Month: May 2008
Q: What kind of benefits do start-ups typically offer? I don’t mean salary or equity: about which you already posted a lot of information. I am talking about health and life insurance, disability insurance – all of the typical benefits one receives when working for a large and established business.
Do you recommend a particular benefits package configuration to your companies? Are benefits ever a part of your conversations with your companies about the ‘costs’ of running the business?
How do you see startups dealing with a regulatory landscape designed for an entirely different type of organizations?
A: (Jason) In order to best answer your question, I asked Dan Cutler from TriNet to opine. Dan and TriNet have been great partners to our portfolio companies – so much in fact that we decided to switch our own benefit offerings over to TriNet. Here are some of Dan’s thoughts, below of which I agree with completely.
A typical VC backed company will offer to pay 100% of a good benefits package for the employee and between 0-50% for dependent coverage. A good package will include medical options PPO and HMO and dental, long-term disability and a minimum of 10K life insurance with an option to buy more.
In order to hire and retain "A" players the savvy entrepreneur will use a PEO (Jason note: "professional employee organization" like TriNet) that can offer self-help HR, online enrollment, several benefit plans to choose from, a PeopleSoft HRIS, tiered pricing, and will pay a flat rate administrative fee.
Regarding compliance issues. All energy spent by the business owner to keep compliant is a waste of time when you can outsource HR and allow your outsource provider to shoulder the risk. The business owner’s job is to move the business forward and select good partners that will provide assistance in areas that are not core.
Fred Wilson has today’s great VC blog post up titled I Got Lucky. It’s the story of how Fred got into the VC business – going back to 1986.
I met Fred in 1996 the same day I met Seth Godin at Yoyodyne (which ended up being the first investment out of Fred’s new fund – Flatiron Partners.) Fred and I have been good friends since and I count him as one of my favorite people on the planet to work with. While it’s fun to read the story, the punch line is powerful and important for anyone that wants to get into the venture capital business.
If you want to be a top tier venture investor, you must be recognized as one of the experts in the field you invest in. When I was at Euclid, I used to watch in admiration as guys like Bill Kaiser worked the enterprise software business or Paul Ferri worked the communications equipment business. They knew the business cold and if you wanted to start a company in their area of expertise you went to them first. That’s what you have to get to if you want to make top tier returns in the venture capital business.
The way you do that is you work for at least ten years in the industry, getting operating experience, building a killer rolodex, and learning how the business works from the inside. Then in your mid to late 30s, you can make the move to the venture capital business, as a partner, not as a wet behind the ears associate who doesn’t know anything other than how to push numbers around a spreadsheet.
I did it all wrong and got lucky. I don’t recommend anyone reading this to try it the way I did it. If you choose to get an MBA, get a real job out of business school. Help to build a few businesses in an industry sector you really like. Become an expert in that industry. Then try your hand at venture capital. You’ll be much better at it than I was my first ten years in the business.
And don’t forget – eat your wheaties.
Q: At RealNetworks we always expensed (vs. capitalized) engineering expenses (as does MSFT). What is your philosophy on this engineering accounting practice.
A: (Brad) Subject to approval by the auditors, I always encourage companies I invest in to expense their engineering costs.
Regardless of the accounting treatment, I think it’s a bullshit practice to capitalize engineering expenses. In an early stage company, this simply serves to obfuscate the reality of the P&L by transferring real expenses to an asset on the balance sheet which is subsequently depreciated over a multi-year period of time. The result – investors and managers have to work harder to understand the P&L and the real economic dynamics of the business. It gets even worse in a mature company, especially one that is public.
However, our good friends the auditors get in the way on this one and encourage some engineering (and R&D expenses) to be capitalized. Oh well – we need to follow the rules. But that doesn’t mean we have to like them.
Note: This was actually a question that I received from a colleague via email, but thought I’d post it here given the content.
Q: My company is close to signing a contract to sell the business. Although I’m prepared to do the role, one of the board members has suggested that we consider using a third party shareholder representation firm instead. Jason – I see that you’re involved with Shareholder Representative Services, the firm my board member suggested. I’m pretty committed to my company so what are the advantages and disadvantages of going with a third party rather than just doing it myself? BTW, I’m currently the CFO and plan on staying on for at least a while post closing.
A: (Jason) My short answer is that under most circumstances you want to avoid this job if at all possible. The shareholder rep issue is a problem that we and many other VCs have been struggling with for years on our M&A deals. Most buyers require that the stockholders appoint someone to have power to speak for all of the stockholders following closing to ease the administrative process. On most of our prior deals, somebody (usually one of the VCs) had to be the rep, and usually nobody wanted to do it. To be blunt, the job sucks. It takes a lot of time and is a big distraction if the person does the job properly, and not doing it properly can subject the person to risk of being sued under some legal theory like negligence, breach of fiduciary duties, unequal treatment, conflicts of interest or something similar.
In your particular situation, you have the added complexity of inherent conflicts of interest. If you are going to work for the buyer following closing, which is effectively what will happen if you continue to work for the company, you’ll have the problem of having to argue on your former stockholders’ behalf against your new employer if any claims come up. That significantly adds to the legal, ethical and emotional challenges you’ll be facing if you serve as the representative, especially if you personally have financial interests on one or both sides.
