Startup Advice

Sand Hill Road: The VC Address of Choice

 

My first visit to Sand Hill Road was in the late 90s when I was raising money for my first startup, LayerOne. Sand Hill Road, located in Menlo Park, is the address of choice for venture capital firms. The price per square foot of space is the highest in an area known for sky-high rents – hovering between $110 and $150 per foot. The first venture capital firm to move to Sand Hill Road was Kleiner Perkins Caufield & Byers in 1972, since then companies such as Microsoft, Amazon.com, Facebook, Twitter, Instagram and Skype have raised money from Sand Hill Road investors. In fact, almost every major silicon valley startup has raised money from one or more Sand Hill Road venture capital firms as seen below (from Bloomberg).

SandHillRoadInvestments

 

My father raised capital from Sand Hill road in the late 90s and early 00s for his companies as did I. Many are predicting the demise of Sand Hill Road as more and more venture capital firms move to downtown Palo Alto and South Park. They suggest that Sand Hill Road is where your ‘father’ raised venture capital. Which in my case is true. The truth is that for a VC the “economies of agglomeration” rule – you want, no, need to be near your peers in the venture capital game.

When I’m in fund raising mode I book a room at the Rosewood Sand Hill (directly across the street from most of the VCs). They have a car service that will drop you off and pick you up from each of your meetings. No where else in the world can you schedule 6 meetings in one day with 6 different venture capital firms. If you head south from the Camino Real on Sand Hill Road the first venture firm you’ll run into is Kholsa Ventures and then Lightspeed Venture Partners, GGV Capital, Shasta Ventures, Accel-KKR, August Capital Management, Mayfield Fund, Greylock Partners, Interwest Partners, Kleiner Perkins, KKR, Sequoia Capital, Makena Capital, Silver Lake, NEA, DFJ, Andreessen Horowitz and Menlo Ventures to name a few.

More and more firms are moving to San Francisco to be closer to the ‘cool kids’, but there is no denying that a visit to Sand Hill Road is a requirement for any startup serious about raising venture capital.

To Taylor, Love Alexander (UPDATED)

This not about me, but

UPDATE: Since writing this post Apple’s Eddie Cue announced that the company would not require artists to forgo their cut of subscription revenue during customer’s free 90 day trial. Did Apple just cave or did they call Taylor’s bluff? I tend to think the latter. Apple’s number crunchers must have calculated how much the various anti-trust lawsuits will cost the company and figured that having Taylor Swift on board was worth the cost. Taylor Swift is VERY popular. Now the only question, will Taylor let Apple stream her latest album – she’s going to lose millions, but with Apple ‘caving’ to her demands I can’t see how she can’t. 

Taylor Swift wrote a love letter to Apple suggesting their decision to give consumers a free 90 trial of their stream service was “shocking and disappointing.” Artists who choose to participate in Apple’s launch must similarly agree to let consumers listen to their music for free during the 90 day free trial. She readily admits that she’s got plenty of money and could afford to forgo her cut of the streaming fees for 90 days, but she is looking out for the ‘little guys’ – the musicians who are just getting started. Of course she knows this argument is total B.S. as most artists, especially new artists or bands get paid next to nothing for their recordings.

The proliferation of ‘360 deals’ are prima facia evidence that most musicians make almost nothing from their recordings anymore. Musicians make their money almost exclusively from live performance and merchandise. Like many technology startups who leverage the ‘freemium model’ musicians basically give their recordings away (the cost to do so is almost nothing with digital distribution) to sell more tickets and merch. Of course some artists, like Taylor, have much better deals that a new band just starting out could get.

Given Taylor’s very favorable recording contract, she stands to lose millions if her latest album were to be available on Apple’s new streaming service even for 90 days. Taylor is grandstanding for the ‘little guy’ so that she won’t lose out on her unique market advantage. I respect her decision, but am bothered by her willingness to create a red herring. The truth is that Apple was precluded by the Justice Department from giving consumers a free 90 day trial while paying the artists as explained by Apple Insider, “Apple has billions of dollars available to pay artists substitute royalties during users’ free streaming trail, but were it to do so, the company would quickly find itself at the wrong end of global antitrust complaints. In many markets, “dumping” free or loss leader products would be considered anti-competitive.”

