“deep down you know that you’re part of history, that the things you are building will be written about and thought about forever, then maybe after that good cry after a short sleep under your desk you’ll pull yourself together and remember. That you are a person in the Arena. A Pirate. That you are here to make a dent in the universe.”

If you are like me you read the post and thought, ‘meh…no shit‘, and moved on to the next post on Techmeme. Turns out that Netscape engineer that Mike quoted didn’t appreciate the attribution. He responded with a post titled, “Watch a VC use my name to sell a con.” Jeremy suggests that the entire venture capital system is corrupt – they make money off of your hard work and provide no value whatsoever. Mike responds point by point here. I won’t bother to rehash the points here, but I did want to point out that a LOT of people are starting to get the idea that capital formation is bad – that perhaps capitalism is dead.

I think it all began with the bailout of the investment banks (and mainly AIG). The outrage against the bankers and the insurance companies was well earned and appropriate. More recently that outrage has taken shape as the Occupy Wall Street movement. The general feeling seems to be that capital formation is bad – i.e. accumulating wealth is bad as it allows the rich to get richer. The undertone is that our economic system has failed – that capitalism is somehow dead. Jeremy’s post suggests that VCs don’t actually write any code and as a result any money they make from investing in your startup is somehow ill gotten or as he suggests a ‘con’.

The Left is against capitalism because it’s outcome is by definition unequal. The framers of our Constitution sought to provide a nation of equal opportunity – a nation where a child born of an unwed mother, given up for adoption to a working class family could one day build the most valuable corporation on the planet (his name was Steve Jobs). In America anyone can succeed (and fail) regardless of who their parents were. On the other hand the Left seeks equality of outcome – everyone should be rich or no one should be rich. The Left believes, like Jeremy, that anyone with money must have had some sort of unfair advantage. The formation of capital – i.e. in this case by venture capitalists – is vital to create this equality of opportunity. Without capital how could Steve have built Apple?

If you have ever attempted to raise capital for your startup idea you are in pretty good company. Once you have actually raised capital for your startup idea you are part of a relatively exclusive club. Your close friends and family (who know how long you have been working on raising a round) will congratulate you. The other members of your team will want to celebrate. The PR folks will prepare a press release and try to get TechCrunch interested in the funding story. But, if you are like me, you might not feel entirely comfortable accepting congratulations or celebrating or even getting some TechCrunch love.

Raising money is a lot of work. First, you have to come up with a startup idea that resonates with investors – if it doesn’t resonate they won’t meet with you. Of course getting an investor to meet with you based on an elevator pitch is pretty easy once you figure out what sort of investments they are looking for (assuming that is the sort of business you want to start). Once the meetings begin you will experience a roller coaster of excitement, disappointment and despair. Some investors will LOVE your idea, your team and generally be ready to put a term sheet together only to learn their partners aren’t the least bit interested in having your deal on their website. If you are lucky you will hear no a LOT. If you aren’t as lucky you will hear a lot of maybes. But eventually, you might get a term sheet. Of course once you get the term sheet you are on your own 10th yard line. You still must negotiate the terms and agree on a final term sheet. Once you have signed the term sheet you are on the 50th yard line. Of course sometimes closing is harder than you think. Papering disclosures, employment agreements, charters, financial statements – all can throw a wrench into a deal. When you finally get the wire you are likely so exhausted you may feel relieved, but I would argue that you are actually back on your own 10th yard line.

The congratulations, celebrations and press coverage should make you feel uncomfortable. Your team won’t understand at first, but raising outside capital is a HUGE responsibility and you should start feeling the pressure at about the same time the wire hits the bank. Your investor believed in you, your team and your idea – enough to put their hard earned treasure at risk. While your Mom, Dad and close friends were more than happy to cheer you on – how many of them wrote checks to fund your deal? Maybe a few, but generally encouragement is free. Your investor is not looking for a standard return – he is specifically looking for outsized returns 10x is the norm. For every dollar you spend you have to figure out how to make it worth $10. People who can do that are few and far in between. If you think the venture backed entrepreneurs is exclusive – try getting in the ‘provided outsized returns to investors’ club – it is downright lonely there. Outside capital isn’t for every startup or every entrepreneur, but if you decide to accept it be sure you understand the responsibility you have placed firmly on your shoulders.

