Month: December 2007
Venture Hacks has today’s great post titled Should I give my lawyers equity? This is a common ask by most lawyers of their early stage clients. Venture Hacks gives you all the correct answers to this question.
Q: I have developed a really cool technology that I really think could essentially solve several huge issues: Piracy (music and even movies), Apple’s monopoly on digital media players and much more. How the heck do I approach this? I really think I’ll need to not only develop the technology (which is my area) but also to do some heavy PR (not my area) and evangelizing (not my area, although I see myself crossing over to that) across the board to get this going, as well as business establishment (not really my area). All of this costs money (also not my area). What to do?
A: (Brad): Find a partner that is an experienced entrepreneur. Or find a mentor that is an experienced entrepreneur. Or find both. Or find several of both. As a technical founder, you should spend your time on what you do best. Use your network to find / attract great people who have been through creating companies before and are motivated / interested in helping you.
Q: What are the most important functional skills that you look for in a startup’s founders and on a startup team? Sales/Marketing/Operations/Technical/Changes every times?
A: (Brad): There are two attributes I want on every founding team – deep tech skills and capable sales skills. Occasionally these come together in one person (e.g. a deep tech person also knows how to sell), but it’s usually great to have a combo. Now – a "sales guy" is not what I mean by "capable sales skills" – the sales oriented person needs to get the tech, understand product, and be passionate about talking to whoever is going to be using the product.
When I look back on my biggest successes, they usually had two to four co-founders of which at least two were technical and built the original product. One of the founders was also the CEO and responsible for "the business" and – while he often had heavy involvement in the product design, he wasn’t coding on a daily basis.
I don’t think I’ve ever had a success where at least one person on the founding team wasn’t deeply technical.
Q: What is your stance regarding watermarks on presentations? I’m thinking something subtle, transparent text diagonally across the face of the slides that says, Prepared for Foundry-Do Not Distribute. Do VCs feel offended that an entrepreneur takes that step or is this pretty typical especially for first communications? And finally, does this even accomplish anything or will a VC still share a presentation with a possible competitor in their portfolio or maybe soon to be in their portfolio?
A: (Brad): I don’t think I can answer this one generically, but I can answer it personally. I would never be offended by a watermark like this and I would respect it. When I see something that could be construed as competitive with a company in my portfolio, I generally mention this to the entrepreneur approaching me right away and give them control over whether or not they want to send me any other information. I don’t keep any email or presentations so the half life of this in my "data store" is typically very short.
I know plenty of VCs that behave the way I do and plenty that don’t. My best advice for entrepreneurs that are concerned about this is to do their research in advance and only approach VCs that you think are relevant for what you are doing, have a reputation for fair dealing, and are transparent about their portfolios.
Also – remember that it’s rarely the idea that matters – it’s the execution of the idea. So – even if your presentation gets passed by a VC you approach to a potential competitor that is in their portfolio, it probably doesn’t matter much beyond the notion that a potential competitor is now aware of what you are thinking about. You will still have to execute – as will they – to be successful.
Q: You’ve discussed the "typical" equity allotments for founders and senior management. But my question is about the perceived and real value (I presume they differ considerably in many cases) of stock options for employees beyond the first few dozen. Do you have any historical perspective on whether options grants really drive wealth creation for any hires outside of early founders? Does "Employee #100" ever get rich off options? Does "Employee #1000"? At what point do stock options really cease being a major selling point for recruiting startup talent?
A: (Brad): While you have to define "rich", I’ll use millionaire as a proxy. There are many examples of companies where the 100th employee made over $1m from stock options. There are less examples of companies where the 1000th employee made over $1m, but there are plenty (Microsoft, Google, eBay, and Yahoo immediately come to mind.)
A successful company that manages its capital structure can always use stock options (or restricted stock) as a motivator. The variance of outcomes decreases as the company gets bigger (e.g. it’s much easier to make a fortune as an earlier employee – but it’s also much easier to make $0 when the company fails) but in success cases the numbers can still be pretty large.
