Information Arbitrage

As my friends know all too well, mine is a life immersed in baseball. Yes, there’s that venture investment stuff, but in between board meetings, team meetings, meeting new companies, staying in touch with my networks and breaking down the barriers to data entrepreneurship at Michigan and Columbia there is baseball. Both my kids are intense baseball players. My wife is a Little League executive (and holds a Ph.D in psychology, which helps) and division coordinator. And I am a long-time manager and coach of teams with kids ranging from ages 7-17, from Junior Minors all the way to Seniors. It has almost become a third career of mine (Wall Street, venture capital, baseball coach). Along the way I have learned a ton about strategy, human psychology - and life.

Newly-minted baseball teams and start-ups have a tremendous amount in common. Every Spring there is a Little League draft and the managers sit around and pick their teams, not dissimilar from kicking off a new start-up. Those of us who have been around Little League a long time know most of the kids, their playing histories, their personalities and their families. But this anecdotal knowledge is augmented with objective data that are generated in a common League-wide tryout the morning of Super Bowl Sunday. Players are scored on their batting, fielding, pitching and catching (if they pitch and catch), and there are various sub-categories in each of these areas. Think of these scores as their resumes and conversations with prior coaches as being reference checks. Drafting players, like hiring team members, is an inexact science but the goal is to get as much quantitative and qualitative data as possible to make the most informed decision you can. Assuming all the mangers work reasonably hard in the data collection process, there is a somewhat common view of how players rank by position based upon skill. But somehow, people’s draft boards look very different post facto. The reason: managers draft for different things.

Year after year, in my experience newer managers tend to underperform more experienced managers. Why is this? My hypothesis is that the newer managers tend to draft based on the theory of “best athlete available that meets my position requirements,” while the old timers tend to draft with a particular team construction in mind. This means taking into account factors such as “Is the kid a team player? Does the player show up for practice on time? Are they humble and do they work hard? Are their parents over-involved and stressing out the kid (and the coaches and other team members in the process)? Is the player a potential leader? Has the player previously been on teams with other kids where they’ve been successful?” In short, the objective function is building the best team, not assembling the most talented group of individual players. And in Little League, as in life, teams win when they function as a single unit and not as an amalgam of autonomous parts. So I have consistently passed up more skilled players in order to draft players who are good, but even more importantly, are good kids and fit within the team concept.

This is a movie I’ve seen many times before in start-ups I’ve backed. There is the seduction of hiring the “rock star, 10x performer, force of nature” contributor, even if they are a prima donna and most assuredly not a team player. I’ve witnessed this from the perspective of whether or not to hire these people as well as whether or not to fire these people who are already in the company. It is a very painful decision to make, but in my experience these people almost never work out in a start-up environment, where every person is so crucial to getting the business off the ground. Positive team chemistry and culture is critical at all times, but especially when a team needs to be working in perfect synchrony, backing each other up and focused as a single unit on the task at hand. Selfish but talented people mess up this dynamic, even if they can write beautiful code but piss off their team members or treat them in a disrespectful way. Fortunately there are talented people who aren’t destructive to a firm’s culture, and these are the people start-ups need to find. Optimizing for team, not simply talent, is the message. 

When building a high-performance team the question you should be asking yourself is: what is the goal and what are the resources I need to get there? Because the goal invariably requires multiple skill sets spread across several individuals, ensuring that you build the connective tissue among these people who are receptive to this “team first” notion is Job #1. It’s not about finding the brightest stars in the sky, it’s about finding those stars that make the constellation you want to call your own.

I spend a bunch of time speaking at events, guest lecturing at friends’ classes and mentoring young people. It is something I feel passionately about and enjoy a great deal. I always try to be blunt, honest and unambiguous with my input, hoping that at least some of the take-aways will be employed by those hearing my words. But I continue to be surprised by the number of common mistakes made by start-up founders, and wanted to provide a short list of some of my hot buttons.

Post-presentation behavior: When I (or someone like me, be they an investor, a well-know start-up founder, etc.) speak at a conference, it is commonplace for a group of people to line up to say hi and chat for a minute. All good. Except what often happens is that a (most often young) founder will try to pitch me their idea. I hate this and it generally leaves a bad taste in my mouth. There are too many people and too little time for this to be successful. You do not have my undivided attention. However, the goal should be to be brief, on point and to either say something smart or ask a good question that relates to discussion. This way, you can send me an email at roger@iaventures.com and you might have seeded a dialogue. But if you force a pitch on me at this moment, forget it.

