Posts from the ‘Posts’ Category
January 26, 2011
In a post last week I offered some thoughts on why I think outside directors are so important to early stage companies. Once you’ve accepted the value and importance of building a diverse board you get to the hard part – identifying the right candidates. It can be a difficult process, but I’ve never met a compelling company with a solid CEO fail to recruit some real talent to the boardroom unless they just didn’t try. It takes work, and it needs to be managed (as I suggested in my prior post – make one of your otherwise useless venture investors manage the process, and hold them accountable!), but don’t fall into the all-too-common trap of letting the challenge of the process lead to inaction. You know it’s important, now you have to make it urgent.
The first thing, as with any good process, is to define the successful outcome. What are you actually looking for in a director? That will depend greatly from company to company – sometime it’s industry connections, sometimes it’s product expertise, sometimes it’s general strategic savvy. Only you can identify what you need.
In general, I’d encourage you not to undervalue general savvy in favor of something hyper-specifc. There’s nothing more valuable, over time, than having a really great thinker and strategist around the table with you – an athlete who can add value across a range of issues.
To help get started thinking about candidates, I offer a few thoughts and tips here on some different types – four good, and one not-so-good.
- Current venture-backed CEOs. Often the most appealing candidates given strategic fit, but be careful – if they’re running their own high growth company, they may not have the time to focus effectively and do a good job. Generally the more mature the company, the better.
Niraj Shah, founder/CEO of CSN Stores, is a good friend who has served brilliantly as an outside director for a couple of my companies. But his “startup” is 9 years old and doing hundreds of millions in annual sales now. He’s got a lot of lieutenants that enable him to leave the office and focus on other things. When he was a $15MM company it would have been very different.
- Cashed out in your industry. These guys can be perfect – they know the landscape, they’re proven winners, and they get the entrepreneurial thing. Frequently they’re in demand from a networking perspective, so they stay very much plugged in and can be super-helpful with recruiting, bizdev, etc. A word of caution here – some successful entrepreneurs become overly enamored of the way they did it in building their success story. Make sure as you interview candidates you explore to make sure they have open minds and are good listeners and broad thinkers. They should be generally interested in and curious about your business and how you’re building it, not just walking into the room pushing their personal agenda.
- Successful entrepreneurs from outside your industry. Discount them at your peril. CEOs & boards frequently get overly focused on finding that perfect candidate from a precisely defined industry, passing on people who are just good startup thinkers and company builders. My friend Pete Willmott, a recently retired 25+ year member of the FedEx board, amongst others, tells me that FedEx has always had some ‘obvious’ board members, like the COO of Northwest Airlines. But he maintains that the non-obvious ones have often been the most valuable. He cites a former senator (George Mitchell), a university president (RPI’s Shirley Jackson), and a baking turned spirits CEO (Pilsbury and later Diageo’s Paul Walsh) as true standouts. Not a lot of global shipping and logistics expertise amongst that trio, yet they consistently made huge contributions to FedEx strategy. If those folks can be critical contributors at FedEx, doesn’t it seem a little silly to categorically decide that the founder/CEO of a successful payments company couldn’t bring real value to the table in building a SaaS infrastructure business?
So much of what’s hard in building early stage companies is the stuff that’s common across verticals – challenging HR & hiring issues; strategizing around negotiating key partnerships; capital strategy; product and engineering issues. Having a sane, objective outsider who’s been there before but hasn’t consumed the KoolAid of your sector can really help.
- Retired executives from your industry. For non-startup execs, where you’re looking for industry knowledge, I have a strong preference for recently retired. I had a great experience a few years back bringing Garry McGuire, the immediately retired CFO of Avaya, onto the board of Allworx, a telecomm equipment company we had invested in. Garry was just stepping into a life with no day job and he wanted to find some projects to keep him engaged and focused. So he had plenty of time and energy to give to the company. He had been an active executive in our marketplace only a few months before, so his relationships, market knowledge, sense of the competitive landscape, etc. were all current, and ultimately quite valuable. If you’re looking at a retired candidate who does not have current and valuable networks then I’d suggest you keep looking.
- Execs with no startup experience. This is for me all but a non-starter, unless you have a large board and are also including one or more startup-savvy outsiders. Rising through the management ranks at GE to become a division president is a great way to become a brilliant manager and strategist. But it doesn’t teach you much about wrestling with growing a business from 10 to 100 employees. Some executives are great at making the shift in thinking, but many others are not. In most cases, if it’s someone without any startup operating or board background, I probably won’t want to be their first startup experience.
