Startable – Healy Jones’ & Prasad Thammineni’s Blog

A couple of my venture buddies are really knocking it out of the park with their venture capital/startup blogs and I wanted to show them a little link love. You should check out there blogs and some of their recent posts.

Rob Go (of Spark Capital) has recently had some great posts. I really like his post on where to find angel funding in Boston.

Lee Hower (Point Judith Capital) just posted on how difficult it is to predict if any given startup will become really, really large.

Photographic evidence that Windows 7 kills kittens!

Just kidding; the little guys are taking a nap. For some reason they love sleeping on my computer.

Windows 7 Kills Kittens!

And I have to say, I like Windows 7. I’ve been using the beta version since the middle of the summer and it hasn’t crashed at all. I also dig the little universal search box; I still use Google Desktop, but MSFT’s search box has become part of my workflow. I have gotten used to the windows-button-tab-button way of circulating through open windows, and graphically it is very appealing. The help documentation is pretty good too, so I’ve been able to modify the preferences I want to pretty easily.

You want to get a job as a junior venture capitalist?

Really? Have you seen the state of the venture market? 10 returns are falling and there is not end in sight and the venture industry is shrinking… But, OK, you want to get a junior investor role at a venture capital firm. Having collected job offers at over a half a dozen venture and private equity groups (and having been rejected by countless more!) I’ve got a pretty strong opinion on how to prepare for an interview with a venture firm. This is what has worked for me. If it fits your style then go with it. (Note that I have never worked with biotech investments so this may not be a helpful if you are looking for a position as a life science investor.) I’ll going to need to do a couple of posts on this topic, so I’ll start with 4 questions that you need to have good answers for before you do the 1st interview.

The 1st questions to have answers to when interviewing for a venture capital position

This is not an inclusive list of topics to prepare for, but these are probably the top few questions that you need to have solid answers – and you should have practiced them so they are concise and impactful. It should not take more than 90 seconds to answer each of these questions; probably less. Let the VC ask follow up questions on the issues they care about – do NOT ramble on.

• Why now? I mean, why do you want to join this firm at this moment? You’d better have an answer. Start by knowing what companies they’ve invested in recently and what exits they’ve had. When I interviewed, I created little packets on each firm. Recent deals, “mission statement” or focus, partner bios. How did my previous experience overlap with the people I’m going to connect with?
• You need to seem like you’ve got a process for approaching a new investment. Check out my venture capital investment memo template for details on what a VC uses to discuss investments. But you need to be brief. I would concentrate on three of the following five topics:

A. Management. Make sure you mention this as an important criteria, but it doesn’t have to be point # 1 on your list. Look for people who have run/managed and grown businesses before and who you trust to grow a startup, or if you are on the West Coast people who seem very coachable, who listen well, who seem like they can grow into being an effective leader and who are humble enough to be willing to bring in a “professional” CEO if the company eventually needs it.
B. Market. You want a big, growing market that has space to have a strong niche player or room for a new big player. For early stage investing the market doesn’t yet have to exist, but you need to be able to feel comfortable that you’ve got at least half a billion, probably more like a several billion dollar market in the foreseeable future. There need to be customers who want/need some sort of a solution and have a willingness to pay. You also need to be able to find and sell to these customers efficiently once you reach scale.
C. Technology. Hopefully the tech is unique, can be defended or can’t be recreated easily. If not, hope that it is at least cool. If it is some sort of a hardware solution it needs to be at least 10x, hopefully more, better than the existing solutions on the market. How much longer will it take and how much will it cost to develop the product and can this team do it?
D. Deal. Can you invest on reasonable terms? Don’t pretend to be an expert here if you’re not. There are lots of good technologists who have become VCs and who did not have any deal experience prior to joining a VC. This is stuff you can learn on the job usually. However, it is important that the capital needs of the company match up with the venture firm’s ability to fund it. How much will the fund need to reserve to support the investment, and does this match up with the capital at the fund’s disposal.
E. Exit. What does this company look like at scale? Is a way to exit the company? Can grow to be a big company and thus do an initial public offering, or are there numerous buyers who might find it strategic/good technology fit? Who are these buyers, and have they been buying?

