Women are changing the face of Venture Capital and if you’re an entrepreneur you need to start finding out how they’re doing it. I’ve put together a Twitter List of women in venture capital who tweet. It only has 50 women on it today, but I’ll be adding more in the coming weeks (feel free to recommend anyone I’m missing). Subscribe: Women in Venture Capital. I also have put together a list of the women most likely to join the Women in Venture Capital List called Startup Women (feel free to recommend women involved in startups).
Author Archives: Alexander Muse
There is a dirty little secret in the startup world and if you promise not to tell anyone I’m going to share it with you this afternoon. Deal? Startup founders are completely insane. Seriously, they are total nut jobs. Anyone who thinks they can take an idea born from their head, hire a team, build a product and raise millions of dollars is crazy. The second dirty little secret is that these lunatics are the ONLY people willing to take the risks necessary to change the world. VCs know both of these secrets.
Time and time again I watch VCs fire founders who are obviously insane for being insane. Of course these same VCs funded these lunatics in the first place. The very same traits that helped the entrepreneur come up with the original idea, attract the right team and investor are the very same reasons an investor will use to oust that same entrepreneur after the first year. Sadly the Americans with Disabilities Act doesn’t offer startup founders any sort of protection.
The irony is that in corporate America, CEOs who do well keep their jobs, but the in the startup world when founders do REALLY well they almost always get replaced. Investors want to find someone who can effectively manage the opportunity for growth the founder and their investment created.
So how do you fire a startup founder? Fund him and then wait. You’ll be able to find a great reason to fire him soon enough. Steve Jobs, crazy in his own right, said it best,
“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”
There are countless examples of investors easing or pushing out founders out of the companies they founded. You might have heard about Tinder the UBER popular mobile dating application. From the start, this little company was run by crazy 20-somethings Sean Rad, Justin Mateen and Whitney Wolfe. Their emails and texts to one another posted all over the internet give you a glimpse into the craziness of these three founders. Today IAC, the investor in Tinder, is slowly easing them out of the company for being crazy, BUT the folks at IAC who funded these kids always knew these people were lunatics. They chose to ignore the craziness in the hope they’d build something fantastic – and Sean, Justin and Whitney did just that.
So how can startup founders become the exception (think Gates and Ellison) and not the rule (guys like me)? The easiest option is to talk to a healthcare professional and get a prescription for Prozac. This will likely help a great deal. If you’re not into mind altering drugs you could use Chris Yeh‘s eight step plan to keep your job:
- Don’t get caught by surprise.
- Start planning your defenses early.
- Get everything in writing.
- Constantly work the key players.
- Realize that you are dispensable.
- The best defense is a good offense.
- Don’t sign anything during the coup attempt.
The most successful mobile apps are staffed by small brilliant development teams. The core ShopSavvy application was developed by less than five full-time software engineers. Over time we added more and more developers, but more bodies didn’t really improve our productivity, features or functionality. Throwing bodies at software development is often counterproductive. Just the other day a recruiter reached out to discuss a CEO opportunity with a mobile app company with 60 developers located outside of the country. My first reaction was that we needed to fire everyone, relocate development to San Francisco and hire the ten best developers we could find. We wouldn’t save any money as the company was already spending more than $4M in development salaries (our average salary in San Francisco would be $400K), but our work product would be 10x better/faster.
The dirty secret is that the BEST software developers are between 10 and 28 times more productive than average developers. Robert Glass in his book “Facts and Fallacies of Software Engineering” uncovered the uncomfortable truth that “the best programmers are 28X better than the worst programmers.” Further, in research conducted by Sackman, Erickson and Grant, outlined in Fred Brook’s “The Mythical Man-Month“, found that the best developers are 10x more productive and deliver code 5x faster than average or normal developers. Stop counting lines of code to determine productivity. The best code:
- is maintainable (easily for multiple developers to work with = lower cost of ownership)
- has fewer bugs (focus on cost of ownership not time to completion = saves time both during creation and maintenance)
- has fewer lines (leverage others tools and frameworks = less code that does more)
So if more developers won’t help what can a company do to produce more results? Joel Spolsky and his partner Michael Pryor have a simple theory they’ve been testing since 2000 (its been working):
If you’re in the software development world you might have heard of Brooks’ Law, which states that “adding manpower to a late software project makes it later.” One developer has ZERO coordination and communication overhead while ten developers working on the same task must coordinate and communicate. These interactions take a LOT of time. Imagine trying to coordinate the work of 60 developers?
