UPDATE: Nicholas Carlson reported today that Sequoia’s Roelof Botha (investor in Square) tweeted, “To do two things at once is to do neither.” ~Publilius Syrus. Soon afterward he deleted the tweet. I agree with him.
Dumbest Idea Ever: Twitter (after raising more than $360MM) has decided to hire a part-time head of product.
Second Dumbest Idea Ever: Square (after raising more than $37MM) has decided to hire a part-time CEO.
Jack Dorsey, co-founder of Twitter and current CEO of Square, announced two hours ago that he was rejoining the Twitter team as head of product. Strangely in the same announcement he indicated that he would keep his position as CEO of Square (a mobile payments startup he co-founded). In Jack’s tweet he suggested he could somehow perform at 200%. I think it was my mom who explained to me that the whole giving 110% was impossible – the most you could ever deliver was 100%.
Over the past decade I have been CEO of four different startups (LayerOne, Architel, Big in Japan and ShopSavvy) and I can tell you being the CEO is more than a full time job. Giving 100% is really hard especially if you have a family (I am married with two kiddos). Each day there are a million decisions to make and a million different directions you can take a startup. I can’t imagine having to reboot my brain to begin thinking about a second startup – especially one as big as Twitter.
Twitter is an amazing company with amazing growth. I can only imagine sitting through the board meeting where it was decided that Twitter could get by with a part-time head of product. Surely the company could find someone in the Bay Area to head up product of Twitter. Seems like a pretty easy position to fill. Of course the jury is still out over at Square.
Square has secured a lot of venture capital, but whether or not it is a financial success is still very much up in the air. Square needs a LOT of attention and perhaps a course correction. The truth is that Square’s part-time CEO can’t (i.e. unless the company has mastered special relativity) give 100%. How much will he be able to give? Lets assume 20% of his effort is focused on his personal life. This means he will be able to give up-to 80% of this effort to both Twitter and Square. I bet Twitter is a very demanding place – hundreds of millions of dollars on the line usually creates demand. Surely they would want half of his effort – i.e. 40% leaving Square with a 40% CEO. Is this smart? I think Jack is a great guy and an awesome entrepreneur – but I think the board of both Twitter and Square should be rethinking this idea…
Like almost everyone else I wrote a post about Color yesterday and couldn’t help but write another. The CEO of the much discussed $41M startup gave an interview with Matt Rosoff and explained that Color is not a photo sharing company, but instead “we’re a data mining company”. Wow. If Bill thought his ratings were suffering simply because the app didn’t work that well he hasn’t seen anything. Smartphone users HATE to hear that apps are ‘mining’ their data. The developers in our office immediately ‘threw up’ all over the comment.
Bill explained the business model as follows: “Advertising through the app. We’re going to build a intelligent system that allows businesses to participate with their customers. So when you walk into a restaurant and you use Color, and they’re also customers through a self-service Web interface — or actually a self-service iPad interface — every time you walk into the restaurant, your [first] name will show up with your picture. The maitre d’ or receptionist will know who you are, they’ll be able to welcome you, they’ll know the last time you were here, they’ll be able to see pictures if you took them here. They’ll be able to provide you better service than they’ve ever before, that’s going to drive up their revenue by increasing repeat business because we always want to go back where we feel welcome.”
At the end of the day I feel bad for Bill and their team, but I guess they can afford a little ribbing from the startup community. Best of luck guys…
More than a decade ago I asked for $145,000 as CEO of the startup I founded. The investors didn’t balk. I would have been embarrassed to ask for more, but I bet I could have asked for more. Ryan Roberts, the Startup Lawyer, suggests that $300,000 is an unreasonable yearly salary for a CEO to request/demand. Comstudy has a report titled, “Compensation & Entrepreneurship Report in IT” that provides compensation details for startup CEOs, here are some of the interesting numbers:
- Only 33% of startups in later stage funding rounds still have their founding CEO
- By the second round founding CEOs own 18% of their company
- Average base salary for founding CEOs is $237,000
- Average total compensation for founding CEOs is $286,000
- Average total comp for non-founding CEOs is $339,000
- Average ownership for non-founding CEOs is 5.46%
Given that the average startup CEO salary is between $286,000 and $339,000 I am not sure $300,000 was that unreasonable.
I run across people who want to start their own business all of the time. Sometimes I even hire them (typically a bad idea). Most people have no idea how much hard work and time it takes to create a new business. In most cases I think it is impossible to start seeing returns before the first year (if you are getting returns before then it is likely you are not investing enough of your money or time in the venture). Most people are not prepared to work long or hard enough to make their business viable. The ones who are usually succeed.
Ironically, by the time things seem hopeless and you begin to think about getting a job your business is usually poised to start working. Most people start to argue with their partners, friends and family at this point and they are focused almost exclusively on failure. Called negative target acquisition, this phenomenon ensures that you will fail. If, instead, you can keep focusing on making the business work you have a good chance of success after the first 12 months.