• Be knowledgeable on several industries/spaces that you think would be interesting investment areas for the fund. This is pretty critical. The firm is going to be looking for your to be able to source new investment opportunities, and this starts with figuring out industries that are potentially interesting. Use the criteria laid out for what makes a market interesting, and cite facts and figures around the space you’ve picked as proof that you know what you are talking about. Finally, know of and have the ability to make intros to companies in that space that may be good investment candidates.
• Prove that you can learn to execute deals. Show that you are not an idiot mathematically – did you get good grades? Talk about analyses you’ve run at your last job. Mention negotiations that you’ve been part of.

This isn’t intended to be an exhaustive list of questions that you will be asked in a venture interview. Most of my interviews (at least the ones where I’ve gotten the job) have been multi-day affairs, so obviously you are going to get asked a lot of different questions. But you would be amazed – venture partners tend to ask pretty similar things. Stick to a solid framework, because the partners at the fund are going to be comparing notes with each other and you are going to need to be consistent.

I’ve completed the second step of my recovery from being a venture capitalist* and am now the head of marketing at Pixily, an online document management service focused on the small business customers. (Yes, it’s Prasad‘s company!) I’ve had the opportunity to get close to a number of startups since I left Atlas earlier this year, and have loved a bunch of them – particularly some of the ones over at TechStars. But I found myself slowly spending more and more time at Pixily, from a few days a week to 30 hours a week to 60 hours a week plus lots of brainstorming time in bed at night when I was supposed to be sleeping. Eventually Prasad and I decided that I might as well take the plunge and go full time.

I’m really excited about working with Prasad and the team at Pixily for a bunch of reasons:

• We are growing, and growing fast. Guess what – growth is fun! Even more fun on the inside of the company vs. being an investor looking in from the board level.
• It’s new to me. I’d been an investor/finance type for my whole career. But marketing is totally new. I think I’ve got a feel for what I want things to look like from a high level from my days as an investor, but actually getting there is the challenge.
• I still get to play with numbers, since marketing is now a metrics driven function. I always liked running different scenarios for potential portfolio companies – now I just get to do it in real time…
• Working at Pixily has really stepped up my passion level. Passion matters more than when I was an investor. One of the greatest investors I worked with was a partner at Summit Partners. He had the uncanny ability to dispassionately evaluate every little detail of a deal, and had no “sunk cost” fallacies. If an important part of a deal didn’t check out he would walk away, regardless of the amount of time we’d spent working on it – even if we’d spent a year and a half and had spent hundreds of thousands on due diligence. I think that is part of the reason he was such an amazing investor. But when you are company trying to grow, you can’t be dispassionate. You have to believe that what you are doing is going to work, even when little things go off the rails. So, while the ups are great, it is the excitement I feel for the company’s potential that keeps me chugging on through the occasional setback.
• It’s really cool to do something that actually, directly helps customers. I’m getting a lot of the passion I just mentioned from customers. It was after taking a few customer support calls that I really “got” the problem that Pixily was solving. Small businesses really like this service and they are changing the way the work and integrating Pixily into their everyday processes. There is a real, unmet need in the market – small companies are still paper-based and a new generation of business owners want to manage their businesses’ information online, not in filing cabinets, and from their phones, not from their desktop. Helping people make this change is really exciting!

There are a ton of other things I’m finding really fun – but the one thing I do miss (besides the deep, peaceful slumber of the money man) is having time to blog more. I hope to pick back up the blogging pace, since I’m experiencing all kinds of new things and want to share and get people’s opinions.

Finally, sign up for a free trial for your startup! Send us your paper documents, upload your digital files, and start using Pixily as a search engine for all of your companies’ paper! And you can use the “HJ2009″ coupon code for $5.00 off when you sign up for a paying plan.

*The first step was acknowledging that I had a problem

The WSJ is reporting that Congress has rejected the Treasury’s plan to regulate venture capital firms as “systematic risks” to the US economy. This is good news to all my VC friends, and to the startup ecosystems that they finance. As I’ve mentioned before, I am against regulating venture firms as they do not create real risk to the banking and financial system because they do not aggressively use leverage. We’ll see what the Treasury comes back with, but there has to be some sort of a way to tell the difference between a hedge fund and a VC that is backing small companies.

