Startable – Healy Jones’ & Prasad Thammineni’s Blog

Today I use a ton of applications on my iPhone to get the full experience of online services/sites like Facebook, Amazon, LinkedIn, Wikipedia and others. But the beauty of the web (at least on the PC) is that you don’t need to download software in most cases to get a full, awesome experience. I can just log into eBay and start trading stuff; I don’t have to wait for a download to get going.

But on the mobile phone it’s different. To get the best experience I need to hit the app store and download something. It’s a like a weird step backwards from the point where anyone could easily use any site with a browser (from your PC) without downloading software to a place where each site has its own special software that requires a download and install.

According to MediaPost:

Gartner estimates the combined installed base of smartphones and browser-equipped enhanced phones will surpass 1.82 billion units by 2013, eclipsing the total of 1.78 billion PCs by then.

But the firm warns that many sites still are not optimized for the mobile Web, even though cell users expect to make fewer clicks on their phones than on a PC. To successfully expand into mobile, publishers will have to reformat sites from the small form-factor of handheld devices.

I totally buy this argument. While one can quibble around the exact number of mobile devices vs. PCs, there is a clear and obvious trend that mobile devices are becoming an important secondary, and to a lot of people, the primary web access device.

So I wonder – will web sites just automatically be optimized for mobile viewing, or will the “app” become even more important? Is this whole app thing for using online services a real of “de-evolution” of the web – or a mere blip before mobile browsers and bandwidth become powerful enough to support the real web experience? What do people think, are mobile web apps here to say or just a strange passing fancy?

Great interview with Don Dodge, tech luminary who recently joined Google from Microsoft. Don was technology ambassador for Microsoft and is now in a similar position at Google. Don has a very unique view into both companies strategies, technologies and cultures. Some of the best quotes:

One of Google’s biggest challenges: “Another challenge is to earn a reputation for communicating clearly with developers and partners, providing them the support they need, and being as clear as possible about our product road map. ”

On how Google is prioritizing its efforts vs Microsoft: “All the exciting new applications are running in the browser, with application code in the cloud and the cell phone as the platform… Microsoft has product offerings in each of these areas, but they weren’t the high-priority programs… At Google, Chrome (browser), Google App Engine and Google Apps (cloud), and Android (mobile) are top priorities…”

On the state of MSFT: “I think Microsoft today is a lot like IBM was in 1985.”

On the cloud: “It all comes down to your application needs, workloads and design architecture. Amazon, Google and Microsoft are all solid choices.”

It’s a great interview; check it out.

It’s great news that Laura Fitton’s oneForty has received venture funding, in Boston, by Flybridge Capital. I’ve blogged about oneForty being one of the most exciting companies coming out of TechStars Boston this past summer, and it is great news for the local New England internet scene that oneForty has been funded by a local firm.

I had a bad feeling that oneForty would move West, as Laura had good angel funding backers from the SF area. She also was working closely with a web design firm base in SF. Of course, the major thing that had me scared she’s leave Boston was the recent ZenDesk move – cool company leaves Boston after it gets funding from a West Coast VC. But Boston was in luck! Jeff Bussgang of Flybridge had the cojones to step up and keep this cool company in New England. Good luck with the investment Jeff and good luck to Laura as you grow the business! (Also, congrats on recruiting Sachin Agarwal to the team and bringing a talented internet entrepreneur to the area from Chicago.)

I’m going to do something out of character (and off topic for this blog) and complain about Wall Street. I started off my career as a baby banker before moving into venture/growth investing, and think I know a bit about the people on Wall Street. My thoughts here stemmed from a recent post I saw about several important bankers missing a “chat” with the President. I’m not really faulting the bankers for missing this meeting; there was bad weather and their commercial flights were canceled. Although, I will point out that, when I was a banker intern in NYC I once had to take an overnight town car from New York to DC to deliver pitch books because the senior bankers were afraid that bad weather would keep the associate on the deal from making the meeting. And they were right. And the senior bankers also had the courtesy to fly in the night before to avoid potentially missing the meeting with the important client. But I understand not needing to fly down the night before to make the meeting with the President. After all, he’s not really a client or anything.

But that is not the point of my piece. Rather, I’d like the point out the problem with Wall Street.

The problem with Wall Street

Wall Street is full of people who really, really want to make money.

In some ways this is a good thing. It provides a place for people who want to make money to do so in a legal fashion. It’s kind of like the way the Marines provide a legally valid profession for people who really like to kick a** and take names and blow things up.

But it also leads to some issues.

