September 9, 2014

I got together with an entrepreneur the other day that was looking for some advice. He admitted that he had spoken to a number of angels and VC’s about the product he was working on, and their initial response was a fairly dismissive “I’ve seen this tried many times before”.

I’ve said those words before as well, both directly to entrepreneurs as well as in our internal conversations about companies. But I’m convinced that “it’s been tried before” is a terrible way to dismiss a startup idea.

The reason is that this statement allows you to be way too intellectually lazy. It essentially says “I’m not going to think deeply about the challenges of the problem or proposed solution, I’m just going to assume it won’t work because others before it failed.”

This is fundamentally flawed for a couple reasons.

First, things change. That’s the point of technology. What wasn’t possible before becomes possible now. Even if technologies themselves don’t change, industries are constantly shifting as technology changes the rules of the game. If you hope to invest in tech, or be as disruptor, it’s actually a great thing to go after an opportunity where no one has been successful in the past if the context surrounding the problem has changed significantly.

Second, almost all companies have been tried before, and almost all startup companies fail. The fact that others before you failed is probably true for more than half of all successful company.  Great companies are the exceptions, so pointing to the norm doesn’t tell you much unless you go deeper.

The fact that many others have tried to tackle a problem in the past actually shows that there’s demand, and that others have cared enough about the problem to quit their jobs and try to solve it.  Maybe they were wrong, but maybe they were very right about most things, just made some poor choices along the way.

This is not to say that you shouldn’t have respect for the past – I think we have a lot to learn from what came before us.  Just as I’m disappointed when folks say “it’s been tried before”, I’m also surprised when founders are unable to articulate why “this time is different” when they are embarking on a well trodden path.  Conversely, I am always impressed when I hear detailed, knowledgable commentary on a sector, and why other attempts to solve the same problem failed (plus what needs to happen to drive to a different, successful outcome).  This Tweetstorm from Nathan Hubbard, former CEO of Ticketmaster on the challenges with Seatgeek (and also why Fansnap had challenges) is a good example.

So, for founders that are starting companies in spaces where “it’s been tried before”, my advice is to acknowledge that this true, and focus on either

a) what has changed to make now the right time for this company (apparently the #1 question asked by investors at Sequoia) and/or

b) what you are doing better or different than those that came before you

Usually, the answer isn’t a laundry list, but one of two critical things that set the company apart from what has failed in the past. And if investors don’t want to engage in an intelligent conversation about these things, then move on.

September 2, 2014

I think it’s sometimes a good exercise for companies to take a step back and think about the big external threats to their businesses.  This forces some level of intellectual honestly about one’s position in the market, and can push you to try to see around corners and respond.

Given that, I thought I’d write a post on the threats to my own business.  There are five in particular, and I’ll give some commentary on each one.  Perhaps in a future post, I’ll go deeper into how we are approaching these.

1. New Competition.  When we started NextView, there were relatively few seed focused venture capital funds in the country, even fewer on the east coast, and almost none in the Boston area. Today, the landscape is very different.  There are many more funds today than there were four years ago, and although a few have bubbled to the top in various sectors or geographies, many more are striving to get to the top of the heap. This creates competition, and competition makes it tougher to see and win deals and drives up pricing.  Unlike large funds with hundreds of missions of dollars in each fund, it doesn’t take a huge amount of capital to getting going as a seed investor, so the barriers to entry are not as high.

2. Skipping Straight to A. Some founders are able to skip an institutional seed round and go straight to a multi-million dollar A-round where a larger VC puts in the lion’s share of the capital.  This can happen either because the founder can bootstrap the company with her own resources to get further, or because the company and team is so compelling that a large fund can lead a series A out of the gates.  As I’ve blogged about in the past, there are positives and negatives to this strategy, but it is a viable option to some founders.

3. Non-institutional Leads.  I’ve seen a few cases now where a number of very high-quality institutional investors were interested in investing in a company at valuation, but a non-institutional investor was willing to set terms 1.5 – 2X higher than that valuation.  The institutions walked, but the round got done.  The founder sacrificed having potentially “smarter money” around the table, but got the same amount of dollars in the bank for less dilution.  This happens because institutional investors tend to be more price and terms sensitive overall.  With the advent of more open, standard financing documents, it’s also more possible for founders to just set terms themselves and have investors subscribe. In a frothy market, rounds can get done in this way at pretty high prices (or valuation caps for notes) albeit with less value-added investors involved.

