Startable - Healy Jones’ & Prasad Thammineni’s Blog

Great post by Mark Suster on when, if and how startup founders should be allowed to take money off the table before their starup has reached a real exit. Mark’s basic thesis is that it is sometimes a great idea for startup founders to sell some of their equity to their investors. He discusses his own experiences and suggests how he would have managed his own companies differently and/or not sold them when he did. His post is well reasoned and is worth reading. He does suggest a few scenarios where this makes sense and should be allowed, including the founder having been with the company for a certain number of years, limiting the $ amount to something reasonable, etc.

What I’ve seen is that early-stage VCs with big funds are not against buying common stock from founders, when the startup is doing well. As I’ve mentioned in my startup valuation post, VCs are always thinking in terms of their percentage ownership. When the company is doing great and VCs with deep pockets are already investors and want to increase their ownership, so if that means potentially buying stock from founders you may be in luck.

One of the other funds I worked for, Summit Partners, made a living off of buying stock from founders. It worked pretty well, since Summit liked investing in companies that were profitable and growing - and hence didn’t really need traditional venture capital to grow the business. Founder liquidity was the general excuse Summit used to get into some great companies.

I’m not at all against the idea of founders taking some money off of the table, provided the company is doing well and provided they continue to own enough of the company to continue to care about its success and work hard to keep it growing. I do think this would be a real advantage of selecting a larger sized fund as your initial venture capital investor. Smaller investors may not have the additional cash reserves available to both fund some liquidity and also continue to have enough in reserve to fund the company’s growth.

Properly supporting and working with the CEO is the most important action a venture capitalist can take after funding a startup. When I was a VC, I was very impressed with how often the partners I worked with would communicate and brainstorm with their portfolio companies’ CEOs. Part of the VC’s responsibility, and the board of directors’ responsibility, is to perform annual reviews of the CEO’s performance.

The board evaluation of the Chief Executive Officer

The CEO position of a startup is pretty lonely sometimes. Just because a CEO is in charge of a business doesn’t mean that his/her professional development is over - but getting the right feedback and guidance that can help the executive grow professionally can be challenging. Getting effective feedback from employees can be hard, since it is not always easy for them to speak “negatively” about their boss to their boss. And of course, your employees and co-founders are probably pretty busy trying to grow the company. Interactions with the board can be enlightening, but usually focus around discussions of strategic imperatives and operational milestones, not the CEO’s professional development.

While it is certainly the CEO’s own responsibility to try to grow as a professional, it is up to the board to provide the critical feedback and development. Some of the partners I worked took their CEO’s growth very seriously and ran rigorous CEO evaluation processes from the board level. This is a huge amount of work. Sometimes my partner would run the process, other times another VC on the board would, and sometimes it would be the independent director. This is not the same as the “hit this revenue number and these operating metrics and your bonus with be $XYZ” that is put together by the compensation committee. This is really a process intended to help the CEO become a better leader and manager.

I only got to see this a couple of times; I wasn’t a VC long enough to run through this cycle more than that. I’m sure that I am missing some of the important nuances (heck, maybe even some of the important macro-themes) of a CEO evaluation.  However, from what I could tell this is what happened:

The CEO was informed by the board that one of the directors would be running a review process. That director would inform the CEO what the expected timing of the evaluation would be. The end product of this review would be a discussion with the CEO as to his/her performance for the previous year against the company’s stated goals and the CEO’s developmental goals from the previous year, critical feedback and the setting of additional goals/areas to for improvement for the following year. That director would also have a private conversation with the board alerting them as to his/her findings in this review.

To prepare for the review evaluation forms were distributed to each member of the board of directors (I’ve put an example of this form below - I’ve embedded it with Pixily’s document sharing/embedding feature). The director in charge of running the review would collect these forms and have conversations with the other members of the BOD as needed. The director would also do the same with critical members of the management team, such as the CTO, Sales VP, etc.

The evaluation focuses on:

1. The company’s previous year’s goals and performance vs. those goals
2. The company’s near and long-term prospects
3. The CEO’s character, as demonstrated in the past year
4. The CEO’s ability to develop and articulate a vision for the company
5. The CEO’s leadership of the company
6. The CEO’s leadership of the board of directors
7. The CEO’s management of the executive team
8. The CEO’s ability to recruit talent into the company
9. The CEO’s decision making skills
10. The effectiveness of the CEO’s operational style/skill-set
11. Top strengths and weaknesses of the CEO
12. Critical advice from the BOD and team on how to improve management skills and lead the company

I’ve put my own version of this CEO evaluation form into Pixily and embedded it below. This is not a perfect copy of what I’ve seen other VCs do - it is my own attempt to make a more clear, less overlapping review form. I’d love comments on it, as I’d like to leverage other people’s experiences to make up for my own lack of experience and then improve the evaluation form…

After collecting all of this feedback, the director would then create a master evaluation form that would be shared with the CEO during an evaluation. Read the rest of this entry »

Here is a great link to “50 Essential Strategies For Creating A Successful Web 2.0 Product” by Dion Hinchcliffe. I’m about half way through the list, but some of the points are pretty thought provoking. Dion is trying to be quite comprehensive, so he has the standard “release early and often” advice, but also has more nuanced suggestions such as “Search is the new navigation, make it easy to use in your application” and “The link is the fundamental unit of thought on the Web, therefore richly link-enable your applications.”

This is a solid read on Web 2.0 strategy/design execution. I’d recommend that even experienced web executives take a look at the list. Even if you already know everything he mentions it is still a well written refresher on what makes the online environment so special.

In how to choose the right business idea, I introduced the concept of the Idea Funnel.  Like me, you could use the idea funnel to narrow down a bunch of startup business ideas into few viable ones. I talked about stage 1 of the due diligence process, namely, “Is the idea viable?”. In this post, I will present the second and final stage, namely, “Can I execute on it?”. 