Once you’ve decided what you want, the trick is holding the bar high enough, but not too high. Have the same standards for excellence that you would have when hiring key employees, but also understand that filling the seat is nearly as important as filling a key operating role in your company. If you’ve worked your networks hard, been aspirational about reaching out to some “dream” candidates, and come up empty, then don’t turn your nose up at the great-but-not-quite-perfect candidate that’s eager, available, and willing to work. Fill the seat – I know you need the help. And remember, directors are like employees – if they turn out to be no good, the board can fire them and try again.
Bottom line – outside directors can be real difference-makers for young companies, and are an essential part of good governance. Finding them will never become urgent, so make it a priority and put someone in charge of the process. If you’re clear on what you’re looking for, work at it, and hold your standards high, you won’t regret it.
I’ll save some thoughts on outside director compensation for a conclusion to this series next week.
January 10, 2011
Just before the holidays I took a colleague out to lunch at Devi in Union Square in NYC. It’s widely regarded as one of the best Indian restaurants in the country. We enjoyed their spectacular 5 course chef’s lunch menu over a leisurely 2 hours. We each had a drink. The total bill? $68. An incredible steal. And they were thrilled to have us.
You want to do it tomorrow? You can. You want to do again on Wednesday? Be my guest.
I’m thrilled today to announce our latest investment here at High Peaks – we’ve joined a terrific set of partners – Hearst and GrandBanks Capital – in a Series A investment in NYC-based VillageVines. VillageVines is the leading online source of discounted dining experiences at America’s top restaurants – think hotels.com for restaurants. More details below, but first, a step back.
So quick – name the only thing the world needs less of right now than another VC blogger? If you said another daily deal site, you’re right.
The proliferation of Groupon clones represents without question the most remarkable burst of me too-ism I’ve seen in my 12 years in the very me too-ish world of venture-backed startups. I’ve seen counts ranging as high as 1,200 daily deal sites around the country as of the dawn of the new year. A bubble, no doubt.
It’s a bubble driven by low barriers to entry and spectacular unit economics. Aside from a sales guy who runs around signing up merchant partners and someone to write copy and do a minimal amount of design work, there are very few variable costs to these businesses, zero inventory expense, and cost of goods that don’t have to be paid for until weeks after the revenue cash comes in the door. TechCrunch did a nice teardown of Groupon’s economic model here. It’s a pretty sweet business model, and dead simple to get started. I expect that the low startup cost and terrific unit economics will lead to a surprising number of these clones surviving. They won’t be big winners, but I’m sure there will be dozens and dozens of profitable, niche players still around in a few years.
My partners and I have spent a bunch of time talking about the opportunity created by the fantastic job Groupon, LivingSocial, and the like have done in training both consumers and retailers as to the power of these business models. In particular, I’ve been thinking a lot about the merchant side of the equation and how to better address their needs.
Groupon, while incredibly effective at driving new customers, is not always an economic picnic for the retailer. This has been much discussed – a recent Rice University study highlights the challenges faced by retailers. And independent of the questions around the profitability of the deals for retailers, we’ve heard again and again that merchants want solutions that can help them out every day, not just episodically.
In a world where Hotels.com, Priceline, and others long ago proved that there’s an enormous opportunity in helping the owners of high value perishable travel inventory (hotel rooms, airline seats, etc.) dispose of that inventory and thus optimize capacity utilization and better manage their bottom lines, it’s taken a long time to start treating restaurant booths, salon chairs, or massage tables the same way. The same fundamental principles apply to perishable inventory in these businesses – if a salon owner is paying a stylist to be in the shop, every incentive is there to get him working rather than standing and waiting, even if at a substantial discount. And while many people think restaurants must be different – food is expensive, isn’t it? – the reality is that most restaurants know that they are overstaffed most Sunday through Thursday nights. With food costs typically running only 25-30% of revenue, if you can control when discounts are redeemed, there’s a lot of margin left to play with in driving more people through the door and more money to the bottom line.
With smaller transaction values (and thus lower absolute gross profit) than travel, consumer and merchant acquisition costs have previously kept these markets from opening up. But thanks to the Groupon phenomenon and their (a) training of consumers and merchants to the deals concept and (b) innovation around viral customer acquisition models, I think the economics of these businesses have now fundamentally changed.