One, Wall Street will gladly take money from your grandmother. If grandma is silly enough to make a bad trade in a complex security, then she deserves to lose her money. Or, if grandma’s pension fund trusted some of its money to a money manager who is just not as smart as someone else, then grandma also deserves to lose her money. It’s too bad, but that is how it works. Although I’m not really sure how grandma is supposed to retire if there isn’t really a safe way for her to invest her money without sharks taking an unfair percentage of it.

Two, somehow incentives on Wall Street lost touch with the duration of the risks and assets bankers were creating. An annual cash bonus system doesn’t work if you are creating a security that might not show any problems for the next five to ten years. There is no claw back. Unlike PE shops, where partners can actually their pay taken back if their fund loses money, a banker (I’m not really sure why they are called bankers when they are actually traders/hedge fund guys working within a bank) – anyways, a banker gets paid at the end of the year for the actual and/or fictional appreciation of her trades. Imagine there is a trade (syndication, loan, whatever) that a particular banker could make that might result in her getting paid millions of dollars this year. Even if this trade has a small percentage chance of sinking the bank (or maybe even the entire financial system) why wouldn’t she make that trade? Her downside is limited to losing her job; her upside is unlimited. The NPV of that trade is very, very positive to her. Like the good little capitalist that I am, I always assumed that public stockholders, through the board, would ensure smart risk management and proper compensation of traders. But I guess I was overly optimistic, since shareholders lost billions and happy bankers still are getting nice bonuses this year.

I, for one, am glad that Wall Street exists. Money needs to move from industries of low returns and flow into places where it can create jobs and finance growth. I also like making money for myself and I don’t find anything morally wrong about wanting to make money.

I guess I sometimes feel bad about grandma’s retirement, but I’m not really sure how to protect her. And I don’t know how a bank is supposed to retain talent when that talent can easily leave the bank and go to another shop where it will get paid a ton in the form of annual bonuses based on short term gains. But something just does feel strange when grandma can lose her retirement, via no fault of her own, and very smart people on Wall Street can once again get awesome bonuses based on very short term incentive plans. It just feels strange.

Vivek Wadhwa had an interesting post today on selling in TechCrunch. I’m learning some serious lessons on selling now that I’m the head of marketing at Pixily – although I am very much still a novice sales manager! I reserve the right to be completely wrong/change my mind on any or all of these points

1. Aspiring to a touchless sales model is great, but small business customers like to know they can reach you on the phone. Many great SaaS companies have a great sales funnel that terminates when a customer signs up online without speaking to a sales rep. I think most small business SaaS startups hope to create this type of sales cycle. After all, how can you have a profitable company if you need to have a sales person on the phone closing $15 per month sales? But, at Pixily, we’ve found that phone calls result in sales and great free to paid user conversions. We offer a free trial, and a decent number of our paying customers choose to sign up for the free trial and eventually convert to paying customers. The highest converting (free to paid) lead source is the customers who call us and who we sign up for the free trial over the phone. The convert to paying customers by over 3x vs. the next best source. (Note: “source” is probably not the right word to use, but it’s Saturday and my coffee isn’t kicking in quite yet…) Is this sustainable in the long term? I’m not experienced enough to know at this point.
2. Customer service reps make great sales people too! Vivek mentions how developers make great sales people. I’d very much agree, since our developers often drive closed leads from networking events they attend and from conferences they speak at. But we are having success with our customer service reps doubling as sales people. First of all, they know the product. Secondly, they understand how live customers are using the product. Third, when a free user calls in to ask a question it’s the time to try to sell them on an upgrade!
3. Customers do the darnedest things with the product – asking them “why are you interested in my product” is really helpful in selling. For example, one of Pixily’s products is a simple document scanning service. We happen to be pretty good at scanning documents, and can offer it profitably as a stand alone service. We had a bulk scanning customer who was a magazine publisher. He wanted to get his old magazine issues (from the 80′s and beyond) online, but only had them stored in print. Once we actually really understood how he wanted to use our product we were able to sell him – even though we were more expensive than a couple of local scanning providers in his area. We’ve sold this particular product a few more times, mainly because we “get” what the customer’s end goal is.
4. Managing a sales pipeline is harder than it looks. When you are the VC, you get to see all these pretty sales funnels at board meetings. When you are the person trying to grow the business, keeping the different campaigns and leads all moving along in the funnels is much more challenging! I guess it’s just in my nature to enjoy playing/measuring our sales channels by output, but I have to fight the instinct to not spend too much time in analytics and not enough time in selling/content creation.
5. When selling online, content is king. I’ve had a ton of luck getting great content out of a marketing intern we recently hired. Not only has he built an entirely new site dedicated to document scanning, he’s also put out some very helpful blog posts and made content upgrades to our web site. All this content is producing – both in terms of us moving up on Google, getting more traffic and improving our conversion rate.