Getting in touch with a VC: The number of blind emails we get with a pitch and a meeting request is extreme. This exercise is a complete waste of time as far as I’m concerned. The signal/noise ratio is simply too high to do all the calls and take all the meetings people want. But there is one way people short-circuit a meaningful part of the deal funnel - getting referred into us by a trusted person. This person can be another investor with whom we’re close and done business. It can be one of our founders. The common thread is someone whom we trust and whose judgement we value. While we don’t take every meeting requested from referrals, the likelihood of getting a close look is infinitely higher than sending in your stuff and hoping that a meeting will take place. So use that entrepreneurial intensity, passion and ingenuity to network to someone who knows me or one of my colleagues and impress them sufficiently such that they’re comfortable making the introduction.

Networking: Even with all that has been written about the importance of networking, I see way too many aspiring entrepreneurs looking for a silver bullet for how to meet domain relevant people for collaboration, recruitment and support. Have you checked out relevant Meetup groups? General Assembly? Do you have specific experience where you might mentor other founders at TechStars or another accelerator program? Have you spent time doing research around events taking place at local colleges and universities? How about starting your own community around your particular area of interest? With even a little effort it is impossible not to find abundant opportunities to network, learn and grow. You’ve just got to do it. I have no simple answer. It just takes time and hard work. Kinda of like what it takes to be a startup founder.

Building your brand: If you are in the start-up world, either as an employee, founder, investor or aspiring to do any of the three, it is important to thoughtfully build your online and offline identity. The beauty is that these efforts are valuable for anything you might want to do, and, in fact, is great practice for what you’ll do when you land your dream role. Develop a thesis and take a stand. How can you add value to the community discussion? Start writing, but with a purpose. It forces clarity of thought, opens up your mind and lets people get to know you better. Create opportunities for speaking in public and sharing your ideas with others. This will help bridge the online/offline gap and build a more personal identity, as well as providing a forum for feedback and debate instead of living inside your head. And of course actively maintain a Twitter account and an up-to-date LinkedIn profile. These are table stakes for people wanting to get a quick snapshot of who you are and what you’re about.

Be passionate, be strong but be deliberate. The fact is that no matter how smart or hungry you are, it just takes time to network, acquire knowledge and experience and to feel comfortable in your own skin as a member of the start-up community. And this is a good thing. Life is a marathon, not a sprint, so be purposeful and focused without feeling like you’re behind where you should be. The worst thing you can do is be unfocused and reactive, letting the environment dictate your roadmap instead of the converse. This doesn’t mean be insular and block out external influences; it means remaining true to your mission. It’s just like my idol W. Edwards Deming used to say (paraphrasing): It’s about understanding the process. If you develop the best processes, positive results will follow. 

It’s all there within your grasp. Just be thoughtful. Listen a lot. And by all means, follow your passions.

Yesterday’s horrific and senseless tragedy in Boston stirred up many of the same feelings I had on a beautiful September morning almost 12 years ago. Sadness. Anger. Rage. Confusion. And simply Why? Why did this happen? How could it happen at a time of celebration, peace and personal and community achievement? Words simply don’t do the feelings justice. I went to Twitter to get more facts about what had happened, and then looked for the Tweets of my many Boston-based friends to see that they and their families were ok. Finally, my feelings washed towards empathy, understanding how such a tragic event can both shock and ultimately cause a city, a community to come together in ways previously unimaginable.

As I’ve watched the many responses to the event pop up on blogs, Facebook, Tumblr and Twitter I’ve been both amazed and blown away by the stark message sent by all: We will not stop. We will not be scared. We will get busy helping, contributing - and running. I wouldn’t be surprised to see 2x the applications to the 2014 Boston Marathon given the vibe I’ve seen across the social nets. Many of my running friends across the start-up and investment communities have already stated their intention to run next year’s Boston Marathon, to simply say no to fear and to move forward in a constructive way. Props to all.

But perhaps the most surprising aspect of the responses I’ve seen is that rather than focusing on anger and thoughts of revenge, they’ve largely centered on feelings of sadness followed by calls to action. Donating blood, money and time. Running in next year’s race. Positive stuff. I don’t know if we as a society are getting better at reacting to crises or if violating something as pure and sacred as the Boston Marathon caused a specific outpouring of emotion, but I’m truly blown away by the tone of the messaging. To me it is a life lesson in how to handle crises being demonstrated on a mass scale. 

#respect

I periodically write about my learnings as the leader of IA Ventures, principally to unlock what is in my head and in my heart. As an operating partner with people who are giving their lives to building their businesses and a financial partner with those who have entrusted us with their capital, this is a very serious undertaking. Sometimes I find it necessary to call a “time out” in order to reflect, assess and share. That time is now. 

