Not sure what to think, at $250 a month, but could be a great startup jam-session kind of a place if the right ecosystem of people moved in…

One of the more common types of securities used by venture capitalists is the participating preferred stock. This preferred stock is an accepted part of the startup financing landscape, although it has some pretty significant impacts on the value of the common stock (i.e. the stock owned by management and employees of the startup) at an exit. In particular, participating preferred stock can significantly impact the return profile of an investment for a venture investor at a smaller exit value. Exits have shifted from IPOs, where participating preferred holders usually are forced to convert to common shares, to smaller M&A exits, where participating preferred holders have certain… special privileges. (See my recent post on VC backed exits in Q1 2009.)

Anything that provides extra return to a VC at an exit takes return from the founders, so it is important for entrepreneurs to understand participating preferred stock and its impact on the exit value of the common stock.

The one point that I would like startup CEOs to take away from this post is that:

The type of security your venture capitalist purchases will have different ramifications based on the size of your exit.

First of all,

What is participating preferred stock?

Participating preferred stock:  Preferred stock where the investor receives back their invested principal (plus any accrued dividends) before common stock holders and then participates on an as-converted basis in the returns to common stock holders. In other words, participating preferred holders get their invested dollars back THEN get their % ownership in the remaining proceeds. 

I’ll run a math example down at the bottom of the page, but here is a chart showing returns to a company that raised $3 million on a $3 million pre-money valuation.* Read the rest of this entry »

I had the chance to visit the Techstars Boston space last night and spend some time with some of the mentors for the program, Shawn Broderick who is running the program in Boston… and I got to sit with one of the companies that has already set up in the space and is hard at work on their project!

Shawn (and Brad Feld and David Cohen) have put a huge amount of work into getting the seed program going here and recruiting an amazing group of mentors. In the initial companies selected for the Boston program there are some really fun concepts, and I am hopeful that the entrepreneurs will be just as solid. Hopefully I’ll be able to spend some time over there this summer!