So I started last year looking at models that integrate deeply with the business practices of the retail partner and become a reliable way to dispose of excess inventory every single day. Be more than just a sporadic driver of new business (a merchant can get onto the Groupon calendar not more than 2x/year), become a critical part of how the merchant plans and forecasts their business. In short, be a real partner. Do that, and they’ll never let you go.
I first looked at a few opportunities in the high-end personal services space – Brooklyn-based LifeBooker has the right model there. Then in early fall I met Ben McKean and Dan Leahy, co-founders of VillageVines, shortly after they re-launched their business and expanded from NYC into Chicago, DC, San Francisco and LA. These guys are super bright, incredibly thorough and analytic, and very hungry. And I think they’ve got the formula nailed for the restaurant business.
Restaurants use the VillageVines platform to upload inventory that they need to fill. Those tables are then offered to VillageVines customers at a 30% discount off the entire food and beverage bill. Amazingly, it includes everything – order a $1,000 bottle of wine, pay $700 – the more you spend, the better the deal. And they make it dead simple for the restaurant to sign up – it takes less than an hour to get a new partner into the system. In NYC they’ve signed up almost 100 restaurants, including a bunch of big names like Le Cirque, Delmonico’s, Kittichai, and Aquavit.
It costs you $10 to make a reservation (refundable if you cancel). When you arrive at the restaurant, you do everything like you normally would, but then when the bill arrives, the 30% has already been magically deducted. There’s no coupon, no special card, nothing else to do. You could take someone out on a first date or a client out for an important dinner using VillageVines and your guest would never know. This seamless experience has greatly enhanced adoption and usage of the service. And it’s naturally viral – I make a reservation, we go out together and split the bill, you save 30%, you go home and sign yourself up.
As a consumer, I’m addicted to the service – I’ve had 8 VillageVines meals in NYC in the past month, and have a reservation for tomorrow. But it’s even better for the restaurateur – a no-brainer tool that enables them to take an otherwise unfilled table and fill it, while not risking driving discount diners on days or at times when she doesn’t need the business.
The early results are awesome – membership is growing very rapidly in all five markets, and restaurants have really figured it out and are starting to come to us in large numbers. Adding to the appeal, restaurants report that VillageVines is bringing them attractive, high-end clientele who end up ringing up larger than average checks, driven by the healthy discount. They’re getting a great boost to their top and bottom lines while opening up a new channel for customer acquisition, enabling waitstaff to earn more tips, and giving consumers a great deal. Everybody wins.
We’re thrilled to be investors, and I’m thrilled to be a consumer. While I can’t offer you the chance to invest, if you live or travel to one of our five markets, I can certainly encourage you to become a member – join the fun and have some great meals on us at www.villagevines.com. And if you’re not in those markets, don’t worry – we’ll get to your city soon!
January 7, 2011
About a year ago, we successfully exited our investment in Threadsmith, in which we had been the seed investors in early 2008. We ultimately ended up selling to a very logical strategic acquirer, NASDAQ-traded Vistaprint (VPRT). It was a good outcome, and we made a very nice, if not spectacular return. But our process was severely compromised, and the ultimate value realized was considerably lower than it could/should have been, because each of the two very best fit potential acquirers were private companies stuck at a standstill in the IPO pipeline. While still private they didn’t have the cash, we didn’t want their private stock, and they felt like they shouldn’t be doing anything dramatic strategically as they prepared themselves to go public.
While Vistaprint was without question on every Threadsmith board member’s list of the 5 most logical acquirers, the strategic logic was stronger and the likely value greater for two other interested parties. These two companies, had we been operating in a 2006-2007 IPO environment, each would have already been public. We know based on conversations with their management that they would have loved to have owned us. If public, they almost certainly would have been interested bidders, eager to do the deal and tell Wall Street about how Threadsmith was going to be a great driver of new growth for them. But in late 2009, as they languished waiting for the IPO market to improve, their hands were tied.
So we went from probably 4 really strong possible acquirers down to 2. When one of those two dropped out early, our opportunity for a competitive process was gone. And so, for a $50MM fund working through what in the grand scheme of things was a relatively tiny trade sale, the state of the IPO market had a dramatic impact on our outcome.