As I’ve written before, our most valuable resource is time, not money. Given this realization, we’ve continued to emphasize lead-managed investments or relationships where we are co-lead with a partner and firm whom we like and respect a lot. This necessarily means writing somewhat larger checks and working to own more of companies driven by compelling teams possessing great chemistry, rich skill sets and bold visions. The result of this strategy is to take somewhat longer to close an investment, but to have established an even deeper relationship with our founders, their customers and other key players in their ecosystem. I can’t tell you how many times I’ve referenced my friend and co-investor Mark Suster’s memorable post Invest in Lines, Not Dots. His advice cuts both ways - not only is it important for we as investors to get to know our potential founders well, but for founders to get to know us as people and potential partners, too.

This also works to cement one of my absolute bottom lines as an investor: our founders need to want to work with us as much as we want to work with them, and if there is a “fire drill” to consider an investment or a sense that founders are optimizing for round price and not for who-is-the-best-partner-to-build-the-best-business, we’ll simply agree to disagree and bow out. No hard feelings, but these are simply not the situations that comport with our notion of deep partnership. I’ve also been amazed and impressed at the due diligence our potential founder/partners are doing on us, and value and appreciate the thoughtfulness and the time they take to make sure we’re the right fit for them. 

It is important to note that the above in no way has impacted the stage at which we invest in companies, which continues to be seed stage/first money in (or first institutional money in) or early Series A. Our fundamental philosophy is that we are best-suited to help build companies from Seed through Series B stages, and this is closely tied to our belief that we are building a portfolio that sits at the optimal point of the risk-reward continuum. We’ve always believed that “small is beautiful,” and continue to cultivate deep relationships with larger firms to partner with us at later stages of a company’s development. It is very hard to be good at everything, and we’ve deliberately chosen to focus on the early stages of a start-up’s life.

This approach also has also worked to shape our reserve policy. While we have always created significant reserves for follow-ons, we are now firmly settled into a “life cycle” approach: we are positioned to lead Seed and Series A rounds, with sufficient reserves to do our full pro rata in Series B rounds. We have done and will do select Series C participations, but only where we expect the marginal return on our capital to be in the 7-10x range or higher. But as companies experience rapid growth and begin to scale beyond our early-stage competency and capital base, we allow ourselves to get diluted down from the early high ownership levels to still significant but lesser levels as fresh capital is better deployed against new opportunities. This is a natural and comfortable hand-off that takes place from early stage to growth stage, and we are not in the growth stage business. And that is fine with us.

Likely the hardest thing about building a business for the next 50 years is team construction and company culture. While I work hard to create a particular culture that I hope is retained well beyond my leadership of IA Ventures, team construction is a delicate balance that needs to evolve as the business grows and develops. Venture capital is a people-powered business and one which doesn’t scale particularly well (at least in the way we interact with our partner companies). Therefore growth requires more people, each new person adds to and changes the culture to a certain degree. Core principles are retained but style and chemistry dynamically adjust to new people who have entered the system.

So as culture and vibe are shifting and incorporating new inputs, the nature of communication necessarily changes in response to more specialized roles and responsibilities. New analyst? That changes things. New principals and partners? I can only imagine the shock to the system. It’s not that shocks, jolts and new dynamics aren’t good; in fact, they’re mostly great! But getting the balance of skills and styles right that all fit within the culture is not an easy task. This is why we’ve been super deliberate when bringing on new team members, and our approach has worked thus far. But the stakes continue to grow as the firm grows, and as we are all so busy traveling and spending time with our companies it is challenging remaining centered, strong, focused, synchronized. Mindfulness is one thing: successful execution is something else entirely.

In the time I’ve spent building the IA Ventures business, it has become abundantly clear that I am facing exactly the same issues as those founders whom we back every day. Articulating and selling the mission and the vision of the firm. Clearly communicating the value and benefits of our product. Closing business. Staying close to and getting feedback from customers. Recruiting. Understanding the competitive landscape. Proactive strategy development and planning. Marketing and PR. To say that I have empathy for the startup founder is the understatement of the century. I get it. Believe me, I get it. Few things are as exciting or rewarding as building a business, but it is also among the hardest things I’ve ever done. But 3.5 years in, there is nothing I’d rather be doing. Thanks to Brad, Ben, Jesse, Julie, Joey, Adrian, Drew, and all of our founders. You’ve pushed me hard, yo! The best is yet to come…