Why? There are a million reason why, but here are three:
- Most clients don’t take you seriously during your first 12 months. There will be lots of potential clients that will wait in the wings to see if your company is going to make it.
- It is likely you won’t even know what business you are for the first 12 months or so. You need time to figure out who is going to pay for what you do or make.
- Everything takes longer than you assume. Your website won’t get done on time, your projects will take longer, you will be busy focused on the wrong things at first and so on.
Our Big in Japan business was a great example of a business that took a year to figure out. Just before our year anniversary (after almost ten months of work) we lost a key contributor because they gave up on the business. They began focusing on what wasn’t working instead of focusing on what could work. Two months after they left the remaining team figured out how to make the business work and signed up major clients who turned the breakeven business into a big money maker for Spur. Let me tell you, it got really hard to see how the business was going to work until August of 2006. My advice to anyone considering starting a business?
- Commit 13 months to making the business a success.
- Prepare your family for the 13 month committment and get their buy-in.
- Work on and in your business for 12 hours a day (including weekends).
- Be prepared not to make any money for the first 13 months.
- Be prepared to change your business plan over and over until you get it right.
- Be prepared to do everything yourself.
- Be prepared to fight with your partners, spouse, friends and family.
- Realize that before you succeed it will seem like you have failed – don’t give up.
- Realize that if it was easy everyone would do it…
- Oh and read Rick Segal!
Alternative Title: How to get a lot of users for your app on day one: Raise $41M in Venture Capital.
I’ll admit I was terribly curious when I read that a startup called Color had raised $41M to launch a social picture app of the same name. Wow. I even downloaded the app and used it myself. The company raised $41 million from Sequoia and other investors at a post-money valuation of $98 million. Wow. An app that hadn’t even launched was worth almost a hundred million dollars. I couldn’t help but wonder what I was doing wrong – my mobile app has more than 7.5 million users and I would feel a little silly suggesting it was worth that much (of course I think it will be worth a lot more soon). Sequoia (‘ironically’ – inside joke) tweeted that “a company like Color comes along once or twice in a decade.”
Matthew Ingram suggested that the real value the investors received in exchange for their 40% stake in the company was an amazing team. Matt explains, “the company is headed up by Bill Nguyen — who sold his music-sharing service LaLa to Apple in late 2009 — and includes Peter Pham, founder of BillShrink, as well as former LinkedIn Chief Scientist DJ Patil.” Sounds like an amazing team to me, but still $100 million? Matt concludes, “Another photo-sharing app, regardless of its unusual features, probably isn’t going to cut it. And it’s probably worth mentioning that the Valley is littered with the skeletons of high-profile startups that launched with big ambitions and lots of money.” I think I agree with him (see the first user reviews to the right).
At the end of the day I think the smartest part of this was launching the app while announcing a huge funding round – perhaps the largest early stage investment in a mobile app that hasn’t launched. Everyone who reads TechCrunch (and that is a lot of people with iPhones) has downloaded and tried the app out by now. The next question – will everyone else do the same?
Color.xxx Pitch Deck
The most active VCs in the world are located on Sand Hill Road in Menlo Park. Just take a look at the map above and you will get a sense of just how many firms are located on this one small street. FYI – the rent in this area is higher than Manhattan or London’s West End ($144/sqft). VCs in the rest of the country just don’t seem to be doing much. Sure there a few good firms in Boston and New York, but the time and capital it will take for you to go visit them is equivalent to the time and capital you could spend visiting 10 to 20 firm on Sand Hill Road. Here are some of my hints for entrepreneurs:
- build your short list of VCs on Sand Hill Road to visit
- start booking appointments two weeks in advance of your trip
- meetings can be booked almost back-to-back (takes 5 mins to get anywhere)
- rent a car (trip from SFO or San Jose= $70 cab, cabs are rare in Menlo Park)
- book a room at the Stanford Inn (the Rosewood is great, but expensive)
- setup your virtual office at the Madera Bar at the Rosewood Hotel (across the street and free wifi)
- Plan to meet people for drinks and dinner each night at the Rosewood – it is a great VC scene
Here are a few of the firms you will find on Sand Hill Road:
John and I have been looking around for office space in San Francisco for ShopSavvy and were surprised to learn that the City of San Francisco has a payroll tax. This unique tax for a municipality (San Francisco is the only city in the country who does this) levies a 1.5% tax on payroll. Really?
We really want to be in the city, but I can’t imagine why we would give up 1.5% of our payroll to San Francisco when we could easily move out to Brisbane or the Valley. The city council is considering creating a tax break for six years for companies willing to relocate to the portion of the Tenderloin and the mid-Market Street in an effort to revitalize the area (not certain we want to be in the business of revitalization at this point).
On top of the payroll tax the city also requires startups to pay 1.5% of the gains from employee stock options. Talk about shooting yourself in the foot – Dallas is looking better and better all of the time. Here is the relevant text of the code:
SEC. 902.1. – PAYROLL EXPENSE.
