ROBGO.ORG

When I started in venture capital, east coast VC’s largely had a formula for the kind of founders they wanted to back. There was a high degree of interest in backing repeat, experienced entrepreneurs or executives.  Many successful investors had made their LPs (and themselves) many millions of dollars by finding a rock-star founder, and then following him or her through 2, 3, or more companies successfully.  Simultaneously, many of these companies relied on very strong proprietary technology and IP.  As a result, it was very difficult for a young, first time entrepreneur with an interesting (but technically undifferentiated) internet product to get investors attention (especially after the bubble burst).  This region lost many amazing companies to the west coast in the process. It’s getting much better, but this continues to happen.

This history is a reminder to me about the danger of following conventional wisdom for its own sake.  Thinking back, I think it’s pretty clear that conventional wisdom ends up

1.) being applicable in a more narrow context than is commonly believed and

2.) being based on a context that changes more quickly than most people imagine possible.

In retrospect, the reason that pursuing this profile of entrepreneurs and companies became conventional wisdom is pretty straightforward.  This region had had a number of successes in enterprise software and telecommunications infrastructure. Young entrepreneurs were at a disadvantage starting these sorts of companies.  It was a huge advantage to have C-level relationships at the large carriers or enterprises.  Repeat entrepreneurs or well known CEO’s could get engagement from these customers well before a functional product was actually available. First time entrepreneurs would have a hard time even getting a phone call returned.  This model worked, and things were good.

The problem is that the context of the world changed. Today, we have a new conventional wisdom, especially in the consumer internet space.  The realization is that entrepreneurs that are developing consumer applications with a social component tend to look very very different from the founders of old. The conventional wisdom isn’t quite as tightly defined, but a couple characteristics I’ve noticed investors gravitating towards are below (some are serious, some less so)

• Young, under 30
• “digital natives” who grew up in an internet connected world
• Socially connected urban hipsters of SF and New York
• Designers and geeks, not technical wizards
• “Hustlers”
• In love with photography, quirky sneakers, and indie music
• Using the words “test”, “pivot”, “iterate”, “MVP”, like they studied at the feet of Steve Blank
• Ramen eating

Now, some of these characteristics are reflective of terrific entrepreneurs in the consumer internet space.  They describe many of the founders we’ve backed too.  But this is by no means a rule for all. I find it really funny to see my more conservative friends from other professions go into the startup world and start to become molded to this persona.  I don’t think that works – it’s important to be authentic.

Besides, conventional wisdom comes and goes.  As a firm, we often back younger, first time founders in certain projects.  But we’ve also backed older, repeat entrepreneurs in others.  Usually, we have a preference for more experienced founders when a company needs to participate in a complicated eco-system where being an “insider” is an unfair advantage.  Sean Black, the founder of SalesCrunch and former VP of Sales at Trulia is an example of this, as is Paul Nadjarian who founded Mojo Motors after a career spent working with auto dealers at Ford and Ebay Motors.  Different contexts dictate different rules.  It’s easy to be intellectually lazy or rely too much on heuristics and miss this.  It’s also easy to look around and see everyone else behaving one way and use that as a reason to follow.  Ultimately, conventional wisdom is wisdom for a reason.  But that reason doesn’t hold true for all circumstances or all time.

I watched Apple’s announcement about their textbook offerings with great interest yesterday. It’s a market that I’ve been following for a long long time and one where I have pretty strong feelings. A couple quick thoughts from my vantage point:

1. The $15 pricing is not nearly as disruptive as one would think. Here’s why: A typical textbook publisher essentially takes their cover price on a title and divides it by the number of years in circulation to get the effective revenue per title per year. High school textbooks cost about $70-$100 to schools. Divide that by the typical 5-year period they are in circulation, and you get ~ $14-$20 per year per title. From a publishers standpoint, Apple’s $15 annual price isn’t a big change, so they are going to be pretty happy. $15 sounds like a nice number, but it doesn’t really change the equation much. It just amortizes the cost across the life of the book. College textbooks are much more expensive than K-12 books, and new editions come out much more frequently. I think you’ll see major college textbooks offered closer to the $50-$80 range, which is basically what digital books are going for now at Coursesmart.