I’m looking to “hire” an online marketing intern to help me. You don’t actually have to know anything about online marketing, but you do need to be a good writer, willing to do some basic numerical analysis and not be afraid to pick up some simple HTML. You will also have to be excited watching a startup grow and being an important part of small team trying to take on the world. I’m imagining this will be an undergraduate student somewhere in Boston, although this also might be fun for a recent grad who doesn’t have full time employment. Stock options will be awarded, and this could potentially become a full time position (no cash compensation at the moment, sorry). At first the commitment will probably be close to 15 to 20 hours a week, then ramping down once we’ve got everything up and running. Email me at healy (at) startable.com with your resume, and if you have it, a link to your blog so I can check out your content creation/writing style.

There has been a lot of talk recently about the amount of value venture capital brings to the US economy. As usual, this includes a lot of griping by entrepreneurs who were unable to raise venture funding and who thus rip on venture capitalists. Occasionally, there is an academic report that attempts to shine a little light on the subject. Many times these professors do not really understand VC, having never helped start a company nor invested money in startups. But on those rare times when a person who really understand finance and startups publishes a robust study it is really worth paying attention.

That is why a recent TechCrunch article, “What Have VCs Really Done for Innovation,” posted by Vivek Wadhwa, has got me thinking. Vivek is a professor (at Harvard, and I think Duke) who has also helped grow software companies and worked for CSFB. Not only his is his background the right one to study entrepreneurship and venture funding, but his post was thoughtful and much more measured than the typical VC-bashing.

Vivek is responding to the NVCA’s recent PR campaign. In this campaign, the NVCA highlights venture capital’s contributions to the US economy and how a lot of innovation in the US has been done at/by venture funded companies. Here are some of Vivek’s key points, as picked by me:

1. The NVCA claims that 81% of tech jobs and 21% of GDP is produced by venture-backed companies; Vivek responds by asking: “would those jobs never have been created if the VCs had never appeared on the scene? How can the NVCA prove causality?”
2. He highlights some research he is about to publish on how, after interviewing over 500 successful entrepreneurs, only 10% raised VC in their first venture and only 25% raised VC for their second. In other words, not that high of a percentage of successful companies bother/need to raise venture funding.
3. “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.”
4. VC investments don’t really out-perform other investment asset classes (he specifically discusses research vs. the Russell 2000 index).
5. “What’s behind the NVCA’s voodoo economics? Even though they vehemently deny it, VCs are looking for bailout money and tax-breaks.”

These are some pretty negative opinions – from someone who has a right to be making them. I agree with some of his points, but not all. At the risk of sounding too much like a VC industry defender (remember I used to be one!) here are my responses/takes on his points:

5. Starting from the last point, I think Vivek is half right. The venture industry is fighting a real battle to avoid having their carry taxed as capital gains. However, other than a change in government policy towards cleantech I don’t think VCs are looking for bailout $. What I really think VCs are looking for from the government is to try to avoid being lumped in with “evil” private equity and hedge funds and thus become regulated as “risks to the US economy.” See my post on how private equity regulation might impact venture capital firms. In fact, this point is really a core reason why the NVCA has started making so much noise recently. Regulation could have a negative impact on venture investments, at least for smaller firms that can’t afford the time and effort to comply/prove to the government that their investments aren’t about to cause a global financial meltdown.

4. He’s probably right.

3. Again, he has a real point. But I disagree that all VC funds ignore innovation. First of all, what defines innovation? Would Google have been innovation? It’s not like they were the first search engine. In fact, the search space was already a sexy place to invest when they got funded. But, as a user of their search, analytics and ad words products I’m pretty happy this non-innovative company received money from their venture capitalists. Secondly, what makes venture capital so important for the US economy is not just the creation of innovation, but the commercialization of innovation. Universities are great at fostering innovation, but it is usually companies that take that innovation and create jobs and technologies that can be used. But, I do agree that there is a lot of me-too investing in the venture capital world. Too many of the same ideas do get funded – sometimes I actually wonder if this actually hurts innovation by creating too much undifferentiated competition in nascent markets. But that is probably something for another post.