For all these reasons, I got involved with Shareholder Representative Services. I serve on their advisory board, but more importantly, our funds have used them on a few of our recent exits and have been very pleased. The selling company hires SRS to serve as the shareholder rep, and they professionally manage the entire process. We’ve found that we get better information and quicker responses from them than if one of the other investors serves as the rep, we get to avoid the risk and burdens of being the rep, and we still maintain significant involvement in the decision making process when material issues do arise.
Because of SRS, we’ve determined as a fund that it is highly unlikely that we’ll ever serve as the rep again – it would have to be a deal with unusual circumstances that I can’t think of right now. It’s not a good use of our time and is not in the best interests of our fund or our LPs. Besides, we hire professionals to manage every other aspect of the M&A deal process. Why wouldn’t we do the same with respect to the post-closing period?
David Feinleib at Mohr Davidow Ventures has today’s great post up titled Why Startups Fail. Given all the consumer web stuff that got funded between 2004 and 2006, we are heading for another wave of failure as companies run out of gas after their Series B / Series C rounds and their investors lose patience with them. In addition, you’ve got the natural cycle of "well – it never really worked" – such as evidenced by the rumor from VentureBeat that Akimbo has thrown in the towel after raising $47m.
Q: I’ve got a software startup that has a novel approach to solving a market problem. However, the solution stems from the nature of the process, not from the code per se. In terms of trying to finance the venture, would this necessitate getting enough funding to be first to market and just try to grab validation/market share before the copycats (especially those with deeper pockets) come around, or is there actually IP that can be protected within the design of the process?
A: (Brad) As a deep cynic about software patents and IP protection around process technology in software, my short answer is that it’s better to go build the product (and the business) rather than spend your limited time and resources on the IP protection. My position is not a uniform one – many people would encourage you to put real energy and time into trying to protect your IP before you build the product.
In almost all situations I’ve encountered, I encourage the entrepreneur to just go build the thing. I continue to be amazed that the number of entrepreneurs searching for money who want me to sign a non-disclosure agreement before they will tell me what they are working on, or who think they have a truly novel (and non-obvious) approach to something where the patent is the key to the long term value of the business. There are lots of ways to protect your software ideas – the best way to do it is to get on with building something that it truly valuable for your customers.
Q: Are you aware of any VC’s that have funded founders that have failed at their previous ventures?
A: (Brad) Absolutely. Me! Any many other VCs. Failure is a normal part of entrepreneurship which I’ve written about extensively in the Failure section on Feld Thoughts.
My favorite entrepreneurs to fund are those that have had at least one success and one failure. While it is a cliche, failure teaches the big lessons. Most importantly, entrepreneurs that have some failure under their belt have humility and perspective that I think is deeply useful in the creation of the company.
There is a perspective – promoted by some people – that the best serial entrepreneurs have never been unsuccessful. This is a myth – the vast majority of successful entrepreneurs who I know have a long string of failures in their past.
This applies to VCs and angel investors also. If someone tells you they have never lost money on an investment or have never been involved in a venture that didn’t work, you should give them a very skeptical look.
Q: Is it a bad idea to send a business plan to too many VC firms? I have access to a large list of VCs that invest in my type of company and I was thinking about blasting out a business plan to all them. My thought process is it is a numbers game and the more people that see it the better the odds are that someone will be interested in it. I am just a little worried about the intellectual property side of things and by sending it to too many firms it could be vulnerable.
A: (Brad) This is a terrible idea.
First of all, don’t send your full business plan in your first email to a VC. Instead, send a short overview (in the text of the email) and an executive summary. A VC should be able to quickly determine whether or not he wants to spend time with you from this information.
More importantly though, simply sending your business plan (or overview) out to a large number of VCs with whom you have no relationship with is unlikely to yield any results. When you are raising money, it’s a "quality" game, not a "numbers" game. The higher quality your introduction, the greater the change you will get an audience from a VC.
Some VCs take a look at every email that comes in over the transom (I do – and I always try to respond.) However, if it’s a totally cold, random, "Dear Sir" type email, I give it less weight than if an introduction is made by a colleague that I know and respect. While there is a range that varies based on how busy I am at any particular moment, what kind of mood I’m in, and whether or not my dog woke me up too early in the morning, some sort of connection to someone or something I know is always better.
Finally, I wouldn’t worry to much about the intellectual property side of things. Even though the theme that "VCs steal entrepreneurs ideas" seems to go around the system regularly, my experience (as an entrepreneur, angel investor, and VC) is that this is an urban myth. Most VCs will simply ignore your email blast.
Josh Kopleman has today’s great post up titled How to "Ask for the Order". After I read it, I thought a better title would have been "Lubricating Commercial Transactions", but then again, I’m not a titleist (one who is excellent at making up titles.) I learn this lesson over and over again, especially after a company I’ve made a seed investment in gets a bill from their lawyer for $42,000 for doing very little on a financing.