That said, if the valuation of a company gets ahead of itself at an early stage, stock options – especially in our new and exciting world of the 409a regulations – could end up having a lot less value because the strike price would be set unnecessarily high.
Mark Davis – a member of the DFJ Gotham – has written a very extensive series of posts on his blog titled Get Venture. Mark describes his goal as to "create the entrepreneur’s manual for raising venture capital." He’s covered a lot of ground that is a good read for any entrepreneur looking to raise venture capital.
Q: In your experience, what are the chances a talented entrepreneur will make $1M from his startup? (And no, I don’t mean making $150K/year for 6 years and 8 months. 🙂
A: (Brad): I have no clue as it depends on many different inputs as to be an impossible question to answer simply (e.g. you need to know a lot more to determine anything that resembles an accurate analysis of the potential outcome. However, this is a thought provoking question which I’ll answer a different way then intended.
If the goal of a talented entrepreneur is to make $1m from a startup, he should consider getting a job that makes $150k / year for 6 years and 8 months. Whenever I meet an entrepreneur that is focused on a specific economic outcome, I lower his chance of success because I think he’s focused on the wrong thing. By definition, an entrepreneur should be striving for a significant economic payoff. Yet the economic uncertainty of entrepreneurship is so high and the range of outcomes so broad that an entrepreneur just has to believe that if he nails it, good financial things will happen.
The direct tradeoff between a specific financial outcome ($1m) and a salary over time ($150k * 6.667 years) doesn’t really capture the essence of the financial trade in entrepreneurship. In a success case, the $1m could turn into $10m, $100m, or even more. Or $0. The $150k * 6.667 is still going to be $1m. Which would you rather have ? (a) 0 < x < $100m+ or (b) $1m < x < $2m? If (a) you are an entrepreneur. If (b) you should stick with your day job.
Q: I’m the founder of a small internet start-up. Among my duties are editing and posting content daily, creating media partnerships, and bolstering our growth with creation of widgets, facebook apps, etc, but I’m also doing all of the fund-raising which feels like it should be my full-time job…if I could. I’m finding it hard to do everything and so my fund-raising is not going very well/quickly. My question for you is: as an early stage company looking to raise a seed round of under $500k ASAP to help us grow, what are your thoughts about outsourcing fund-raising to a place like Vfinance so I can focus on running the business? Are there any drawbacks?
A: (Brad) This is a bad idea. You should not do it. Even though fundraising – especially for an early stage company – can turn into a full time job, it’s an important one for the founders to do.
You need to treat fundraising as a priority. Presumably the reason you are raising $500k is to be able to hire a few people to help you leverage your time better as you are trying to get your business up and running. If you don’t put enough energy into this, you fall into a classic chicken and egg problem where you don’t have the money to build out your team, but you don’t have enough time to go raise the money because you are busy doing everything because you don’t have the team.
Take a deep breath and realize that fundraising has to become the most important thing you are doing at this stage. Find an early investor or advisor that knows you, likes you, and has credibility and hopefully a network of other investors and advisors. Ask this person to help you with introductions to other angel investors. Manage these introductions like a sales process – once you have a pipeline of potential investors spend the most time with the ones that appear to be most interested. At the earliest stage they are investing as much in you as they are in the business and idea, so make sure you are on the front line of this effort.
Start every day off with this. Fundraising should be the first thing you spend time on each day until you get it done. Once you take 100% responsibility for it and make it your priority, it’ll get easier.
Today’s great VC post comes from our partner Seth Levine– “Sales is a Science, not an Art.” I agree with Seth’s take on sales. The most successful sales organizations are metric driven folks who really have control over all the “levers” that can be pushed and pulled to affect change.
Given the distributed nature of the sales workforce, it’s really important to have a definitive process to avoid wasting a lot of time and having high turnover.