2. I also agree with this. The ratio sounds about right. I’m willing to bet that many of those unfunded companies would have been less successful if they had raised venture capital. Venture funding is not right for most companies, even “successful” ones. Entrepreneurs too often think that their business needs venture funding to be successful – but as I like to say “don’t raise venture capital.” But I don’t think this is an indictment of the venture industry; it is more a generic point that most companies do not require VC to get where they are going.

1. I can’t really speak to the validity of the NVCA’s numbers in terms of what % of the US economy is based on venture funded businesses. However, I can say that venture funding does help companies get bigger faster. I know I just made fun of it, but would Facebook be as large as it is without venture funding?

Vivek has some very good points, and he presents them with data – which makes them even more powerful. I understand his negative reaction to the NVCA’s PR campaign – it is a little over the top. However, I think venture capital is important to this country’s technology leadership. While I don’t think the US needs MORE venture funding, I do think that a healthy early-stage financing environment is necessary to foster continued innovation here. I hope that as we come out of this downturn and seek to change the financial landscape that early-stage investors are not caught in a regulatory net designed to keep hedge funds from doing silly things with highly-leveraged derivatives or other exotic instruments.

So, Facebook announced yesterday at TechCrunch50 that they were finally cashflow positive. This is pretty big news. It means they’ve created a real business, one that is, in theory, self-sustaining. They’ve reached the holy threshold where venture capitalists stop biting their nails and thinking “man should I have sold this earlier…” Now the management team can seriously start getting wined and dined by investment bankers hungry for “the IPO of the year.”

But, after we congratulate the team for a job well done (nice job people) we probably ought to think about what this means for social media as a business. Here is a company that now has 300 million users – and has just now become cash flow positive. What is that, like 5% of the Earth’s population? What number of companies ever founded reach that high of a global penetration? That’s a pretty amazing number. And they needed that many users to become cashflow positive?

I believe that Facebook has raised over $700 million in venture capital. Impressive. I doubt that more than a handful of companies, ever, have raised that much private capital. I don’t know how much of that has been used in the quest to become cashflow positive, but I assume it is a decent amount. Although, to be fair, a meaning amount of that capital might have gone to providing liquidity to the management team.

So what does this say about social media as a business model? The requirement to get sooo large and burn sooo much capital calls into question the basic business model of a social media company. The pure online company with revenue only coming from advertising just doesn’t seem to make sense if you have to get that big to become a self-sustaining company.

Just to be clear – I am not questioning Facebook. I am pretty much amazed at what they have created and am excited to see what is next for the company, both as a venture-junkie and a FB user. But I just wonder if these stats are the death nail in the advertising-based online business model. Who else could possibly reach cashflow positive with a pure advertising model if you need that many users and that much capital?

A few quick interesting links:

A good friend of mine just posted a study on the impact of social media on generating actual leads vs. search on the Hubspot blog. In a not surprising conclusion, social media traffic had a much better conversion of traffic to leads (i.e. was higher yielding) than search traffic. I guess this makes sense, because if someone is engaged enough to connect with you via social media then they are probably a better potential customer.

Congratulations to DataXu, and Atlas Venture portfolio company, for formally launching its service. DataXu is a bidding platform for online display advertising and has a solid team from MIT and is headed by Mike Baker, and experienced online advertising executive. Good luck to them as they grow the business! I like the company because I believe that there is a funny power dynamic in the online advertising world – powerful ad sellers like Google also are the major suppliers of ad optimization technology to the ad buyers. So, basically the people who sell you the ad also provide you with the tool to decide if you want to buy the ad. This may or may not be a real conflict of interest, but it is strange. I always imagine the analogy of the car dealer also being the one publishing Consumer Reports. A player like DataXu should help ad buyers become more sophisticated and control their own data.