By the way, the company decided they didn’t think I would be a good fit. Thank God. But honestly? I’m disappointed they didn’t want me to help fix their company.
As the Cofounder & former CEO of ShopSavvy, one of the most popular mobile shopping apps, I regularly get approached by recruiters and investors conducting CEO searches for mobile app companies. Most of the time their mobile app company has hit a plateau and they’re looking for someone with experience to come in and ‘fix it’. While I find it inconceivable that I’d actually be offered a CEO position, the idea of accepting a CEO position I didn’t create in the first place is unbelievable. At the end of the day I suspect that 99.9% of the companies that approach me have no intention of hiring me, instead I think they want the benefit of my experience for free. So here is what you’d get for FREE if you called me:
How can we get more users? There is a inherent level of users and usage for every application – i.e. a certain percentage of the population who is aware of each application will download and use your app. The sad truth is that most people who hear about an app won’t download it and even fewer will actually use it even if they do. Companies need to figure out what percentage of the total population they’ve exposed their app to and then determine it’s ‘inherent level’ of adoption. This won’t be an easy effort, but definitely worth the effort as it will help the company understand how to proceed. Here are some of the most common methods for getting more users:
- Buying Downloads. Some developers have had success manipulating the App store by paying for downloads, but these strategies rarely work and even if they do for a time they won’t work for long as Apple actively seeks to prevent abuse.
- Paid Media. Companies can simply buy digital, print, radio and television spots to drive awareness of their application. This method has worked for many developers, but is a very expensive option. The apps ARPU and user retention needs to be HIGH for this method to work out economically.
- Earned Media. This was the method we used at ShopSavvy. Working with our PR firm, we spent all of our time helping reporters build print and television stories about our application. We held reporter’s hands, building sample video content of all aspects of our app, helping them tell a compelling story to consumers. As a direct result, each year we have HUNDREDS of television stations running 30 second news segments all over the country. Working with partners we also managed to get BIG celebrities, like Jimmy Kimmel, Oprah, Anderson Cooper and Martha Stewart, to use our application on their television shows. Through polling, we believe that more than 50% of American smartphone owners have heard of ShopSavvy (have you?). Earned media is a great way to find users.
The real problem with most applications is that they lack an inherent mechanism for user growth. Most companies that approach me about a job have well designed and very useful mobile apps – the problem is that I’ve never heard about most of them. There are simply too many apps vying for too few users. Even BIG brands have a hard time attracting users. The solution is actually very simple: design applications so that they become more useful when a user’s friends use the app as well.
Consider the photo creation app Instagram. Not only does Instagram allow you to add unique and fun filters to your photos it makes it easy to share them with your friends and family. Instagram is a FAR better app when you get your friends to download the app. Instagram found an inherent mechanism that led to amazing user adoption. There are scores of similar apps that have better filters and photo editing capabilities, but they don’t get better when you get your friends to use them.
Inherent mechanisms are best, but artificial incentives such as leaderboards, sweepstakes and premium features can be used to encourage users to invite their friends to download the application. App stores are constantly changing the rules around artificial mechanisms to drive downloads – companies need to make certain they aren’t violating the rules.
How can we get our users to use our app? Once a company has figured out how to drive downloads, they invariably discover that it is a far more difficult task to keep those users engaged in the application. I know from personal experience how heartbreaking it is to acquire a user only to realize that they have forgotten that you exist a month later. Most apps are only opened a single time so companies must create COMPELLING reasons to keep in touch with their users. Facebook and LinkedIn have mastered the art of notifying users of activity via email, text and push – resulting in simply AMAZING cohort numbers. Driving user engagement is not terribly hard, but most companies don’t think about it until its too late.