Raising money is a lot of work. First, you have to come up with a startup idea that resonates with investors – if it doesn’t resonate they won’t meet with you. Of course getting an investor to meet with you based on an elevator pitch is pretty easy once you figure out what sort of investments they are looking for (assuming that is the sort of business you want to start). Once the meetings begin you will experience a roller coaster of excitement, disappointment and despair. Some investors will LOVE your idea, your team and generally be ready to put a term sheet together only to learn their partners aren’t the least bit interested in having your deal on their website. If you are lucky you will hear no a LOT. If you aren’t as lucky you will hear a lot of maybes. But eventually, you might get a term sheet. Of course once you get the term sheet you are on your own 10th yard line. You still must negotiate the terms and agree on a final term sheet. Once you have signed the term sheet you are on the 50th yard line. Of course sometimes closing is harder than you think. Papering disclosures, employment agreements, charters, financial statements – all can throw a wrench into a deal. When you finally get the wire you are likely so exhausted you may feel relieved, but I would argue that you are actually back on your own 10th yard line.

The congratulations, celebrations and press coverage should make you feel uncomfortable. Your team won’t understand at first, but raising outside capital is a HUGE responsibility and you should start feeling the pressure at about the same time the wire hits the bank. Your investor believed in you, your team and your idea – enough to put their hard earned treasure at risk. While your Mom, Dad and close friends were more than happy to cheer you on – how many of them wrote checks to fund your deal? Maybe a few, but generally encouragement is free. Your investor is not looking for a standard return – he is specifically looking for outsized returns 10x is the norm. For every dollar you spend you have to figure out how to make it worth $10. People who can do that are few and far in between. If you think the venture backed entrepreneurs is exclusive – try getting in the ‘provided outsized returns to investors’ club – it is downright lonely there. Outside capital isn’t for every startup or every entrepreneur, but if you decide to accept it be sure you understand the responsibility you have placed firmly on your shoulders.

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…

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…

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

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…

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.

For the past 30 days or so I have been working on putting together a $5MM round for ShopSavvy (our mobile app company) at a $19MM pre-money valuation. We have spent almost a million dollars building ShopSavvy into one of the leading shopping platforms for mobile phones. Today the app has more than 6.5 million users who are actively saving money by comparing online and local prices of the items they buy. Three months ago our biggest competitor with just 2 million users sold their assets to Ebay for $5/user. Using this as a comparable we should be worth at least $32.5MM. I would argue (and I have previously) that if you include our team and our backend systems (Pricenark) we are worth even more. Several potential acquirers have approached us about selling, but we have decided that ShopSavvy could be a billion dollar company in as little as three years. As a search/advertising business we think that each barcode scan our users conduct could be worth between $.05 and $.20 each (each Google search is worth between $.05 and .06 each) making ShopSavvy an important player in the mobile shopping game. Add platform opportunities like our payment wallet, couponing, rebates, deals and warranties and ShopSavvy could become the dominate player. If we wanted to sell ShopSavvy today I have no doubt we could get $50MM or more for the company, but we have convinced ourselves that it makes too much sense not to go for the grand slam. For a mere $5MM and 24 months we will know if we are going to be that billion dollar company – pretty cheap in the scheme of things. Again to reiterate: for a venture investor the problem isn’t mitigating the downside risk, but ensuring the upside opportunity. On the other hand, angel investors love to protect the downside. If ShopSavvy continues to grow at rates even half as fast as our current growth trends it will be worth significantly more than invested capital. This is just the sort of bet angel investors love – lots of upside and very little downside. Turns out it is a lot easier for us to raise capital from angels and super-angels than venture capital firms.

So what does this mean to you? If you have a great way to mitigate downside risk spend more of your time talking to angels and super-angels. If your downside risk story is horrible, keep talking to venture capital firms and the issue won’t even come up.

The paper concludes that “Non-local investments made by venture capital firms based in the Valley, Boston, and New York outperform their local investments.”

I was on Sand Hill Road a few months ago and the guys at Sequoia explained that my startup was a no brainer to fund, but I would need to relocate to the Bay Area. Maybe I should send them a link to the paper on Scribd. Thanks for the post Ryan.