4. Alternative funding sources.  Related to 3, the potential to fill out rounds gets easier and easier with the rise of alternative financing sources like Angelist, FundersClub, and others.  This is probably a good thing overall, because of the increased efficiency in the ecosystem.  But if filling out a round becomes easier, then part of the value of having a strong lead to establish credibility goes away.  Individual angels can lend their credibility to an investment through an Angelist syndicate, even if they are only investing a pretty small amount of capital themselves.  Some specialized platforms like Kickstarter can garner so much interest from non-financial backers that founders can avoid dilutive financing at the seed stage altogether.  These platforms are really interesting to seed funds because they are simultaneously a threat, a weapon, and a sourcing mechanism.  It will be interesting to see how this all plays out.

5. Getting Crammed Down.  The threat that always plagues seed funds is whether a very promising business hits a speed bump, and ends up going through a very dilutive financing.  Many seed funds have significant follow-on capital, but not to the degree of traditional venture funds.  This isn’t as much of an issue when times are good, but it becomes a problem when times are bad (and yes, this bull market will end at some point).  There is no obvious solution to this.  If the fund decides to reserve  more capital for follow-ons, they either have to a) invest less in the seed and have less ownership to begin with or b) raise a larger fund.  If a), you reduce the cram-down risk, but also reduce the fund’s upside because you own less of your portfolio companies to begin with.  If b), the bar to return the fund is now higher because you have more capital.  You either have to have bigger wins than before to get the same performance, or you have to own more of your portfolio companies, which puts you right back where you started.

So, these are the existential threats to my business.  Most were the same threats that existed when we started NextView, just the 2014/2015 version.

Another way to summarize all of these is that in the seed stage VC market that I compete in:

  • The barriers to entry are low
  • The barriers to scale are higher, but seed funds shouldn’t scale
  • The barriers to excellence are high, but sustained excellence is hard

In a market like this, success and market leadership are very fleeting.  Sure, there is some brand benefit and network effect as you become known for investing in great companies.  But those are short lived.  Just like any startup, to stay successful, you need to stay inventive, stay hungry, and keep putting out the best product time and again.

All in all, this is good for entrepreneurs.  It’s harder work for us, but it’s the business we’re in.  I wouldn’t have it any other way.


August 6, 2014

Directr was founded on a mission to allow anyone with a smart phone to create great video. The realization of the founders is that while video is perhaps the most powerful mechanism for communication, very few people are able to use it effectively.

In a few short years, the team at Directr built an award winning product that democratized the creation of quality video for consumers and businesses alike. And earlier today, it was announced that the company looking to democratize video creation was successfully acquired by Youtube, the world’s leader in democratizing video distribution.

I’m excited to see where Google takes the company and how they integrate the product into their various offerings. It’s a win for all involved, but a bittersweet one for me because we loved working closely with Max, Eli, and the team.

Congrats guys, and good luck pursuing your same mission with a much much bigger platform. I hope we get to work together again.

July 29, 2014

When we make our seed investments, we have a strong preference for preferred equity rounds and forming a board of directors that meets regularly. Even in the rare case when we invest in a convertible note, we only do so if founders are interested and excited about convening with us and perhaps one or two other major investors on a regular basis in a structured way.

Some folks may question why we do this.  Given how early a company is, it’s reasonable to think that the limited resources, simplicity of the business, and speed of execution negates the need for board meetings, at least until a company is further along.  The argument is that board meetings (and prepping board materials) is probably overkill at best, and a waste of time at worst because of a few reasons:

1. Too time consuming to create materials when they don’t add direct value to the company

2. The meetings are not helpful enough.  More can be accomplished ad-hoc or via email updates

3. Founders have control and don’t really need to report to anyone

I empathize with these concerns, and I’ve seen boards and board meetings become pretty disfunctional and a poor use of time and energy.  But we think they are important even at the seed stage of a business. Here are a few reasons:

1. It forces a cadence of accountability

We tend to suggest that seed stage companies convene with their board ever 6-8 weeks.  I think it’s a healthy level of frequency for the level of depth that these discussions should have.  Overall, my bias is to suggest meetings that happen more frequently, but are shorter and less formal. But that’s personal preference.