How do we make money? There are many ways to generate revenue with your application; however, for purposes of this post I’ll focus on in-app advertising. Unless a company’s application is a rocket ship, it is important to incorporate advertising units from the very start. In fact, companies should seriously consider making advertising seem like a feature rather than a toll. When we built ShopSavvy we decided to tightly integrate the advertising unit to the actions of our user. Specifically, when a user scanned a barcode we knew what product they were holding in their hands, we knew they were likely going to purchase that item and we also knew which store they were in. We created highly functional advertising units based on this information that didn’t seem like ads. Here is a early presentation explaining how they worked:
Companies who find ways to incorporate ‘feature based advertising’ into their applications can generate MUCH higher CPM rates than applications that simply ‘display’ advertisements. To leverage these higher CPM rates, companies must create scarcity and exclusivity when marketing their advertising units. To start, stop selling ads from networks like Google. The best and most lucrative ad units are sold and not bought – companies need to sell their own ad units (or at least engage an agency to sell them on their behalf). Sometime the ads a company DOESN’T sell are more valuable than the ones it does sell. For example, at ShopSavvy we were regularly approached by advertisers that were willing to pay our rate, but their product (hotels, airlines, cars) weren’t relevant to our users activity. We elected not to run advertisements that were unrelated to our user’s activities and as a result we created exclusivity – not just anyone could buy our ad units. We also sold various location and product filters to single advertisers creating real scarcity. By focusing on feature based ads that were both exclusive and scarce ShopSavvy was able to demand a $500 CPM (yes, five hundred dollars).
How can we tell whats working and whats not working? EVERY single company that reaches out to me focuses almost exclusively on ‘vanity metrics’ like downloads, total sessions and total first time users. If I press them for real discovery analytics like: cohort-based analysis: quantifying exactly how specific groups of users continue to use and engage with their app and which groups generate revenue over time; user-centric funnel analysis: understanding how distinct user segments convert on specific goals and ARPU, they simply don’t have the data. The companies that are really measuring inside of their applications don’t call me. How can a company understand what is working and what is not if they’re not leveraging the data their users provide them each day? Users tell you everything you need to know. Companies who fail to listen fail generally. Start measuring NOW.
Hopefully this post will save us both a lot of time. It is terribly unlikely you’d want me as your CEO and even more unlikely that I’d actually want the job. Truthfully? I’m better at starting things than finishing them. If you want more help, I offer a full day of mobile consulting for $10,000+T&E. Shoot me an email if you’d like to get together: firstname.lastname@example.org.
- Addison TreeHouse – Addison
- Backlot FW – Fort Worth
- coLAB Workspace – Fort Worth
- Common Desk – Deep Ellum
- The Dallas Entrepreneur Center – West End
- Fort Work – Downtown Dallas
- The Foundry Club – Mockingbird Station (Dallas)
- The Garage – Deep Ellum
- The Grove – West End
- HeadSpace – Carrollton
- Nōd – Far North Dallas
- Spryrocket – Lower Greenville
- TechMill – Denton
- Weld – The Design District
- The Werx – McKinney
Read more about them in CultureMap.
Back in 2oo9 Adeo Ressi started the Founder Institute and came up with the idea of a new type of common shares for startup founders called Common F Shares (F stands for founder). These F shares were designed to allow a startup founder to maintain control of his company even if he didn’t own the majority of shares. Until Adeo proposed the idea of a share type that protected founders interests, venture financing documents hadn’t changed since the 1970’s. Wilson Sonsini lawyer Yoichiro Taku drafted the Common F legal documents and Adeo published them on his website (you can download the documents here – you’re going to need a lawyer, but these will give her a headstart).
Whenever I watch SharkTank with my kids I wonder how they’re able to negotiate a deal without understanding the nature of the capitalization of the company. If a SharkTank company has Common F Shares they don’t have to worry about giving Kevin O’Leary more than 51% of your company. Common F Shares provide a founder three major advantages over standard commons shares including:
- Shareholder Control. Your Certificate of Incorporation (COI) will include two classes of common stock. The first, Common A offers the holder one vote per share while the Common F offers the holder more than one vote per share (usually between 10 and 100 votes per share).
- Board Control. Common F directors receive two votes per director, while common directors only get a single vote.
- Protective Provisions. The company is required to obtain the consent of at least 51% of the Common F directors before:
- the COI or bylaws are altered.
- additional shares of Common F are authorized.
- any new series or class of stock is issued.
- conduct a merger, sale, reorg, acquisition, liquidation or dissolution.
- appoint additional members of the board.
- declaring or paying dividends or distributions.