To make up for the 90 day free trial Apple has offered artists a MUCH bigger payout than their competitors like Spotify, Rdio and Pandora, while charging a similar monthly rate to consumers. By giving consumers a free 90 day trial Apple and the artists are giving the service a fighting chance. If successful Apple streaming service might create a lucrative marketplace for the little guy. Ironically, if Taylor were to just cave in and let her music stand next to other artists during the free trial period she would help create the very marketplace that could REALLY make a difference – allow smaller artists to make living on their music.

You can decide to live in a scarce or abundant world.

the-power-of-intentionThe other day a friend was telling me about a book she is reading called “The Power of Intention.” She was explaining how the book described that many people have a scarcity-driven world view. The idea that there just isn’t enough to go around, i.e. the world is zero sum.

Many of our ancestors here in the U.S. just didn’t accept the idea that scarcity had to rule their lives, instead they decided that they could live lives of abundance. The old world view was that the pie was finite, the new world view was that the pie could get bigger or was infinite (and I am not talking about zero-point energy).
For me this has been proven through our experience with open source software. Architel needed a trouble ticket system to run it’s business. We didn’t want to spend $50,000 to $100,000 on a boxed solution that would require a yearly investment of $10,000 to $30,000 per year for software licensing and support. Instead we decided to build a software program specifically tailored to meet Architel’s needs. If we had a scarcity-driven view of the world we would have locked the software up on our servers and used it to competitive advantage. Instead, viewing the world from abundance, we released the software to anyone interested enough to download it. Over 100 people/companies per day downloaded the software over the course of six months. Since then hundreds of companies have requested that we customize it, host it or manage it for them resulting in a completely new line of business we call SimpleTicket.

Since many people and much of the world lives in a zero sum world of scarcity it is important to realize how they play. The most popular method of play is called minimax, i.e. the idea that one should minimize the maximum possible loss. (remember War Games?) Wikipedia explains better than I can:

\sup_\theta R(\theta,\tilde{\delta}) = \inf_\delta \sup_\theta R(\theta,\delta)A simple version of the algorithm deals with games such as tic-tac-toe, where each player can win, lose, or draw. If player A can win in one move, his best move is that winning move. If player B knows that one move will lead to the situation where player A canwin in one move, while another move will lead to the situation where player A can, at best, draw, then player B’s best move is the one leading to a draw. Late in the game, it’s easy to see what the “best” move is. The Minimax algorithm helps find the best move, by working backwards from the end of the game. At each step it assumes that player A is trying to maximize the chances of A winning when he plays, while on the next turn player B is trying to minimize the chances of A winning (i.e., to maximize B’s own chances of winning).

Minimax doesn’t even allow for the concept that two people could win.  If you don’t have a framework to allow for abundance you will continue to “work backward” from the result you assume most likely.  Isn’t this crazy?  Win, lose or draw?  Thats it? I don’t think so.  If you were to take a look at my office library you would find more than 20 titles on game theory. Only one of them even comes close to explaining why abundance works – it is called the Bible (John 6:5-15)…

Startup Founders, You’re Going to Get Fired

firing-startup-foundersThere 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:

  1. Don’t get caught by surprise.
  2. Start planning your defenses early.
  3. Get everything in writing.
  4. Constantly work the key players.
  5. Realize that you are dispensable.
  6. The best defense is a good offense.
  7. Don’t sign anything during the coup attempt.
  8. Counterattack.

Startup Founders: Leverage Your Board of Directors

Once a startup founder has raised outside capital, regardless of stage or amount, it is time to think about building a lasting relationship with his investors. Here are my top four tips:

  1. COMMUNICATE regularly with each investor/director by sending a monthly progress/update email. Spend 30 minutes detailing all your accomplishments, challenges and go-forward plans. You don’t want to wait until your next board meeting or until they email you asking what the hell is going on.
  2. ASK each investor/director for help each month. Think about how each investor/director can help you – perhaps with a product launch, a candidate for employment or a business development deal. If you keep them busy they will be a LOT less likely to get in your ‘business’. One of two things will happen – you will get much needed help or he will hide from you.
  3. MEET (in person or via phone) with each director PRIOR to each board meeting. Show him your agenda and ask him if there is anything he’d like discussed at the meeting. If there are controversial issues to be discussed determine where he stands. If he’s on your side enlist him to meet one-on-one with directors who might not be on board yet PRIOR to the board meeting.
  4. DOCUMENT each interaction with your investor/director. The day after your board meetings email an overview of what happened and what decisions were made to each director. You will approve the minutes at the next board meeting, but you’d be surprised how time can change your perception of history. Do the same thing EVERYTIME you engage with your investor/director – a quick followup email detailing what was accomplished and what everyone has committed to do is VERY important.