While I was a VC I put together a list of “pitch tips” for entrepreneurs pitching their businesses to venture capital funds. Of course, I probably should have glanced at them when I was helping Prasad pitch Pixily! To help me be a bit more organized the next time around I’ve compiled all of these tips here, with links to my original posts.

VC Pitch Tip #1 – Turn off your screen saver
VC Pitch Tip #2 – You won’t be eating much lunch during that “lunch” meeting
VC Pitch Tip #3 – Get to the venture capitalist’s office early
VC Pitch Tip #4 – You don’t need to wear a tie to meet with an early stage venture capitalist
VC Pitch Tip #5 – The Venture Capitalist will want to hear a lot about your team
VC Pitch Tip #6 – Bring a USB drive with your pitch saved on it
VC Pitch Tip #7 – Format your financial model for printing
VC Pitch Tip #8 – If you are going to use WebEx to during your venture presentation, send the slide deck over email ahead of time and have a direct phone line available
VC Pitch Tip #9 – Don’t show the VC the IRR they will get
VC Pitch Tip #10 – Technology venture capitalists love demos
VC Pitch Tip #11 – Keep the actual slide deck short but sweet
VC Pitch Tip 12 – Be able to complete your entire fund raising presentation in 10 minutes

Even me, who has seen a bazillion pitches from the other side of the table, totally forgot to get to the VCs office early enough for one pitch to comfortably set up the projector. And the first time, I almost sent off our financial model without formatting it to print – a huge NO NO.

Ah, well. Maybe for our next round I’ll be smarter.

The awesome folks over at Betahouse have just launched Boston Founder Dating. It’s a way for people looking to found companies to connect. The idea is still in its infancy, but I find the idea awesome. Who knows, this could be the way the next great undergrad company founder hooks up with their savvy sales exec co-founder! And if eHarmony can claim to have hooked up 2% of current marriages, why can’t Betahouse introduce a few cool entrepreneurs to each other?

I was pretty surprised at the recent news that Canopy Financial was cooking their books. Sure, early stage investors don’t usually conduct much financial diligence, because early stage investments are not usually made on the basis of historical financial performance and pre-revenue technology development type companies don’t really have a ton of meaningful data in their historical financial statements anyway.

But growth investing is a different story. Growth investments are made on the basis of financial performance, both projected and historic. Most growth investors insist on having a formal audit, paying for a quality of earnings analysis from an outside accounting firm and have long, painful conversations with the company’s accounts. And in brokered deals, where an investment bank is involved, the ibank is assumed to have conducted their own due diligence – which includes at least one conversation with the auditors.

I know this because I was a growth investor, early stage investor, and (I’m loath to admit it because it’s so uncool these days) a baby investment banker who worked on some growth venture deals.

When I was with Summit Partners, we had pretty long, boring conversations with both the company’s auditors and the outside accounting firm we brought in to do a quality of earnings analysis. As the junior person, I usually led the process, but the entire deal team was involved in conversation with the accountants. The head partner was the person who authorized the couple hundred thousand dollar quality of earnings analysis. This analysis was conducted by an auditing firm that WE had a relationship with, not the company. I might have drafted up the list of questions we asked, but the partner on the deal was very much the guy asking a lot of the questions at the accounting firm. And he also was the person who had to present our accounting diligence to the investment committee. Note that this committee wasn’t a rubber stamp committee – they asked annoyingly deep questions on specific numbers. A number of times we had to go back to the company and auditors to really figure out the answer.

And at the investment bank, we didn’t just check the box if a company had an audit. We called the head auditor and spoke about the audit. When was it conducted? How long did it take? Was there any doubt that the company had the cash and revenues presented in the audit? Any parts of the company’s numbers that were potentially controversial, or did the company take aggressive recognition tactics anywhere in their numbers?

But there may be something that happens when investors get lazy. The audit homework might fall to the most junior person. But even then, you’d expect that this person would be pretty competent and would follow standard list of questions designed to at least ensure a good conversation with the auditor. At Summit, a huge portion of our mandatory investment memo was financial diligence. It usually was 10 to 15 plus pages of analysis, and included the audit and quality of earnings analysis and notes from the conversations with the auditors. It was a pain in the butt, but it was set up so that everyone knew what had to be done and the partners could do dives into the numbers during investment discussions.