I tell this story because with the wires all abuzz over the past week about LinkedIn’s plans for an IPO this year, I’m still hearing entrepreneurs and investors say “So what? We don’t need IPOs to make money.” So what??!! Thank god, I say! We ALL desperately need a wave of this stuff to start rolling this year. While there has been much written recently about the challenged state of the IPO markets and the fact that many entrepreneurs and investors think they’ve gone out of style (Bill Gurley has been particularly thoughtful, as usual), I haven’t seen enough people talking about why we so desperately need more activity here. If anything, I’ve heard too many of my peers in the seed & early stage markets saying they don’t care.
2010 – “The Year of the Super Angel” – saw no shortage of claims about the old rules being dead and how these new forces in the VC landscape were responding to the fact that everything has changed. Some of these claims are perfectly valid, especially around the various elements of the lean startup – it indeed no longer takes a $5MM Series A to build a fantastic web service, achieve product-market fit, etc. But the claims I’ve heard from a lot of new entrants to the seed and early stage investing landscape about our collective freedom from reliance on a robust IPO market just don’t hold water.
Small VCs (like me) and, increasingly, so-called Super Angels and MicroVCs, love to say that amongst the reasons we can consistently drive great returns is “As a small fund, we’re not dependent on the state of the IPO market. We can make plenty of money, and drive great returns for our investors, even if we never sell a company for more than $100MM.”
I’ll confess – I’ve been guilty of making exactly that claim to LPs and others. But I won’t be making that case anymore, because it’s simply not true. Or at least half of it isn’t. Let’s parse the quote above into its two statements: the second is indeed true – we can have a great fund without a $100MM+ exit; but the first is without question B.S. We are ALL dependent on the state of the IPO market.
The problem is that the second statement is so dearly dependent on the first. In a world where great companies aren’t getting public, we end up with a paucity of buyers for our terrific, smaller companies. In aggregate, exit opportunities, and values of those exits, are greatly dependent on the number of public buyers out there. Public companies have two things that private companies don’t have – (a) a good stockpile of cash (admittedly, Facebook and others are finding their own ways to build such stockpiles, but they are very much the exception) and (b) a liquid, non-cash currency for making acquisitions. So when fewer companies are getting public, you have a decrease in the number of buyers who feel like they have the resources, currency, or strategic flexibility to do deals. And thus lots of people feel the same pain as my Threadsmith story.
Here’s a remarkable fact: over the past 10 years, the total number of NASDAQ-listed companies has shrunk every single year. Or, said another way, in each of the last ten years, the number of potential public buyers for private companies has been smaller than the year before. Ask any infrastructure/enterprise SW investor if it’s helpful for their portfolios that Oracle has, in recent years, purchased (and taken off the table as potential competitive buyers) public companies like Sun, BEA, PeopleSoft, ATG, and Retek, amongst others. Ask any digital media investor if they think an AOL-Yahoo merger would improve the exit prospects for their companies. Of course not – it takes a buyer off the table.
Now sure, as small funds, we don’t need IPOs or $300MM trade sales in our own portfolios to move the needle for our LPs. As I said before, the second half of that quote above is true – our two funds at High Peaks, at $25 and $50MM, can each drive great returns without ever selling a company for more than $100MM. However, you simply can’t say that makes us immune to the state of affairs in the IPO market.
We should all – investors and entrepreneurs alike – actively cheer for more IPOs. As long as they’re good companies (and lord knows there’s dozens of good ones out there languishing in the public markets’ waiting room), the more the merrier, for sure.
To all the seed and small fund investors out there – let’s stop conveniently denying the interconnectedness of our ecosystem. The IPO market matters to all of us in a big way. Super Angels and MicroVCs are no silver bullet solution for LPs looking to make money in venture while the IPO pipe stays frustratingly tight. I’m a fan of the small fund model, but we need to be intellectually honest about how we describe it.
That said, that honesty can and should include trumpeting the fact that with the exception of a tiny handful of large, diversified funds, smaller funds are in fact better positioned to make money. Despite the conventional wisdom, small funds have in fact consistently outperformed their larger brethren over the past 30 years, as last year’s Silicon Valley Bank study on small funds illustrated so compellingly. We’re at the most profitable end of the market – let’s just avoid discrediting ourselves by lying about why.
December 21, 2010
I’ve spent my entire 12 years as a VC in small funds. By today’s standards, I’ve been something of a microVC my whole investing career. We’ve always talked about looking for capital efficient businesses, and we’ve certainly recognized the tremendous advantages that have accrued to investors like us as cloud computing, outsourcing, and Moore’s Law have made it cheaper and cheaper to run SaaS and web businesses. You really can get a lot of businesses going, and going a long way, on $1 million or less.