Even though dozens of decisions are made each day, and multiple products will ship in between meetings, it’s nice to have an external forcing function to keep you accountable to goals and the longer term trend of your business. I find that this looks fairly different depending on whether your company is pre-product/market fit, or post PMF.  If you are pre-PMF, I would use these meetings as mileposts to bound your experiments.  In each board meeting, talk about the experiments you plan to run to get closer to PMF and why.  Lay out short term goals, and then re-visit them during the board meetings to assess what worked, what didn’t work, and what you learned.  This kind of methodical goal-setting I think is really helpful, and it’s nice to have some external structure to force that behavior at times.  Sometimes, having mid-point check-ins are helpful. One founder I currently work with in the pre-PMF stage meets with me every 2-3 weeks to review these sorts of iterations.

Post PMF, it’s less about shorter term goals and experimentation, and more about monitoring the KPI’s of the business, and staying on top of longer-term priorities that might slip.  Similarly, I’m a fan of setting goals, and doing lookbacks.  Have you been unable to hire the engineers your were hoping for? Is a big partnership or deal slipping because you failed to reach some interim milestone? Has an important KPI slowly dropped for 4 weeks in a row to the point that it’s indicative of a major issue?  Are you looking around corners and prepared for the future?  Again, as an operator, you are asking yourself these things all the time, but it’s helpful to have other people to keep you accountable. I find that few founders have enough discipline such that they wouldn’t benefit from this kind of external accountability.

Accountability is also a potentially effective tool to motivate your team as well.  One CEO of a seed-stage company I was on the board of, once told me “even when I know our board meetings are going to be short and straightforward, I find it really useful to push the team towards getting stuff done so that we can show our progress to the board.  It may be artificial, but it’s a helpful tool for me, and it motivates the team to tell you about the stuff they’ve been able to get done”.

2. It Provides Strategic Time With Outsiders

It’s easy to get lost in the day-to-day grind of building your business.  Actually, that’s probably the right thing to do to accomplish great things when you are under-resourced and under a lot of time pressure.  But it’s important to be able to think more strategically about the business as well, and it’s helpful to get good external perspectives. Board members are potentially really great for this, because they should have sufficient familiarity with your business to have an informed POV, bring a broader set of perspective on what’s going on in the market or what has gone on in similar companies, and they are financially incentivized to maximize the enterprise value of your company.

If you think the strategic discussions at the board level aren’t productive, that’s a lost opportunity that should be addressed.  I’d address it one-on-one, in a more casual setting with the board member.  Your board member should be an ally, not an adversary or someone you are simply reporting information to.  If things don’t feel that way, something have gone awry.  This can’t always be fixed though, and it’s usually impossible to get rid of a board member.  This is the reason why you should really be careful about picking the right investor and board member, not just maximizing terms on a financing round.

3. Governance

Even at the seed stage, I believe governance is really important. In many startups that I’ve observed, the companies that quickly started going sideways had a diffusion of responsibility among the investors, causing major problems to be caught way too late.  Not that investors determine the success of a company, but I do think that good governance can help a company avoid mistakes, or reduce the impact of them, or at least prevent the mistake from becoming a mortal wound.

This is obviously helpful for founders too. I often see that a brief, informed board discussion does lead founders to make different decisions about hiring, compensation, budgeting, resource allocation, stock sales, etc that they end up being happy about down the road.

4. Preparation for future

Finally, if your company is going to get to a stage where there is a subsequent, VC-led financing round, you will certainly form a board then and have regular meetings and prepare materials.  I think it’s helpful to have experience and context working with your seed board member before getting to this stage.  It will help you determine your own style so you can get the most value out of your board.  It will also give you additional context for what kind of a board member you want to have, which should inform the way you think about new investors in future rounds. If you are going to build a large scale, venture-backed company, board meetings and board materials are in your future.  You may as well get started early.

Closing Thoughts:

Because we realize that many seed-stage founders have never run board meetings before, we wanted to provide some helpful guidance on preparing board materials and getting the most out of those meetings.  Our latest NextView growth guide covers these topics, and even offers downloadable templates to simplify the creation of your own board decks (as well as a template for an alternative Google-docs approach).  Check it out here and share it with other founders that might find this helpful:

Also, for other feedback and advice on making the most of startup boards, our friend Brad Feld has written a great series of posts on the topic, as well as a book. Check those out here and here.