Or, perhaps the company and investment bank were running a “rushed” process. “Hurry up and invest or else the deal will go to someone else!” So maybe in the fury of a quick-execution deal the audit diligence never got done. Maybe the faked audit letter was enough, and the investor assumed that the investment bank and company’s audit committee had done their job and confirmed that the company’s books were legit. With the growth numbers that Canopy claimed (I think I heard revenue growth from $9 million to $60 million the next year?!?) I can understand how an investor could get pretty worked up about not losing the deal. On the other hand, it’s really not that hard to arrange a conversation with the auditors. They realize the importance of speaking with a company’s investors, and go out of their way to make time. And, while ideally you’d spend the four weeks it takes to do a quality of earnings analysis, if you are rushed a good talk with the auditor can go a long way. A simple question such as, “hey, have you completed an audit for the time period xyz” might have been helpful here.

Of course, there is also the audit committee from the company’s board of directors. Although I have noticed that the audit committee usually gets chaired by the outside director, not one of the professional investors. This is because it’s a pretty painfully boring job to have. And so, the person who would probably do the best job, an investor who has been on numerous boards, typically isn’t the audit chair and it is usually the person with the least board management experience. But still, someone on the board probably might have noticed something was wrong.

I don’t know anything about the Canopy situation other than what I have read in the news, but it does blow my mind. Spectrum Equity has a reputation as a quality shop, and FT Partners is a pretty decent fin tech investment bank. Nobody’s due diligence is perfect, but financial statement diligence is such a basic blocking and tackling piece of diligence that you’d think would have been conducted on a $62.5 million growth investment. It’s just a strange situation.

Despite the existence of standardized term sheets from the NVCA legal fees continue to be a major cost of raising early stage capital. I always recommend getting one of the biggest and best law firms as your counsel during your fund raise, because legal mistakes can really hurt you and your startup. But good attorneys are very expensive. Remember that the venture capitalist will also have an expensive lawyer helping his/her fund with the investment, and they will ask you to pay for their lawyer too. So, when you get the term sheet from your investor you need to:

Make sure you cap your investor’s legal fees

It is typical that an investor ask for you reimburse their legal fees. However, many investors kindly forget to put the typical second sentence behind this provision in the initial term sheet that they give you. That sentence is something like “reasonable fees in the amount of up to $25,000 to Investor’s counsel.” You have ever right to cap the fees, and the typical cap is $20k to $25k.

I really wish there was an easier way to raise small amounts of capital, say less than $1 million, without expensive lawyers. But I have yet to find a really fair way to do this, and because the stakes are very high it makes sense for both sides of the negotiation to have good representation. I guess legal fees will always be part of a fund raise. I know I’ve complained about legal fees before, and will likely continue to do so…

Following up my post from yesterday on exciting seed funding developments in Boston, The Founders Collective is officially launched. At least, their web site is now up. I know they have been attending various tech networking events recently and the word was already out that they had money to invest.

More seed funds for Boston = better

Boston needs more very early stage investors, and this fund looks like it will help fill a very critical fund raising gap. From their stated positioning on their web site, it looks like they will actually address the biggest hole facing the Boston technology investment scene:

Two guys and a dog. Unless one of the three is Bill Gates, it’s hard to get funded here in the North East.  Believe me – I know from both sides of the table now. New England VCs (and many of the local angel groups) love supporting previously successful CEOs and founders, but are slower to pull the trigger on unproven talent. If the Founders Collective is really willing to step up and fund new startup talent this could be a real boon to the local tech scene.

Is this the new early stage VC model? Most of these partners have real, full time jobs as founders/leaders of their own companies. Doing the math, there is no way a $40 million fund could support this many traditional VC partners salaries w/o the expectation that the next fund(s) would be much larger. Since the Founders Collective states that they want to keep the fund size small, the expectation must be that most of them keep their day job. Since I am now all too aware of what it’s like to work at a very early stage startup, I should probably say “day and night job.” How are they going to be able to do this? It’s going to be a ton of work, but I hope that they are successful.

How many new investments can they reasonably make in a short period of time? I wonder how much involvement the full-time CEO partners will be able to make. Will it be a consensus driven fund, where each partner needs to agree to a new investment, or can a single partner push the funding button? I’ve got so many questions on how this will actually work. It’s quite exciting.

They also state that most of their investors are successful entrepreneurs who are hoping to be involved in mentoring the fund’s startups. This would be awesome. Every entrepreneurial community needs this sort of knowledge and experience sharing.

I wish the team at the Founders Collective good luck and hope that they are able to get some great companies going!