However, in today’s frothy seed investing environment, I’ve seen several examples where the capital efficiency mantra is getting carried too far. I’ve had entrepreneurs tell me they’re raising oddly specific numbers like $575,000 – as if they can forecast their needs that precisely. In some instances, I’ve even seen entrepreneurs who don’t even have any idea how much capital they need, they’re just sure it’s not all that much. So they pick a number without doing even the most rudimentary forecasting.
One of the real risks for seed investors, and for entrepreneurs, as we try to make companies more capital efficient and decrease the size of financings to limit dilution and capital risk in these early stages is that we don’t capitalize companies sufficiently to know when they’ve succeeded or failed. Skinnying down the size of financings and then realizing you’ve funded the company only halfway to clarity is a bad outcome for everyone. Should you write another check and buy the company more time? Are these encouraging early signs, or false positives? Are things going not so great, or do we have some early false negatives? Uncertainty at these moments has a way of starting a path of incremental decision-making and, too often, funding companies well beyond the point where they probably should have been deemed failures.
At High Peaks we are very focused, as a firm, on investing to and through financeable milestones, and building in healthy cushions. Bridges and inside rounds are good for nobody, so finance yourself to avoid them. When deciding how much money to raise, map out a vision for your company that you and your advisors believe will lead to a next financing that happens at a much higher price than the current round. Regardless what they are, make sure the milestones are meaningful and that investors will reward them. When you’ve identified the milestones, then follow these three steps to determine how much money to raise:
- Think hard about how much cash it will take to reach to those milestones. If you’ll have revenue in that time period, be VERY conservative about how much revenue you assume is contributing to cash flow.
- Add 6 months more of cash – you want to reach the milestones BEFORE you start raising money again. That’ll be a 4-6 month process unless you’re insanely lucky.
- Then add a buffer – at least 30%, but better 50%. Things will go wrong, stuff will take longer to build, first customers will be slow to commit. It ALWAYS happens. So give yourself some cushion.
Bottom line, you need to raise enough money that you know you’ll be able to raise more at a much higher price if you succeed. And as importantly, you need to raise enough that you’ve given yourself a full chance to succeed. The bad outcome for entrepreneur and investor alike is staring at an empty bank account thinking “If only we had 2 more months, we really could have gotten there.” You haven’t yet succeeded, but you also don’t know if you’ve failed. Those situations tend to lead to bridges, down rounds, and other versions of good money after bad (some nice thoughts on this from Rob Go).
So be capital efficient – minimize dilution and make everyone’s upside that much better. But don’t be shortsighted in your pursuit of efficiency and avoidance of dilution. Build cushions into your cash needs and execute with confidence that whatever happens, you’re going to know where you stand when the cash has been spent.
December 15, 2010
It’s been said plenty of times in plenty of ways, but yes, I absolutely agree. . .the world needs another VC blogger like it needs another Groupon clone, location-based service, or college football bowl game, for that matter. So why the heck am I entering this overcrowded fray?
In short, this is more about me than it is about you. I’ve always liked writing, and I’ve always found writing to be one of the most effective ways for me to structure my thoughts and force myself to spend time reflecting, analyzing and, most importantly, synthesizing. I’ve done it for my own good, and for the benefit of communications with my partners (inside and outside my firm), for years. But I’ve always thought that I’d benefit a great deal from doing even more of it. So, after sitting on the sidelines of the blogosphere for too many years now, I concluded awhile ago that a public blog would serve a very useful forcing function to getting me doing more writing and, importantly, thinking. I won’t let myself have one of those blogs that sits up there with 5 or 6 weeks between posts. So I’ll force myself to write more, and as a result I’ll think more, and all that should make me more effective at what I do – think about markets and customers, imagine new technologies and opportunities, wrestle with the challenges of building early stage companies, and work hard to support the CEOs that choose to work with me in any way that I can. Shame on me for waiting so long.
Of course, I do hope that a few people read this, and I hope folks will tell me what they find useful and not useful about it. And I hope you’ll suggest things you’d like to hear more about or get my thoughts on. At the very least, I’ll be offering entrepreneurs who are considering working with me something more of a view into my head.
But hell. . .even if nobody’s there to hear it when this tree falls in the forest, I’ll chop it down anyway.