Venture capital was scarce back in 2009 when Adeo first proposed the Common F model; however, today there is more money than their are great startups to invest in so you have a much better chance of securing these protections. Depending on your experience and track record you may or may not be able to convince an investor to allow you to keep your Common F shares; however, it is my belief that EVERY entrepreneur should include Common F shares in their startup upon formation. It is a great way to get to know a potential investor. Make him explain why he doesn’t want you to maintain control of your startup over time. Common F shares aren’t anything that new. Lots of companies including Google, Martha Stewart Living Omnimedia, Broadcom and Facebook have used similar protections to ensure that the founder maintained control of the company even though she was no longer the majority shareholder.
You may have heard the old saying “companies are bought, not sold” and I tend to agree even if Bruce Milne doesn’t. There comes a time in almost every successful entrepreneur’s life when she will receive an unsolicited offer to buy her startup. This is the moment of truth. Should you take a bird in the hand or let it ride to see if you can build that billion dollar company your investors expect? In this post I’ll assume you’ve decided to sell and give you the benefit of a few of my experiences.
First, you need to realize that there is a very real possibility that at the end of the sale process you’ll still own your company. Most deals fall through for a number of reasons, most of which are out of your control. Especially in hot sectors, there are lots of companies who will want to conduct ‘undue’ diligence to better understand how you’re able to succeed where they’ve struggled.
Second, get ready to put your life and company on hold for months. Depending on how you decide to conduct your sale process it could easily take 4-6 months to conclude. During that time don’t expect to get anything done. Your metrics will likely go flat as the entire organization focuses on the exit and not the business.
Third, protect your interests as much as possible. In early stage startup sales breakup fees are unusual, but that doesn’t mean that you shouldn’t ask for one. You can run the sales process however you see fit and you alone can make the rules (assuming you’re being bought and not sold). Here is the process I recommend:
- Courting period. Exchange of basic information to determine interest on both sides. Get a basic understanding of ballpark value of the transaction. I recommend this period lasting no more than 2 weeks. Cut the buyer off after this point. They need to make an offer or move on to another target.
- Letter of Intent. The buyer will deliver you an LOI outlining the terms of the transaction. Assuming the consideration is acceptable you should put some teeth into the LOI. I’d recommend having the buyer pay any and all legal and accounting bills you will incur during the diligence process – usually around $10-20K – if he ultimately decides not to move forward with the transaction. This is a tiny sum and will weed out almost all tire kickers. I recommend negotiating the LOI for a period last no more than 1 week.
- Due Diligence. The buyer will conduct extensive legal and financial diligence. Give the buyer no more than 4 weeks to complete his diligence.
- Firm Deal Term Sheet. You should have the buyer reiterate the deal terms he outlined in the LOI and get him to agree to cover your legal and accounting costs as well as a small breakup fee ($100K for early stage startups) if they fail to close within a reasonable amount of time. I would recommend setting a 30 day time limit.
- Purchase Agreement and Close. Negotiation of the PA and subsequent close should only take 30 days.
This schedule is very aggressive, but very doable. If you’re in a hot space and have a great startup you should demand/expect this sort of timeline and process – 3 months is completely reasonable. The consideration of $100K plus costs is STILL a horrible deal for you if the buyer fails to close. You’ve surrendered 3 months of progress – $100K won’t come close to covering your costs, but may save you from wasting time with a non-serious buyer. Good luck!
In my experience acquisitions are hard and often fall through. Given the recent spat of news about an acquisition that we may or may not making, depending on who you talk to (Houstonia, Dallas Business Journal, D Magazine), I thought it might make sense to outline the steps of an acquisition.
- Step One: Determine whether or not you want to grow your business organically or through acquisition. Spend a lot of time answering this question. Acquisitions really are disruptive and sometimes detrimental to your business.
- Step Two: Find a target acquisition. Most targets are private companies and reveal very little about themselves publicly so it takes a lot of work to find an acceptable target. You can use a broker or investment bank to help you, but usually you’ll uncover the best opportunities in your own space on your own.
- Step Three: Approach management and/or the investors of the target to determine if they are interested in selling. More often than not most targets will be VERY reluctant to admit they would be interested in selling even if they really are. More often than not it is best to take a soft approach indicating you might be interested in making an investment or some sort of partners (ironically, these two options might be a better idea than the acquisition). This process will likely take a few weeks.
- Step Four: Meet the target. Once you’ve managed to pique the interest of the target’s management team and/or investors it is time to meet. Your goal is to get the target almost as excited about you as you are about them. You’re building confidence that a) you can get a deal done, b) the transaction will be lucrative and c) it is worth their time to work with you. Expect this process to take a week or two.
