Startable – Healy Jones’ & Prasad Thammineni’s Blog

The wrong investor can really traumatize a startup’s growth trajectory. Stupid questions, micro-managing/backs-seat driving, pig-headed insistence on the wrong strategy, forcing bad executives on the company, halitosis – it’s a pretty long list. If you are a startup founder about to take on venture capital financing you should want to know everything you can about your funding venture capitalist prior to accepting an investment. One of the most basic tests you want to conduct is to speak with some of the other founders who have worked with the VC. This isn’t that hard – most VCs will expect this question.

Ask for introductions to founders who have taken capital from the venture capitalist

You’ll want to have an honest, founder-a-founder conversation. Your goal is to make sure that they venture capitalist is someone who you want intimately involved with your company for the next five+ years. Are they trustworthy, do they actively try to help the business, do they listen well, are they approachable and very importantly, are they NOT jerks.

Prasad has begun this phase of the fund raising process. I’m hoping he will have some insights to share on some of the conversations that he’s started to have. However, I think the basic questions that every founder should want to be able to ask other people who have taken the investor’s money are:

• How responsive is the investor
• What help, beyond financial, do they provide
• How involved do they get with your business – try to keep this open ended so you don’t lead the other founder to the answer you want to hear. One founders “very helpful” could be another’s ”smothering.”
• Do they prepare for board meetings
• Do they make helpful introductions (customers, potential members of the team, other funding sources)
• Have they been transparent with their time frame to exit
• If you had to do it all over again, would you accept money from this investor

I am sure that other people have had successful conversations like this in the past and I’d love to hear what was asked and what was learned!

1. First of all I’d like to congratulate oneForty of TechStars Boston for closing on a seed funding round. There are some other interesting companies in the TechStars Boston program and I’m hopeful that they too will be successful in finding funding to continue to grow their businesses.
2. Secondly, congratulations are in order for the team over at CloudSwitch for closing on a second round of financing recently. Commonwealth Capital has invested capital into the business, shortly after the company closed on an investment from my former employer, Atlas Venture, and Matrix Partners. There is a simple reason as to why this company was able to raise capital so efficiently in such a difficult funding environment. A well-respected founding team led  by Ellen Rubin was joined by John McEleney, an experienced Boston-area CEO. As I’ve blogged about before, team matters when raising venture capital. (I know, I’m pretty much linking to Innovation Economy today. I guess Scott Kirsner is just writing about interesting stuff today!)
3. Microsoft is going to sell Razorfish, according to the Financial Times. Pretty interesting stuff. Razorfish is the “creative” arm of aQuantive… Other online ad technology companies have proven that they don’t need a real ad agency arm to do well in the space (such as Google). So does creative matter for online advertising? Well, beyond the basic idea that more interesting display ads are more likely to get clicked, yes, I think it does. Here’s why: social media is growing in importance in online marketing. I’m not talking about targeted ad campaigns run through Facebook’s ad service, but instead the need to engage customers with interesting messages through Twitter, fan pages on Facebook, via engaging iPhone apps, and in other one-to-many social media services. I think it’s pretty clear that customers are getting really good at cutting out the clutter, but are getting pretty into fun “messages as a game” or “messages as entertainment” type marketing programs. I do not believe that simple mathematical formulas can create solid engagement in these areas yet.
4. Finally, the thing I’ve been thinking about for a while: “The Top 100 Networked Venture Capitalists.” I actually think the title to this Techcrunch article is a bit off, it should be the top networked venture capital firms, but anyways… a while ago some academics parsed venture capital returns by how many other co-investors a particular venture firm invested along side of:

They looked at historic venture returns and found that “better-networked VC firms experience significantly better fund performance,”

But who cares about venture capitalists’ returns. What the entrepreneur needs to think about is which venture capital funds are going to help his/her startup the most. The list presented on Techcrunch is a pretty good indicator of the funds that adopt an aggressive investment syndication approach. As I’ve mentioned several times in the past, syndication is a very good idea. If you are an entrepreneur and you are looking for a list of venture capital firms that you should try to network into, this list isn’t a bad place to start. These are the VCs who have the relationships you will need to find additional capital to support the growth of your company. Your fund raise doesn’t stop after the Series A, and these funds are the best at helping their portfolio companies find their next round of financing.

This is my follow up post on what to do if the venture capitalist who invested in your startup leaves their firm. (For the first post on what it means when your VC leaves click here.) My first thought for you, as a startup CEO in this situation, is “wow, you’ve just become an orphaned deal and you might be in trouble.” But all is not lost, and there are steps that you can take to make the situation better; perhaps even a positive. The amount you freak out depends on your particular situation. 