2. I’m a big believer that education and content should become more open. Pricing is one component of openness, but it isn’t the only one. I’d argue that Apple’s moves are an attempt to make educational content LESS open. Think about it – Apple is still going to anchor its content around the big publishers which essentially represent an oligopoly. These publishers spend hundreds of thousands of dollars per title to produce content that is essentially undifferentiated from what you could find on the open web. I’ll bet that this Apple partnership will be designed to strengthen publisher’s stronghold on education, not loosen it. Moreover, if Apple is successful, you’ll also see another new gatekeeper introduced into the ecosystem on the distribution side, namely, Apple itself. I think Apple’s objective through this move is actually to drive greater adoption of its iBooks business and market share for its own devices. This doesn’t have that much to do with education, it has everything to do with increasing market share for Apple and tightening the grip that publishers have on an already captive market.

3. Let’s not get ahead of ourselves here. iPad penetration in schools is still miniscule, even in higher ed. Apple announced that 1.5M ipads are being used in “educational institutions”. There are over 80M students in the US. I think we will get to a place where over 50% of students or more will have access to a computer or tablet, but we aren’t there yet. I’d also like to think that students will have some choice on what devices they use and there is some healthy competition in this market.

4. All that said, Apple being apple, crafted a very inspirational vision about what educational content should look like. I’m glad that they are setting a high bar – I believe in this wholeheartedly.  Personally, I think educational content should be:

• No-brainer affordable for everyone
• Up to date
• Presented in a variety of formats to fit different learning styles
• Extremely high quality
• Modular so that it can be personalized by instructor
• Modular so that it can adjust to the pace of learning of individual students
• Social. I believe any student studying about photosyntehsis should be able to interact with other students studying the same thing (by the way, it shouldn’t matter if you are studying from the same book.)
• Provide students the ability to go extremely deep and also move across topics with the same ease as they do on the internet

Apple’s new platform promises the ability to do many of these things.  But not all. I don’t think some of these are possible as long as the content layer is controlled by a few very large publishers.

5. Overall, I think we are witnessing the end of a very archaic period in education. It’s baffling to me that over 10 years since the death of physical encyclopedias, we still rely on essentially the same format to communicate information to students today.  We’re seeing progress, and I think it has been accelerating significantly in the past 3 years.

In a prior post about what it’s like to be a VC  I made the claim that even if an investor has operating experience, that experience gets stale after a few years.

This led to the following question in my comments:

“You mention that operational skills begin to decline 2 years into the job. If this is true, then it follows that VC GPs can only add limited operational value.”

I have lots of thoughts on this, so I thought I’d expand with a full post.  I think this is an interesting question, because it seems to defy the logic (or conventional wisdom) that a VC with more operating experience should be better suited to help entrepreneurs.  Couple observations.

First, consider the many counter-examples. Fred Wilson (Twitter, Zynga, Foursquare) has been a VC for almost his entire career. Danny Rimer (Skype, Tellme, Stardoll) started out as an equity analyst. Nick Beim (Gilt, The Ladders, JBoss) was a consultant and investment banker.  Some of the legends of the business are so far removed from their operating days that it’s probably a real long shot to say that they bring direct operating experience informed by their prior roles.  I think you’d be hard pressed to find too many entrepreneurs that have worked with these investors who don’t think they’ve been extremely value-added and have helped on strategic, operating decisions that they have faced.

So, why are non-operators well equipped to help?  I think the difference is their longitudinal view of many companies vs. the more narrow (but deeper) view that an entrepreneur has in one company.  A non-operator may not be well equipped to advise you on how to build a product, but she may be very well equipped to advise you on how to build your product TEAM or how to MEASURE your product progress based on what she has seen across many companies.  An investor with lots of experience will also have much more pattern recognition when it comes to some of the challenges that an entrepreneur may only face once or twice in a company’s life. The simplest example is negotiating future financings (assuming you and your investor are relatively well aligned).  But there is also negotiating a sale, letting go of a co-founder, switching business models, rapidly scaling or rapidly cutting costs, etc.

