ROBGO.ORG

I’ve been using this phrase quite a bit in meetings.  I’m quickly realizing that I find myself able to get the most conviction around an investment when I feel like I have a strong sense for what the “path to victory” looks like for the business. I think it helps me be the most effective board member I can be, and also helps me realistically assess an opportunity and my ability to help.

What exactly does this mean?  In purely short-sighted, seed investor terms, the “path of victory” means the inflection points that can be hit in the next 12-18 months to attract other financing to the company at a meaningfully higher valuation.

In a longer-term business context, this means having a very strong point of view on what needs to get done, at the exclusion of many other things.  It’s also about having a mental map or strong hypothesis of the path of the business – not necessarily knowing what’s important in 2-3 years, but at least knowing what’s definitely NOT important in the next 6-12 months to create the most value for the company. It’s about having conviction about stuff like:

• Do we focus on revenue now or not?
• Do we focus on top line user growth or % penetration in a more narrowly defined market segment?
• Do we try to get dozens of small paying customers, or one or two flagship accounts?
• Do you hire more sales people or more engineers?
• What does the product need to be able to achieve to get the right customers sufficiently excited soon enough?
• How will we know if this product is delighting customers or if we need to pivot or start over?
• etc. etc.

I’m increasingly finding that I can’t get excited enough about a company if I don’t feel strongly about their path of victory.  Sometimes, it’s because of ignorance.  Also, sometimes, I have invested in companies that are more of the “really great team, promising market, they’ll figure it out” mold.  But that’s really pretty few and far between. There have also been times when the path of victory that I felt strongly about was wrong and the team has been able to figure that out and adjust accordingly.

Not sure if other investors think this way, but I think that’s increasingly important to me.  Team, product, and market is important to everyone.  But when I think about the practicalities of what’s likely to happen post investment, feeling aligned with founders around their proposed path to victory is really important.

One area of fundraising that is not that straightforward is how to put together a syndicate of investors for your seed round.  Although there have been an increase in the number of seed stage investors, seed rounds are still typically composed of at least a handful of different investors, who each have their own processes and incentives.  It can be a little puzzling for entrepreneurs to make sense of this, especially since the landscape of seed investors is emerging and different seed investors act quite differently from one another.  Here are a couple things I typically suggest when putting your seed round syndicate together.

1. Understand the difference between and a lead and a follower.  Lead investors are those that typically write a relatively large check (usually at least 25% of the round or more) and are willing to negotiate with you to come to terms for your round.  Investors that are not leads will typically invest smaller chunks, and will usually commit to the round once the lead and terms are set.  Lead investors will usually do more extensive due diligence and have a more thorough process.  Often, other investors that follow will do less work because they trust that the lead has thoroughly vetted a deal and identified the main concerns around the company.

The challenge these days is that it’s not always obvious who is and isn’t a lead investor.  As angels institutionalize, you see a lot of them acting somewhere in between – they’ll lead the odd deal here or there, but are mainly in follower mode.  This means that one could end up burning a lot of time with an investor, who’s constitution really isn’t to step up and lead a round.  My recommendation is typically to get a sense of an investor’s parameters early.  If they are writing checks that could make them at least 25% of your round, and writing few-enough checks that they have time to lead many of their deals, then they are a good candidate to invest time with.  If not, I’d take one of the two following tactics.

2. Get soft-commitments early. There are some investors that aren’t comfortable leading, but sometimes are very early “soft commitments”.  These are often people who know you or have a natural affinity for what you are doing.  But this could also be some funds that are just used to behaving this way (eg: 500 Startups).  This goes for angels as well.  My thought is that it’s helpful to approach a few investors early that you think you have a very good chance getting a commitment from.  Your goal is to get that investor to a point where they say “as long as terms are reasonable, I’m in”.  It could even be for a pretty small amount, but you want a commitment that they would confirm if other investors call them.  This can happen fast, and provides good signal value to potential lead investors out there.  Typically, I recommend that entrepreneurs focus their time on lead investors and angels/smaller seed investors they already know to try to push the ball forward.  I wouldn’t pursue a seed investor in this category without a pre-existing relationship, because in most cases, an angel or seed investor would most likely want to be a follower.