(a) The term “Payroll Expense” means the compensation paid to, on behalf of, or for the benefit of an individual, including shareholders of a professional corporation or a Limited Liability Company (“LLC”), including salaries, wages, bonuses, commissions, property issued or transferred in exchange for the performance of services (including but not limited to stock options), compensation for services to owners of pass-through entities, and any other form of compensation, who during any tax year, perform work or render services, in whole or in part in the City; and if more than one individual or shareholders of a professional corporation or members of an LLC, during any tax year performs work or renders services in whole or in part in the City, the term “Payroll Expense” means the total compensation paid including salaries, wages, bonuses, commissions, property issued or transferred in exchange for the performance of services (including but not limited to stock options), in addition to any compensation for services to owners of pass-through entities, and any other form of compensation for services, to all such individuals and shareholders of a professional corporation or members of an LLC.
(b) Any person that grants a service provider a right to acquire an ownership interest in such person in exchange for the performance of services shall include in its payroll expense for the tax year in which such right is exercised an amount equal to the excess of (i) the fair market value of such ownership interest on the date such right is exercised over (ii) the price paid for such interest.
(alternative title: Raising money is like fraternity rush)
In this venture capital environment it is likely you will have two or more options for funding your startup and that means sooner or later you are going to have to make a choice. Simply picking the ‘best’ VC is not as easy as you might think. The real trick is to find the ‘right’ partner and the ‘right’ firm with whom you will be able work with over the next three to five years.
When I was in my 20s I pursed deals with every VC in sight so that I might create optionality – i.e. get as many term sheets as possible. I would take a meeting with the first associate/partner who was willing to meet from a target firm. I think this is a mistake. The better course is to quickly determine who you might want to work with at a particular firm and actively seek him out. Take a look at his portfolio and start talking to the CEOs he previously backed. Give them a call and ask them about about the partner you are considering working with. Most will talk to you and many will actually give you a referral.
Entrepreneurs, unlike VCs, only have a finite time to start companies. If you are lucky you can do two or three during your career – this means you are going to be ‘stuck’ with a particular partner for several years. Being able to work with him is important, but perhaps even more important is his ability and willingness to help you build a massive company. Of course once you find out that you aren’t a fit with the particular partner you are working with you might be tempted to find a different partner at the firm to work with – this almost NEVER works. It is best to move on without burning the bridge. There is no easy way, but usually a VC will sense that you have pulled back and that your interest has waned and stop working on the deal – case closed.
One final note, if you were in a fraternity you might remember ‘rush’. The ‘actives’ invite you to the house, to their parties and generally kiss your butt. But once you accept your bid the party ends and you turn into a pledge – a servant for a semester. It is likely that the partner you are working with prior to signing a term sheet is actively selling you on himself and his firm. Keep this in mind…
Last night John and I had dinner with a rather prolific venture capital partner who was explaining that over the past 12 months he has met with over 300 companies, done deep dives with 30 and offered term sheets to 6. What struck me was the sheer number of ‘Nos’ he has to deliver each week – an average of six per week. What a nightmare that must be.
Over the years I have pitched more than a hundred VCs and less than 50% actually ever say NO or pass on a deal. Generally I have found that experienced VCs tend to give you negative or positive feedback very quickly. VCs like the one above, i.e. experienced VCs, have to move on quickly simply to get through the deal flow. They want to tell you where they stand so either they can stay competitive in the deal or get you to leave them alone so they can move on to the next deal.
On the other hand, inexperienced VCs sometimes have no idea how to communicate your status with their firm. If they haven’t yet done a deal they may be learning the ins and outs of getting a deal through their partnership. There could be a million reasons, but at the end of the day you are in deal limbo – nothing is going to happen. If they decide not to do your deal they may not want to hurt your feelings or end up in an argument with you about why their reasoning for not investing is flawed. Other times an inexperienced VC may have decided not to invest, but doesn’t want to take a position in case you actually find another firm willing to fund your deal – who knows he might want to get in on the action and by not turning you down he keeps his options open.
As an entrepreneur it is important how you take the ‘nos’. When I was younger I would listen intently, formulate the perfect answers and ultimately argue the point with the VC who was simply trying to move on. Experienced VCs who do you the favor of actually turning you down (and, yes it is a huge favor) usually have a number of great reasons not to invest in your deal. Sometimes their partners have another set of great reasons not to invest and so on. Realizing that a prolific VC turns down an average of six companies each week he can’t go through the entire set of reasons for not investing; instead he will usually give you a couple of top level reasons and try to get off the phone as quickly as possible. Trying to argue with him on one or two points is always useless because you don’t have the complete story and he doesn’t have time to take you through all of his/their analysis.
Smart entrepreneurs should listen intently, thank the VC for investing the time to look at the deal and ask if you can keep the door open for rounds or new deals that might occur in the future. Then every quarter or so give him an update on your progress – he may not respond, but he will definitely read your updates.