Former operators on the other hand have an advantage in other ways.  They may have deeper relationships within their industry (although a non-operator may have broader relationships in tangential industries).  They may have more conviction around product or technical decisions, hiring, or even organizational structure. And there is probably a higher degree of empathy for the challenges of being an entrepreneur and founder that might make the former operator a better advisor and confidant.  But I think the further one gets from actually operating, the more stale one gets as well.  You wouldn’t necessarily want someone who was an executive at Excite to tell you how to develop your advertising product because the learnings are so stale and context so different.  In fact, a non-operator may actually have more industry insight than a veteran of that industry because he has deep conviction about an investment theme and can draw from lessons learned from multiple companies within that theme. The folks at Foundry and IA come to mind, although I think this is true for many investors that are more thematic or thesis driven.

So, over time, I think a former operator starts adding value to companies in pretty much the same way that the non-operator does.  That is, based less on their deep entrepreneurial experience, and more from their longitudinal view over many companies over different periods of time. I don’t think this is a bad thing – hopefully I’ve shown that non-operators can obviously be immensely helpful, but usually not in the normal “operational” sense.

Often, I will counsel entrepreneurs that we invest in to bring in a couple angels that are active entrepreneurs in or around their space.  I think it’s a great benefit to have an informal (or even formal) CEO coach, and there are other unique things that a current industry insider can easily bring.  A few examples from our portfolio:

• Boundless Learning:  John Katzman (Founder of Princeton Review and 2Tor)
• GrabCAD: John MecEleny (former CEO of SolidWorks)
• Shareaholic: Stephano Kim (President of GraphEffect), Brian Shin (Visible Measures)
• Insight Squared: Steve Papa (Endeca) and Mike McDerment (Freshbooks)

But ultimately, advisors are just advisors.  They are great to leverage, but can only do so much.  Same thing with investors, even if they do bring deep, operational expertise.  After all, as I often hear VC’s say, “if I’m the one designing your product/marketing plan/technology stack/etc, then we have a big big problem.”

Disclaimer: Although I hold these views, I still intentionally looked to start NextView with two other partners who each have operating and entrepreneurial experience.  Go figure

One important component of our ethos at NextView is the idea of being part of a “Tribe“. There are two sides of this idea.  One is the idea of being a participant and a contributor to the community that we are involved in.  We aspire to do that in a number of ways, but that’s for another post.  The other idea is the concept of collaboration and shared ownership between the partners of our fund.

This collaboration manifests itself in many ways. The most simple is the fact that we are an equal partnership, and thus, are economically equal. But it goes much much deeper than that.  One practice that we instituted early on was to create a co-working culture, much like what you see in the startups we invest in or the shared workspaces where startups are birthed.  Our “offices” at NextView are mainly little phone-booths for taking calls.  If we are not on a call or out of the office, we find ourselves surrounding a large, antique table in the center of our office.

We intentionally made this table the centerpiece of our space and we policed one another to stay out of our offices unless absolutely necessary. I think entrepreneurs that visit us the first time are a little confused when they open our door to see us huddled together.  It may seem weird for a VC, but it definitely isn’t weird if you visit the offices of a startup.

This may sound a bit corny, but I’m convinced that this works and makes a difference.  In fact, I think you can see it in the data.  Earlier in the week, I wrote a post sharing some data about our early portfolio. However, there is one other stat that I didn’t mention that is very unique for a VC firm and I think reflects some of our efforts to promote internal collaboration.

Of the 16 investments that we have made, in 5 cases the “lead” on the investment was different than the “source”.  What this means is that one partner was the originator of the investment (or the owner of the first touch-point with the founders) but another partner led the investment internally.  Leading an investment at NextView means that that partner quarterbacked the evaluation and due-diligence process and is the point person for our firm during the actual deal process and on an ongoing basis with the company.

All VC firms track who “sources” a deal and know who the “lead” is. What’s unusual here is that in over 30% of our investments, the “source” and “lead” are different people.  This is very rare.  In some cases, a fund may have one partner with disproportionate deal flow because of their high visibility or “celebrity status”. But that’s not the case in our fund.

I think this is important for a couple reasons.  First, even though we have a fairly tight focus as a fund (internet enabled innovation, seed stage, select core geographies) we all have different areas that we are particularly excited about.  I think entrepreneurs benefit from speaking with VC’s that have thought fairly deeply about their sector, and aren’t just broadly a firm’s “internet guy”.