3. Fill in the round with value-added followers.  The amazing thing about raising money is that you can go for months with no demand, but the minute a round is coming together with a credible lead, you will be over-subscribed.  It’s kind of puzzling, but then again, I guess it’s not surprising that human beings tend to just follow. But if you are successful with #1 and #2, you probably already have at least half your round committed by a lead and some other investors.  You also have terms that other angels can wrap their heads around and drive to a decision on.  At this point, I would make my dream list of angels and smaller scale investors and try to get them into the round.  The goal here is to find the people that are likely to be the most helpful to the company, even if their dollars invested is really small.  My preference on investor types would be for individual angels or seed funds that write small checks for a living. I would usually avoid larger funds that want to “chip in” at this point to help fill out the round.  If the fund didn’t have the conviction to lead, then they shouldn’t be given the chance to take a flier on your seed only to potentially hurt your chances or raising follow-on capital later.

Here’s how I see a typical (if there is such a thing) fundraise shaping up for a $800K seed round:

Phase 1: Talk to leads and angels that know you.  Get ~$150K of soft commitments from good folks who know you (hopefully fast)

Phase 2: Close your lead.  Get ~$400K from the lead and set terms for everyone else. (could take weeks or over a month)

Phase 3: Fill in the rest.  Maybe with $150K from another seed investor, and $100K from 3 angels that are directly relevant to what you are building (hopefully fast).

Parting thought 1: Some seed rounds can come together with no lead.  At NextView, we call these “headless rounds”.  In some cases, one of the angels has negotiated terms, but in some, the founder just puts together some basic terms and gets investors to rally around that deal.  This can be effective in getting a deal done.  But I think it’s also potentially fraught wil peril.  But that’s a subject of another post.

Parting thought 2: As a firm, we have a bias for leading or co-leading rounds.  We try to quickly drive to an independent decision, and we think that we have a decent enough pulse on the market to appropriately price seed deals and come to the right terms.  In some relatively rare cases, we’ll also act as a follower or give a soft commitment early.  But that is usually a situation where a) we saw the investment too late to take a lead role, b) the investment is outside of our core NY/New England geographic focus, or c) the company is in a sector that is slightly outside our core areas of expertise.

I have the benefit of seeing lots of startups pitch their teams and watching many seed-funded companies establish their early org structures.  I’ve found that there are certain types of orgs and titles that I have a naturally visceral reaction towards.  For example:

- Having any more “C’s” than the CEO and CTO

- Seeing a head of product that isn’t a founder

- Seeing VPs (the more I see, the worse I feel)

Here are some guiding principles that I think explain why I’m averse to these in most cases.

1. You need DO-ers in startups.  You are either building or selling, and if someone isn’t doing one of those two, it’s hard to justify having that person on board.  It’s actually pretty extraordinary to find a truly VP level or higher person who is actually a do-er.  Most of the time, one becomes a VP because they’ve excelled and have progressed to the point where they are leading a team. Their functional skills are a little dated, their mentality is a bit different, and they are just a little (or a lot) less scrappy.  Seed and early stage companies are in need of people who like hand-to-hand combat.  There will be a time and place for more senior people, but you want to bring them in when they have the chance to be as effective as their seniority would suggest.

2. You need to create room for exceptions and growth. The problem with having an army of VPs and CXO’s is that it eliminates room to really distinguish extraordinary talent.  This is when you start seeing titles like “EVP or SVP”, which again is pretty meaningless and frightening.  If you do want to bring in someone much more senior, usually that person is an outlier.  Make the outlier role the VP role, not something else weird.   I noticed this to be true at many extraordinary companies.  I remember looking at the early org at Twitter (even when there were dozens of people) and there was maybe one or two VP’s.  Most of the leaders of their divisions (product, business development, etc) were directors and stayed that way. I also am biased because even at Ebay, when it was a public company, VP’s were pretty few and far between.  Being a Director meant you were directing something significant. I think that’s appropriate.

3. Some may object to my first two points and say “I can’t recruit people because they won’t take a lateral role or anything less than a VP title.”.  My answer to that is – you don’t want those people.  Early stage companies need to be free of politics and that kind of ego.  Everyone talks about wanting a flat culture. But I find that title focused people don’t really want flat, they just want to be as close to the top as possible. Earlier today, I stumbled upon the team page of a seed funded startup in Boston, and saw 7 VP-level and higher people NOT including the CEO.  That’s so not-flat, I guess it’s almost flat!

4. Even better than my suggestions above, how about not even having titles at all?  Just describe people based on their areas of focus and responsibility.  It’s impractical for a large company, but not for a small company.  Check out the team at ThredUp. Aside from the CEO and CTO, you see almost no other titles, just descriptors of what people actually do.