Your situation when the VC leaves

Let’s hope that you’ve picked your VC wisely. Some venture funds have good internal information and responsibility sharing on existing investments. These funds also force rank their investments across the entire portfolio. I think that many of these funds will handle partners leaving much better because they have real understandings of which investments will be supported, regardless of which partner works with the portfolio. Why don’t all funds do this? Because it is a huge amount of work to develop these rankings and keep them up to date. While I was at Atlas we did this exercise several times, and it required the attention of every investing partner, principal and associate, plus the CFO and several members of the administrative staff for two of full days, plus hours of preparation time. And it wasn’t fun. But I think that the exercise gave the fund a much better, more rational understanding on how each portfolio company was performing and the key value drivers and risks faced by each. If you are a portfolio company that is doing well at a fund like this then you will be handled with care during a partner transition. I still suggest you think about following some of the steps I list below, but you are going to probably end up being in good shape.

However, if your fund seems disorganized and doesn’t seem to know who will be managing their investment in your startup after your partner leaves (for example, if you first hear that your partner left in the media/news and not through someone from the fund contacting you), or if your startup is not exactly … kicking ass then you need to be very pro-active.  

Is this the only fund that invested in your startup, or is there a syndicate? This is one of the reasons why you, as a startup CEO, should want to syndicate your early financing with more than a single venture firm. If there is a syndicate you may be in better shape. Hopefully that other fund will continue to be supportive – if so this will make raising follow on financing from new investors much easier. And hopefully this other member of the syndicate will be able to help you meet near-term capital needs.

I am operating under the assumption that you have a good view into what your cash needs will be, and that you know when you will need to raise additional funds for your startup. (If you don’t have a fresh financial plan get it together ASAP!) You should be less concerned if you have 12+ months of cash runway.

Steps you can take when your VC leaves

Figure out what is happening at the venture firm. Read the rest of this entry »

I don’t know if you’ve noticed, but the venture capital industry is undergoing a bit of a contraction. The WSJ recently noted, “Not since the dot-com bust has the industry experienced as much turnover as it is now. Since the end of 2007, the number of venture-capital principals, who make investment decisions and are directors of start-up companies, has tumbled by more than 15%, according to the National Venture Capital Association.” There is a ton of discussion about how the shrinking of the venture industry will impact “innovation in the USA,” and “what does this mean for new companies chances of getting funding.” However, there is another group of startups that is being impacted by this personnel exodus – funded companies. What happens when you are a startup that has raised venture capital and the VC who sits on your board leaves their fund and your company becomes an “orphan deal.”

Well, you should probably freak out a bit.

Let me explain. Everyone knows that there is a lot of rational, thoughtful analysis and diligence work that goes into a venture partnership making a new investment in a startup. However, there is also a bit of passion that goes into any given investment. Fred Wilson recently blogged on this topic when he discussed the leap of faith that goes into any new investment. This leap is mainly taken by the partner who is leading the investment. That partner stands up to the venture firm’s partnership and says: “I believe in this. Here is my work and here is my thought process, and here is why I want to risk our investors’ money in this business and with these founders. If the going gets tough, it will be on my back to figure out how we save this investment.” 

The lead partner knows the startup better than all the other partners at the fund. When the startup hits the inevitable bump (or two) on its road to world domination, it is that partner’s job to pound the table at the fund and say “we need to continue to support this management team.” It is much easier for the partner who made the initial investment in the startup to provide this level of support because the partner: 1) was supportive of the company during the first investment, and assuming the startup has been doing well, has probably also been providing positive updates to the partnership; 2) has seen the team in action, and (assuming the team is good) has developed confidence in their ability to execute; 3) understands the Read the rest of this entry »

Has your startup failed before? I don’t mean the exact company that you just founded, but the business idea that you are attacking. It’s not necessarily a bad thing to try to take on a problem that has already gotten the best of other entrepreneurs. Difficult problems can be the most rewarding and can offer great opportunities. But when I was a venture capitalist hearing one of these pitches, it was very frustrating when the founders didn’t realize that there have been other, failed companies in the same space.

If you are pitching something to VCs that has failed before, you need to be able to talk intelligently about what caused the previous failures and how your startup is different. Venture capitalists will want to know that you are aware of the risks in your space and that you are taking intelligent steps to overcome them. Not knowing about other startups that have failed is fine if you are starting a company on your own (I guess), but if you are approaching funding sources you better know if there have been big-time venture funded failures with a business plan similar to yours.

I was always a bit surprised when I knew more about companies that had failed in a space than an entrepreneur trying to pitch me. That really shouldn’t happen. You’d be surprised at how many entrepreneurs present business plans to venture capitalists that have flamed out spectacularly and don’t know it. A little internet research can go a long way, as can some networking in a space before putting together a business plan and starting the fund raising process.

A venture capitalist’s natural response, when hearing about a startup in a space where a number of other venture backed businesses have met an early demise, is to assume that there is something wrong with the particular industry. “It must be a bad market,” goes the typical thinking. Read the rest of this entry »

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.

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.

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 »

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!

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!