- Step Five: Execute an NDA. You’re going to ask for some basic financial and business information for use in the crafting of your offer. Usually an NDA will also include a confidentiality agreement that precludes you from talking to anyone about the fact that you’re in preliminary talks to buy the company.
- Step Six: Determine the value of the target and its value to you. You will likely have to pay some number in between these two values.
- Step Seven: Secure financing. Unless you’re going to use your stock as a currency or you’re flush with cash you’re going to need to raise debt or equity to fund your purchase. Expect to spend two or three weeks putting together a deal.
- Step Eight: Deliver draft Letter Of Intent (LOI) to the target. This letter will serve as your term sheet outlining what you’re willing to buy and how much you’re willing to pay.
- Step Nine: Negotiate the LOI price and other terms. More often than not your target will have a lawyer and his job is to markup the document. Additionally the target will likely want you to pay more than you’ve offered. It should take a week or two to negotiate the LOI.
- Step Ten: Execute the LOI. You need to set a deadline and stick to it.
- Step Eleven: Begin financial and legal diligence. This can take a lot longer than you might think. Expect at least a month depending on deal size. You’re going to need to budget a few thousand dollars for the legal diligence. The real costs come in when you begin drafting the Purchase Agreement.
- Step Twelve: Retrade the deal. In all likelihood you’ll uncover things you didn’t know when you made your original offer. Take the new information into account and determine if you should lower your offer. The target is NOT going to like this process. Don’t be greedy. The retrade will likely take a week.
- Step Thirteen: Begin drafting the Purchase Agreement. You’re going to start incurring a lot of legal expenses here – around $20K depending on the size of the target. The deal points should be settled before you meet with your lawyer. Your lawyer should be able to finish the PA in a couple of days.
- Step Fourteen: Deliver and Negotiate the Purchase Agreement. Once you deliver the Purchase Agreement to the target his lawyer will want to negotiate the language, but hopefully not the terms. This process could take a a week or two so be prepared for the delay.
- Step Fifteen: Complete the various schedules to the Purchase Agreement. This process could take a couple of weeks.
- Step Sixteen: Execute the Purchase Agreement.
- Step Seventeen: Fund and Close.
In my experience it will take about four months from your first conversation to close. Of course it isn’t unusual for a deal to fall apart for a number of reasons at various stages of the process. Remember a deal is never done until it’s done. There is no such thing as ‘late stage negotiations’ – either there is or isn’t a deal.
When you launch your first startup and raise your first round of venture capital you should simply feel lucky. Only 1% of companies seeking venture capital actually receive any funding at all. But by the time you’re raising capital for your second startup you should really start thinking about securing control. Far too many of us have raised venture capital only to be encouraged or forced to make silly decisions by our boards or investors. You don’t have to believe me, take it from my of my current investors, Dave McClure who suggests,
“Most VCs Are Stupid, Insufferable, Arrogant And Terrible At Making Money.”
Once you have one or two or three startups under your belt you’re FAR more experienced than most venture capitalists at running an early stage startup. Don’t let them ruin your company. Find a way to stay in control. If they don’t want you running the company FOREVER they shouldn’t invest and you shouldn’t regret not taking their money.
The very best way to maintain control is to issue the founders Class F shares. These common shares possess some powerful rights. First, they should allow you to keep board control by offering 2 votes for every director appointed by the class. Second, they should magnify your shareholder voting power by 100:1 or 10:1 depending on the number of shares issued. Finally, you should consider adding provisions to your employment agreement that outline the minimum fully diluted share percentage you’re willing to accept – in the event your ownership drops below, say, 15%, the board is required to gross you up. There are a million ways to keep control. The goal is to keep you in control so you can execute on your vision without worrying about getting fired or replaced.
At the end of the day, if your investor accepts the fact that you’re in control for better or worse you know you have a great partner.
Most mornings I do office hours either at Cafe Express (on McKinney) or Ascension (on Oak Lawn). When I get to either location I will tweet the venue and time period (follow me on Twitter @amuse). Office hours are primarily for members and applicants to my mentoring program. If you’re an entrepreneur you should consider applying to my mentoring program and even if it isn’t a great fit for you, you’ll be able to drop in and share a cup of coffee and some entrepreneurial fellowship.