5. I’ll get in trouble with some of my friends on this, but I also think that the best companies are founded by product-oriented founders.  As a result, I almost always second-guess a team when there is a senior “Head of Product” that is NOT one of the founders. Usually, I’d hope that the head of product is actually the CEO or CTO, at least at the seed stage.  You just can’t punt on product decisions at the earliest stages of the company – the founders need to be able to make the calls.  Also, external heads of product are often not folks who are great product designers, but are more librarians than poets.  Seed stage products need to be inspired by poets, and you can hire librarians later to build a scaleable product process.

My Three Most Important Lessons Learned at Harvard Business School

Business school sometimes get a bad rap in the startup world.  Some of it is deserved – it’s big opportunity cost, and until fairly recently, the approach to most business schools to entrepreneurship has been more about theory than practice.

Thankfully this is changing.  But what is very positive about business school and what hasn’t changed is that they are an amazing collection of people and opportunities that can significantly shape ones education and even personal character.  Many of the founders we’ve backed at NextView are graduates of top business schools and bring many of their leanings from those two years to bear.

As I think back on my own business school experience, I often recall three very important lessons and pieces of wisdom that impact me every day.  One was academic, one was advice from a professor, and one was self discovered thanks to the entirety of the 2-year experience,

Lesson #1: What Makes a Good Market
Before Business School, I had heard of Porter’s 5 Forces and probably memorized it at one point during preparations for consulting interviews. But I really started to internalize the concept at business school and I think of it every day.  When one thinks of attractive markets, it’s easy to just think of markets that are “really big” and “growing fast”.  However, that is NOT what makes a market attractive.

A market is attractive relative to the player involved.  And its attractiveness to that player is based on how the forces in the market work to make it easier or harder for that player to create and extract value.  The forces described by Michael Porter in his framework are:
- bargaining power of suppliers
- bargaining power of Customers
- competitive rivalry
- threat of new entrants
- threat of substitutes

I don’t want to spend much longer on this point, but I’ve found this immensely helpful.  And it’s not just important for investors who are analyzing new businesses in different markets.  But it also dictates the strategy of a founder as they think about their own market and what they need to do to win.

For some additional thoughts of mine on the difference between BIG markets and ATTRACTIVE markets, see this post here:
Lesson #2: Authenticity Works
Authenticity works. It was an off-hand comment from Felda Hardymon during office hours one day when I was a student in his VC/PE class.  But it was a word of wisdom that I really try to take to heart for myself and when speaking to entrepreneurs.

It turns out I’m a pretty socially awkward person.  But much of business school (and much of business interaction) are awkward social situations.  Think about difficult conversations with employees, cocktail parties, cold calling, negotiations, selling, etc.  Those types of situations are a nightmare for someone like me.

But I’ve continuously found that when in doubt, the best thing to do is to drop any social posturing and be authentic.  Talk about what really gets you excited and what you really care about.  I remember when was interviewing for my job at Spark, one partner questioned my willingness to take risks and pound the table for what I believed.  I ended up telling him the story of how I pursued my wife – a very personal but authentic story, and it won him over.

Similar things happen when we speak to entrepreneurs at NextView.  We love founding stories that are driven by highly authentic experiences in a market or with a problem.  We also love interacting with entrepreneurs that are transparent about the things that excite them about their businesses and the things that they worry about or are really hoping go their way.  It’s a highly personal business after all, and we try to put that front and center as a core part of our firm ethos.

Lesson #3: Do the ACTIVITIES You Love

One very interesting aspect of business school is that it can be a 2-year soul searching process about who you are and what you want to do with your life.  A lot of business school students find themselves paralyzed, because it feels like there is a lot at stake in the career choice post B-school, especially with large sums of debt and 2-years of opportunity cost.

That said, I think business school is a wonderful time to step back and reflect on what you want out of life professionally and personally. The problem is, I find that when we think about careers or jobs we want, it’s easy to get caught up in a lot of different motivations – what would other people think? How can I make the living I’d like? Is this job impactful? What kind of a role is suitable for me? Etc.

But I find that business school students (and especially myself) often don’t ask what I think is the most important question. To me, that is – “what activities do you love?”.  We spend a lot of time at work, and you’d better be doing activities you enjoy, otherwise, it’s a terrible way to spend your time until you die. And activities are not jobs.  They are not roles or functions.  They are activities.

For instance, being a VC and being a doctor are very different jobs and roles.  But some of the activities are the same. Doctors and VC’s meet people 1:1 or 1 on a few all day long. They have a lot of first time meetings and hear people’s stories.  They try to solve problems based on pattern recognition. On these dimensions, doctors and VC’s do very similar activities.