Stage 2: Can I execute on the business idea?

In stage 2, you are focused on things that you need to successfully take your business idea to the market. Here are the few things you need to have:

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Last week, I gave a talk on “Starting a Business upon Graduation”  to a group of Harvard Business School students. In addition to sharing my experiences in starting Pixily right after graduating from Wharton, I shared my approach on how one should zero in on a viable business idea. 

I approach the idea development process similar to how one approaches sales leads within a sales funnel (see below). I start of with a number of rough business ideas and put each idea through the due diligence funnel. Some make it through the funnel and some don’t. Ideas that make it through the funnel are more viable and have a higher chance of being successful.

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In an earlier post Prasad Thammineni makes a thesis for why startups should blog. He also asks the question, “Do VCs care if startups have a blog?” As a venture capitalist, I would say, “yes, a startup blog is not a bad idea.”

I will ignore the obvious reasons to blog, such as search engine goodness, brand building, etc. Instead, I’ll focus on why your startup blog matters to a VC.

If you are trying to raise venture capital, a blog isn’t a bad idea because:

1. A VC might find YOU via your blog. This is true - VCs just don’t sit on their butts and wait for new investments to walk in the door. In fact, some VCs actually know how to use Google… and during our research into your space might we just might stumble across your thoughts and then contact you.  
2. Thought leadership/PR. If you are a really well known blogger in your space then you will potentially get quoted in press articles and/or asked to speak at events. Since most VCs can read (and a few can even listen) there is a chance that they will be so intrigued by what you’ve said that they reach out to you. Read the rest of this entry »
   

Pretend you are on the board of a startup. Unfortunately, this startup is not living up to its potential, and is failing to get sales traction as you and the team hoped. Why are sales not materializing? I had a brief, but insightful, conversation with one of my partners today. This partner (like most venture capitalists) is on several startup boards. Most of these startups are growing quite well; however, one of them is not.

The question is why? From a board level, it is quite difficult for a venture capitalist to determine the cause of the startup’s sales slippage. Is it the sales team? Or is it a market/product issue?

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This is the quote Anand Rajaram, one of the co-founders of Pixily, used when being interviewed by Mass High Tech for their weekly journal. Christopher Calnan, the staff writer at Mass High Tech wanted to know how Cloud Computing was impacting hardware infrastructure for his article Cloud computing bursting on the corporate scene.

I think this quote captures the essence of what cloud computing is doing to hardware costs. I strongly believe cloud computing should be part of every entrepreneur’s technology strategy. Let me start by summarizing how open source has become part of a startup’s strategy before making a case for cloud computing.

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The Olympics are almost upon us, and I’m sure there are about to be a ton of cliched articles and blog posts about how the Olympic Athletes can teach venture capitalists and startup CEOs lessons about achieving big/taking risks/going for gold, etc. But, there is another highly motivating athletic contest going on right now - and it’s a lot cooler than the Olympics. I’m talking about the X Games, and in particular the Skateboarding Big Air Challenge. This skating event starts with a 70 jump, and gets hairy from there… The key lesson I took away from this event was that you’re more likely to push yourself when you surround yourself with peers who are doing the same (my other takeaway was that these guys are are totally nuts). Most of the startup CEOs and founders I know who are pushing the boundries of innovation aren’t operating in a vacuum. Instead, they spend lots of time with other founders and collectively push themselves. While I’m sure some of them could do it alone, why would you? Being a CEO of a startup is lonely enough; find peers who can keep you going strong.

I doubt any of the X Games contestants would pull the caliber of tricks they do if it weren’t for the fact that they are constantly spending time with each other. Seeing the other skaters’ tricks leads them to think of new moves to invent. They also know how hard each of the other skaters worked to develop their skills, and thus know how much effort they need to bring to the table to prepare for and compete in these events. When one of the top skaters, Danny Way, took several hard falls but kept coming back for more he inspired the others to go for broke. The eventual winner, Bob Burnquist, pulled an amazing trick (an ollie 180 into an Indy 360 - landed backwards!) to win. When asked afterwards how he had the guts to try such an insane landing, he said “Every time Danny slammed, it was like, how can someone slam that many times and get back up? I skate with him all the time and I have seen him go down and he’s got this mind that is unparalleled, and I get inspired by it.” Here is a video of the medal winning runs, and also Danny Way’s insane falls (keep in mind these guys are jumping a 70 foot gap. *the video has been loading a bit slowly; it’s worth the wait*):

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The cost to acquire new customer/users will change over time, particularly if you are using the web to acquire users. Companies I meet with often have difficulties projecting what their cost to acquire customers will be as they first launch their product. It’s a lot like riding a roller coaster in the dark. This is completely understandable - if you are doing something truly new you’ve got to make a number of assumptions based on really loose information. Experienced executives operating in their native industries can make very good guesses at customer acquisition cost, especially if their companies have a sales force component. Younger internet CEOs are often playing in a completely new environment, so experimentation is usually required to develop better visibility.

(I’ve gotten some feedback that a few of my posts are a bit long, so I’m going to break this one up into two posts. This is part 1)

I am lucky enough to work with a number of startups over an extended period of time and I get to see some pretty similar patterns emerging around customer acquisition costs. These patterns tend to be accelerated for internet companies but also seem to hold for other technology startups. I’m sure there are plenty of examples that do not fit into the framework I’m proposing below, and welcome comments from readers! I could also be ripping off some theory I was taught in business school – if so, sorry for restating the obvious. Since this is a blog about events early in a startups life-cycle, I’m talking about the cost to acquire a new customer during the time frame of a company’s early launch.

Patterns in customer acquisition costs:

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