Finally,

Intuit has agreed to buy Mint.com. This is pretty cool! I believe (or hope at least) that this shows that consumers are moving aggressively to embrace the power of the internet to manage important aspects of their financial life. The thing I always thought was smart about Mint was that it required zero work – you input your account numbers and passwords and the engine does the rest. Pretty slick. Has anyone defined Web 3.o yet? If Web 2.0 was social media/having your friends and others create the content for you, is Web 3.0 automatically surrendering up lots of personal information and letting the web/AI make sense of it all?

Wow, the Techstars Boston Investor Day last Thursday was great! I can’t believe the progress made in the past month by the teams. I’ve been a very absent Techstars advisor for the past month, so I didn’t know what to expect. Everyone in the crowd seemed impressed by the startups, and I felt a great vibe and high level of interest from some of the well-known Boston angel investors I spoke with during the event. Andrew Hyde mentioned to me that it felt a lot like Investor Day at the 1st Techstars Boulder in 2007 – and that 3 of those companies have had successful exits. Let’s hope that the good Techstars mojo continues here on the East Coast. To that end, here is my advice to the Techstars entrepreneurs on keeping the positive momentum going post-Investor Day. I guess the gist of my advice is that the hard work hasn’t ended – it’s actually just begun. But you are in such a great spot that you should be excited to keep moving forward and you should continue to take advantage of everything that Techstars has created with/for you – especially the network.

Techstars Boston, photo by Andrew Hyde

1. Don’t take a breather. You have a narrow window to exploit the momentum that you’ve created. Investors and the press are interested in what you are doing, but they have notoriously short attention spans.
2. Follow up with EVERYONE you spoke to. Send emails to each and every investor that you met – ask Shawn for their contact info if you didn’t capture it. These emails should be out by Monday afternoon at the latest – again, people have short attention spans. Did you speak to any of the tech reporters at the event? Heck, even if you didn’t get a list of the reporters (and bloggers) at the event from Shawn and send them a “thank you for attending email.” Include a three or four sentence business description so they remember who you were. Finally, offer yourself up to talk to them about Techstars or ASK for something.
3. Hit up your local tech press if you’re not from Boston – with a “the local tech startup doing something big time” angle and see if they bite.
4. Have an opinion on the terms of your investment round. This will help move the angels along more quickly.
5. Look for an investor “anchor” for your angel round (if you haven’t already raised your capital/got your fund raise going.) You need an angel to set the terms for seed round, so that the other angels will fall into line and step into the mix. I know a few of you have investors approach you and express high interest in the business. Those are the ones to hit up first. Once you have an anchor things become much, much easier.
6. Consider doing a tranched close on your round so you can get money into the company sooner rather than later (this means taking less than 100% of your hoped for fund round and continuing to work toward getting the other % at the same terms in the not too distant future). Angel rounds seem to take even longer than VC investments, so if you can get some of the investment dollars to come in right away that will help you do important things like pay for developers and ramen.
7. Take the free stuff. If Techstars offers to let you stay in the space for a while, take it. You probably had a good routine going pre-Investor Day in the space, so why mess things up? Keep the same schedule going. Cheap or free rent is VERY hard to find. And if Shawn wants you to pay for the space, well, talk him down as much as you can or ask for the first month free or something.
8. Stay in touch with all the other companies! How awesome were these other entrepreneurs? You have one of the best advantages of any startups – a real, legit peer group. Do you know how lonely doing a traditional startup is? You don’t have that problem! Those other CEOs and founders want you to succeed just as badly as you do. They will experience the same issues that you will face, sometimes before you do. Hit each other up for advice, networking and friendship.
9. Keep the weekly email updates going. It will help you stay focused – and you don’t want to lose the connections that you developed during the program.
10. Don’t get distracted. $, PR and continued growth of the business are your near-term goals. Don’t forget about the business while you take advantage of the external momentum. Set aggressive near-term business goals and hit them.

Finally, a bonus tip:

1. HAVE FUN! You are better off than 95% of all startups in the world. Your network is so much stronger than anyone else I know. Your peer group is strong, smart and passionate. You guys and gals are awesome – kick some butt! (And don’t forget about little old me once you hit it big time…)

Link to Andrew’s photos of Investor Day: http://www.flickr.com/photos/bouldair/sets/72157622218729239/