Second (and this is obvious) this is a highly personal business.  We are different people, and different types of founders may find that they have more chemistry with one person vs. another.  While we all work together to try to impact our portfolio companies positively, you want to have the best possible fit with the investor who is actually the “lead”. After all, you’ll likely spend a lot of time with this person, and will have both very happy and very tough conversations with them over time.

Some final parting thoughts:

• I would argue that a change in the internal “lead” of a deal is usually bad news in most cases.  The worst thing for an entrepreneur is to lose their champion within a firm, whether it’s during the pre or post investment process. If something like this is happening to you (even with our firm) I think it’s fair to press on why this is happening, and make sure that it is for a reason that is advantageous to you and reflects only stronger commitment on the part of the fund.
• When we do change leads, we try to make them happen as early as possible in the process. In 4 of the 5 cases we’ve experienced, the transition happened at the time of the 2nd meeting.  The later it happens, the more time and effort it takes to built rapport with an investor and the longer it takes for the investor to feel like a real “owner” of the deal internally.
• One reason why this practice is typically rare at most firms is that it takes a lot to feel emotional conviction over a deal.  Also, some firms are very competitive internally, and so those investors take deal “ownership” very seriously.  A partner would be reluctant to hand-off a good deal lest they forfeit credit if things go well.  Ironically, another partner would also be less willing to take a hand-off lest they get only partial credit for the success but full blame if things go wrong. This dynamic isn’t always at play, but one way or another, feeling deep ownership over a relationship and investment decision is a big deal and hard to achieve or pass around.

A year ago, I wrote a post detailing some tidbits about our portfolio.  One year later, we’ve made more investments and learned a lot.  I believe that the best way to understand an investor is to meet the founders that they work with.  Second best is to understand their portfolio.  So here is an unscientific cut of our portfolio and some commentary below.  Hopefully it sheds some insight into who we are, how we work, and what we tend to gravitate towards.

• We have made 16 investments. Currently, all are announced and appear on our website
• Geography: Of the 16 investments, 9 are currently headquartered in Boston, 4 are in NYC, 2 are in SF, and 1 has s presence in both Boston and Chicago

The main focus of our fund is in the Boston-New York corridor.  We think that region is particularly promising and underserved.  However, we are lucky to have deep ties in SF, Chicago, LA, and will opportunistically invest in those areas as well. 

• Founders: We invest behind founders from a variety of backgrounds.  Broadly speaking, they break down something like this:
  • First Time Founder: 6
  • Repeat Entrepreneur: 6
  • Tom Brady Entrepreneur: 4

• Source Type:How we meet founders
  • 6 month+ prior relationship with founders: 9
  • Introduced by an entrepreneur: 3
  • Introduced by co-investor: 3
  • Inbound from blog: 1

Typically, we meet companies through our network of entrepreneurs and co-investors.  We like meeting founders early, and often well before they start working on the project we ultimately invest in. But one investment this year originated from a cold email regarding a post on one of our partners’ blogs (we invested after getting to know the founders over several months).  It’s nice to know someone reads our stuff

• Stage:We are seed investors, but often, the first institutional seed round happens at different stages in the company’s maturity.  Here was the status of the company when we invested:
  • Pre Product: 7
  • Post product Pre Revenue: 5
  • Post Revenue: 4

We pride ourselves in being true early stage investors.  Many investors will not invest in a company pre-launch or pre-traction.  In some cases, we do want to see some evidence of a working product and consumer adoption.  But in many cases, we’ve invested in pre-product companies led by product-oriented founders.  In one case, the founder’s “product” was essentially an excel spreadsheet and physical paper handouts.  We invested at that stage, and less than a year later, the company is doing >$100K in monthly recurring revenue. 

• Sector:
  • Consumer Internet: 7
  • Consumerization of Business Software: 5
  • Enabling services: 4

• Syndicate Composition:
  • Angels: 5
  • VC Lead: 5
  • Micro VCs: 6

We aren’t that dogmatic about syndicate composition.  Our main requirement is that there is a strong lead .  We have a bias towards leading or co-leading rounds, but will also participate in rounds facilitated by like-minded lead investors.  There are benefits and drawbacks of different types of syndicates and we try to help entrepreneurs navigate the nuances of each.