July 22, 2014

There are a lot of folks that think that the private tech market is pretty frothy right now.  Some may disagree about whether or not we are in a bubble. But it’s hard to argue against the observation that more bubble-like things are happening currently than in what would be considered a “normal” market.  For example:

  • We are seeing extremely healthy valuations for companies, some with very limited traction or semblance of a business.
  • Very large scale acquisitions are happening for companies with little or no revenue for strategic reasons.  These always happen from time to time, but they seem to be happening more frequently and at higher multiples at the moment.
  • New and unusual participants in financing rounds are appearing.  This includes both new funds being started with unusual backers, as well as later rounds being led by non-traditional entities.

Take your pick, weird stuff is happening.  For participants in this ecosystem, what is one to do? How should you operate in frothy times? Here are a few thoughts, but I’d be curious to hear what others think too.

1. Stay in the game. It’s very hard to tell whether things are on the verge of collapse, or whether we are still in relatively early innings of a massive bull market in tech. Even if the activity in the market seems puzzling, it doesn’t mean that you shouldn’t be a beneficiary of it if you can. Even though many businesses in the first internet bubble were complete failures, some worked and are among the most important companies in existence today. Even though many people saw their wealth multiply on paper only to come crashing down, some made life changing wealth that did not evaporate. And almost everyone walked away with incredible experiences, skills, and a better intuition for the future.

2. Don’t be discouraged. It’s easy to get discouraged from time to time when blockbuster things are happening around you, but not to you.  Hey, as a VC, I could get discouraged too.  The day I started writing this post, RelateIQ (a 3-year old company) was acquired for ~$400M and RapGenius raised capital at a valuation of $400M. These things didn’t happen to companies in our portfolio that day. Nor did it happen to 99.9%+ of companies out there, some of which are excellent companies. To some degree, all participants in this market benefit from frothy times, but the headline grabbing events are still happening to a very small minority of companies. Don’t let yourself get too cynical or discouraged by this. Stay in the moment and play your own game. It doesn’t help to benchmark yourself with the outlier events because they are unpredictable and take a magical combination of being right, working hard, and being really lucky. Don’t give up – the harder you work, the luckier you’ll get.

3. Be realistic about what’s going on. If things are going really well, keep in mind that these are unusual times. Be humble, and remember that ultimately, the best companies in the world are real businesses that solve meaningful problems and capture some of the economic value they create (and that value is more than what it costs them to create it). When your company raises money at a sweet $1B valuation, remember that does’t mean that your company is worth $1B, nor does it mean that you are worth your ownership x $1B. It only means that someone who loves your business was willing to buy a fraction of your company’s shares with preferences at a $1B valuation. Besides, there is a lot more to happiness and self-worth than the dollars in your bank account or the value of whatever equity you own.

4. Maintain agility. Good times eventually give way to not so good times.  Things could also get ugly pretty fast.  Be ready to turn on a dime – the end of good times doesn’t mean the end for you, your company, or the prospects for (fill in your hot sector of choice: Bitcoin, IOT, Mobile, etc). Remember that wonderful companies like Paypal and Netflix survived the dot com crash, and companies like LInkedIN and Yelp were started in the wake of that crash. Twitter was started before the financial crisis hit, and survived, and is thriving. But raise a bit more money a bit sooner than you can. Keep in mind that you may need to get extra creative if things start to go south. Don’t get too far ahead of your skis, and you can navigate whatever lies ahead if you really have a great company.

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  • robgo
     - 53 minutes ago
    Foolishly sent @dharmesh an email today, forgetting about #INBOUND14 - good luck, here's to another great conference!
  • Lee Hower
     - 11 hours ago
    not part of the cloud strategy I think MSFT should focus on, but an exciting move “Microsoft Has Acquired Minecraft”
  • Lee Hower
     - 1 day ago
    @realkenmiller definitely Ken. I'll be out in SF again in late Sept and prob once in Oct too, will give you a ping
  • robgo
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    Every time I see the @UniqloUSA ad with @jjacobs22 I think, the poor guy can't see! Must have been a sunny day for a photoshoot