Let me know if you have any ideas to improve your investor/director relationships.

My thoughts on flip-flops

Untitled design(2)This morning I was sitting in Cafe Express with my son wearing my navy blue Adidas flip-flops when I came across an article titled, “Why Men Should Never Wear Flip-Flops.” Normally I am a fan of D Magazine’s Zac Crain, but I felt compelled to take issue with his latest article.

Flip flops don't make the man...In the article Zac suggests that a man who wears flip-flops is saying, “I have completely given up on being a productive member of society.” As a card carrying member of ‘men who wear flip-flops with jeans’ club I must strongly disagree. Frankly, the men I know that are comfortable wearing flip-flops with jeans are some of the most productive people in society. They’re comfortable in their own skin and not terribly concerned about what anyone else thinks about their wardrobe. Instead, these highly intelligent men, are most concerned about comfort and convenience.

Zac seems to be a little behind the times with regard to how well most men take care of their feet. In the article he argues that one of the main reasons men (as opposed to women) shouldn’t wear flip-flops is because they don’t take care of their feet. Again, the men I know who wear flip-flops are frequent customers of retailers like Onyx. Taking care of your feet is important for a man’s overall health. Far from being the “most horrifying thing a man could wear outside of the comfort of his own home” flip-flops are a celebration of health and comfort.

My suggestion? Judge a man by the quality of his pedicure and not the nature of his footwear. The esteem one holds another human being in should not be a function of his choice of shoes. Of course, I respect anyone’s decision NOT to wear flip-flops. Live and let live…

 

Quora Answer of the Day: Private Equity vs Venture

Venture firms fund the future.Private

If you’re not familiar with Quora you should check it out – I simply love the service. Whenever I want to know something I’m unable to find on Google I turn to Quora and ask a few experts for help. In return I answer questions that others pose to me. For example, today someone asked me to answer the following question: “what’s the practical difference between getting funding from a venture capital firm or a private equity firm?” In some cases I’ll be the only person answering the question and in others hundreds of people answer the question. Check it out…

Please don’t ask me to sign your NDA!

Yea, no. I'm not going to sign your
Everyone in Dallas seems to be doing a startup and lots of these people call or email me to share their ideas with me. More than a few of these entrepreneurs ask me to sign an NDA before they are willing to ask for my feedback and/or advice. The quick answer is that I don’t want to sign your NDA. Feel free to solicit free advice from me, but please quit asking me to sign a contract.

Anil Dash wrote a pretty good post titled, “One more time: No NDAs“. Anil points out that a lot of people feel the same way. His reasons were pretty good and worth repeating:

  • When you ask me to sign your NDA, you’re basically saying, in writing, that you don’t trust me. It’s your prerogative to say that, but it’s a pretty lousy context in which to ask for a favor.

  • I have to pay a lawyer to review a document without having any idea why I’m making that investment. No, I won’t “just sign it” without having a lawyer look it over, because it’s a legally binding document whether a lawyer reads it or not.

  • If your idea’s that good, it’s probably not that rare. I hate to be the one to point it out, but protecting your idea in general is a fool’s errand — good execution is hard to find, but good ideas are cheap.

  • I could get screwed through no fault of my own if some other random person walks up to me and blurts out the same idea that you’ve had. Being exposed to the risk of a lawsuit even if I haven’t done anything wrong sucks.

  • If I couldn’t be trusted with your idea, you’d already know about it. There are folks who don’t like me, or who are annoyed by me, but if I’d broken somebody’s trust in regard to their work, I guarantee it’d be just about the first thing you’d find when you Google my name.

  • The biggest value I can probably offer you is that I would talk about what you’re working on. If I honor your NDA, and I meet a great investor or potential employee or valuable partner for your new venture, I wouldn’t be able to tell them about it.

Are two startup accelerators better than one?

ACCELERATORSEarlier this week I met with two co-founders who had recently completed a startup acceleration program. They were pre-launch and hadn’t raised any outside money (except for the money from the accelerator). In a word they are ‘early‘. One of the co-founders said they were going to miss the acceleration program and as a result it occurred to me that they might be at the perfect stage to join a second accelerator – one that focused on their space and was about to start a new class this summer. The founders had made great headway and in my view joining another program would help them keep up the momentum.