But you never hear VC jobs and medical jobs compared. You do hear VC’s and entrepreneurs compared, and many job seekers out of B-school contemplate both paths.  But entrepreneurs do different activities.  They sell more (or in different ways), they meet very often with their team to solve common problems.  They may actively make design and product decisions, talk to prospective customers for feedback etc. The activities can actually be quite different.

I’m not making the point that being a doctor is more like VC than being an entrepreneur.  But my point is to look at jobs and life as a set of activities that you are doing all day long.  Do those activities map to what you are excited about doing?  Are they activities that are life-giving to you, or draining?

Or, put another way (as I’ve heard from an old boss and mentor), think of the times when you were happiest at work.  What exactly were you doing at that time?  Try to do more of it.

That’s it. Pretty simple.  Don’t overthink it or plan too far in the future.  Do something that you think is interesting and allows you to spend as much time as possible doing activities you love. I think it’s hard to go wrong if that is actually achieved.

So, those are my three biggest lessons learned from 2 years at HBS.  Worth the 2 years and $100K+ of fees? You be the judge

Yesterday, I had the pleasure of joining a number of investors in a meeting with entrepreneurs and policy makers in the education space. It was a terrific group that includedd Karen Cator (Director of Ed Tech for the US Department of Education), Paul Reville (MA Secretary of Education) and Joanne Weiss (Chief of Staff of the US Secretary of Education) among others.  As an investor that is really just dabbling in the education space, it was a really amazing opportunity to learn more about the challenges facing innovation in education, especially in the K-12 space where I have yet to make an investment.

It was really just a preliminary conversation, but a couple simple themes came out loud and clear:

1. The biggest challenge for companies targeting K12 is excessive friction in winning early customers and early growth. Some sub points:

• VC’s look for a rapid path to growth, but it isn’t available in K12 sales.  VC’s almost categorically pass on any company that requires sales into schools and districts
• Slow transmission of information. One would think that a program that is successful in a few districts or schools would spread quickly. Not so. My friend Teddy Rice, the founder of a growing company in the ELL space shared his experience walking into districts that had no clue what his company did, even though most surrounding districts were using his product with great success
• On one hand, investors get excited about “over the top” opportunities that bypass traditional sales channels in favor of a more direct-to-consumer approach. But Alex Grodd from Better Lesson brought us a bit back to earth, reminding that the only payers are consumers, teachers, and schools/districts.  And it’s easier said than done to get consumers and teachers to pay for core educational programs on a broad scale.

2. The common core could provide some positive lubricant for the problem in #1

• Not only is the common core simply motivating broad reform in many states, but it provides a  common set of standards that new companies can build their products around and sell to a much broader market.  This has the potential to reduce some of the friction posed by idiosyncratic state needs
• A common core also should make evaluation of new technologies and programs more straightforward and easier to promote broadly if the data shows positive outcomes.
• Personally, I’ve started to see some companies already start to take advantage of this change.  LearnZillion in DC is building a very interesting personalized learning platform aligned to the common core.  Although their product was conceivable before the common standards, I expect their speed of adoption and quality of content and instructors to be augmented because of this initiative.

3. Fixing the buying process is probably the biggest opportunity, but there are no easy answers

• Lowering the bar to trial, adoption, and purchase of new technologies is potentially the biggest opportunity for change.  Alex Taussig from Highland articulately compared the standard practice of the consumer web (where broken products are shipped all the time) to the much less forgiving enterprise sales dynamic in the K12 space.
• One proposed solution was to create a streamlined, group RFP or RFD (request for discussion) process for new technologies.  But again, Teddy pointed out that “there is a big difference between stated customer preferences and revealed customer preferences”.  I tend to agree that very few innovative products designed for end users survive an RFP.
• Another concept introduced by Stephen Marcus from AdmitPad was some sort of lightweight payment system that could empower innovative teachers to pull the trigger on adopting new products without having to go out of pocket or deal with school or district bureaucracy.  It seemed intriguing, but difficult to implement. Ultimately, we came away thinking that innovation in the payment system would probably most help investors get more excited about companies selling to the K12 space.

It was just the start of hopefully a longer discussion.  I learned a lot, and am thankful to have been able to join.  Many thanks to New Schools Venture Fund, Highland, Flybridge, and Bessemer (esp. Chris Gabrieli) for pulling this together.