Despite what you may think, it is never too late to take advantage of an accelerator – even if you’ve raised hundreds of millions of dollars. Just last year, Silicon Valley based Quora, announced they were going join the 2014 Y Combinator batch despite the fact that the company wasn’t early stage at all. In fact, Quora had just raised their Series C of $80M at a valuation of $900M. The founder of Quora, Adam D’Angelo, explained that he joined Y Combinator to gain access to the accelerator’s partners, mentors, alumni and other resources.

Common Misconceptions:

  1. Joining a second accelerator would be too expensive in terms of equity. Most founders don’t realize that the amount and valuation of the money raised from an accelerator are negotiable. In Quora’s case, they allowed Y Combinator to invest alongside Tiger at the same valuation (i.e. $900M). When we joined an accelerator we allowed them to invest in our convertible note instead of accepting their ‘standard’ deal. Hopefully, after finishing your first acceleration program you’ve increased the valuation of your company and the second accelerator is willing to pay a higher price. At the end of the day, take a look at the value of the program and the cost of the money and make a smart decision.
  2. The first accelerator would be offended if you joined a second accelerator. This is absurd. Princeton doesn’t get upset when their students attend Harvard. In fact your first accelerator has a vested interest in your success and if you think a second accelerator can help you they will happily support your decision. Afterward you’ll have two groups helping you get the support and resources you need for success. Accelerators are a lot like college – you get out what you put in.
  3. Joining a second accelerator is a bad signal. Getting into an accelerator is a competitive exercise, in fact it is easier to get into Harvard than some accelerators. Getting into two is a pretty rare accomplishment. Don’t get me wrong, most of the startups coming out of accelerators are better off NOT joining a second accelerator, but in some cases it is clear the company needs more time to bake – accelerators are a great place to cook. If anything, joining a second accelerator is a positive signal.

If your first demo day went well and you need a little more time and a little more help seriously consider joining a second program. Two heads are always better than one. Good luck.

 

How big is the market for your product?

Has an investor ever asked you this question:

“How big is this market?”

If you’re like me you’d say something like:

“According to Forester the XYZ market will be $20B by 2016.”

Of course this answer is complete bullshit. The real number – the one YOU need to understand is very simple.

Total # of customers * price = market size

market-sizeMy conversations with the companies I mentor are confidential so I can’t really give you any specific examples from them, but I can reveal to you a conversation I overheard this morning while writing this post at Cafe Express on McKinney. On the right side of the table in a blue button down shirt an investor sat and asked the entrepreneur on the other side of the table how big the market was for his fitness/gym mobile application. It was clear he didn’t really have a rational answer – he said BILLIONS (the US gym market is actually $21B). I was REALLY tempted to walk over to the table and tell them the actual market size – Hint, it’s not $21B. It took me five minutes to come up with a rational answer – all you need to do is ask the right questions and type them into Google.

First, I asked Google how many health clubs there were in the US. The answer? 30,500. The entrepreneur has two different revenue models – one selling to the software/application to the gym directly and the other taking a cut of fees generated by each user of the application. Assuming the software is sold to the gym at $150/mo and assuming you sold to every gym in the US the total market size for this business would be: $54,900,000/year.

Assuming, instead, that the software generates a cut of every member at a particular gym you need to know how many people in the US have gym memberships. Google says there are about 50,000,000 people paying for gym memberships – so assuming you generate $1/member/month the total market size for this business would be: $600,000,000/year.

So the BEST CASE market size for this business would be between $54M and $600M. But you need to be rational – what percentage of the market do you REALLY think you can capture? 1%? 5%? 10%

Assuming 1% the best case market size = $6M/year
Assuming 5% the best case market size = $30M/year
Assuming 10% the best case market size = $60M/year

Grabbing 10% of the entire market in the next three to five years would be a HUGE feat so we can agree the best case market size would be less than $60M. Now that we understand the potential market size for each revenue model which one would you pick? The first model enables you to focus on a MUCH smaller customer base – i.e. a universe of 30,000. It also puts the onus and responsibility of getting their customers on the app at the feet of the gym owner – the startup gets the money no matter how many members actually use the app. So this model might be easy one but you’d be trading potential upside in exchange for ease of implementation.

Of course my point is not about this particular thought exercise, but in general – do you REALLY understand the real size of your market? If you don’t you’re missing a real opportunity. Get busy…

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