Crowdfunding is all the rage. Even the SEC recently blessed one type of crowdfunding for which there was risk of an enforcement action. Several in the early-stage ecosystem have called for VCs to “up their game,” as alternative paths to financing create competitive threats to both incumbent firms and the venture model itself. I think drawing parallels between crowdfunding and VC investment is both silly and inappropriate and conflates several important factors, most of which have to do with whether a founder is dealing with a good VC partner or a lousy VC partner. There will always be good VCs and shitty VCs from a founder perspective, and the presence of crowdfunding is unlikely to impact this phenomenon. That said, here is the compare/contrast as I see it between crowdfunding and VC funding (assuming one is dealing with a quality VC who acts as a true partner with management). Please note that I am not looking to specifically address of whether crowdfunding may or may not be a good vehicle for accessing early-stage investment opportunities. I will say, however, that if one’s investment thesis generally revolves around the notion of “social proof” than I don’t hold high hopes for this corner of the asset class.

1. Mentoring and assistance

• VC: High
• Crowdfunding: Low

With younger first-time founders, I personally believe money is not at all fungible and that there is significant value to partnering with a great individual at a great firm. I have personally witnessed this as a founder, as an angel and most recently as a VC. Whoever says that “all money is green” and that the source doesn’t matter isn’t giving the inexperienced yet visionary founder very good advice. I believe this talk is a function more of ego and bravado than really trying to give a founder the best advice for building a sustainable, long term, profitable business. Cynics will say “Oh, you’re just talking your book.” My response: come back with a thoughtful argument and save the platitudes. I also acknowledge that many founders successfully build a suite of mentors and advisors both inside and outside of their funding syndicates, but I don’t see these relationships as a replacement for a VC operator that has interests and exposures closely aligned with those of the founders.

2. Stability

• VC: High
• Crowdfunding: Low

Most seed stage businesses with which I’ve been involved have not been “up and to the right” propositions from the get go. It has taken a bunch of time - invariably more time than expected - to achieve product/market fit and, more importantly, to figure out a scalable and replicable way to sell the product. And with this extra time comes extra financing requirements, often more than the start-up has on hand. Because of this, in purely angel-funded situations (and, by extension, crowdfunded situations where there is no ostensible deal lead with the responsibility and resources to bridge the gap), it is frequently either brutally painful and time consuming or impossible to secure this incremental capital prior to Series A-type metrics being hit. This is only one of the ways where a supportive VC partner can help keep the team focused on execution by injecting enough capital to hit the key operating milestones Series A investors are looking for. And this can generally be done quite quickly and painlessly, but has to be done in an environment of trust and support. It is important that both founders and the VC feel a bridge investment was done fairly and thoughtfully, but this is something that strong VC partners do every day. It’s part of life.

3. Friction

• VC: High
• Crowdfunding: Low

As crowdfunding platforms become increasingly turn-key and the information provided becomes better, it will become easier and easier to tap a broad array of accredited investors for start-up funds. VCs, regardless of how streamlined their process might be, will always represent more friction and require more effort in order to close a round. They will ask more questions. Spend more time. Likely distract to a greater extent. But in my experience this process is often healthy for the start-up founder and forces a level of self-awareness, insight, professionalism and transparency that did not exist previously. For more seasoned founders this might not be seen as valuable, and the more streamlined crowdfunding process might be more appealing. In fact, as I see it crowdfunding appears most appropriate in two distinct circumstances:

1. Where the money raised is to hack together a prototype, and the focus is purely technical and not on business-building; or
2. Where the money is raised from a seasoned founder who doesn’t value the tangibles and intangibles offered by a VC, and really does view dollars as fungible.

Distraction and diffuse efforts are killers, especially in nascent businesses. Trying to do too much sucks valuable resources from accomplishing the core mission, but is often viewed as being important for “keeping options open” or “controlling one’s destiny.” The goal of a seed stage company shouldn’t be optionality preservation but laser-focused customer engagement, and to let the market help drive the iterative product development process rather than engineering in a vacuum and trying to solve everyone’s problem. This is the big issue of developing a general platform versus solving an important pain-point through a vertical application. Platforms can have great capabilities, but it is hard to prove the value without specific use cases. This is why UI is so important even in data-driven API-based start-ups, as potential customers need to actually SEE the value, not merely have it depicted in a spreadsheet or on a series of charts. Being able to demonstrate value is no easy task and involves several key steps. Ignore them at your peril.

• Know your customer. This is especially difficult in two-sided markets, where seeding growth on both sides is often a necessary element of demonstrating value. But many B2B2C companies have similar issues. Do you need to get widespread consumer adoption before showing a clear value proposition to the enterprise? Can you be laser focused on building the consumer application and solidifying usage and deep engagement while seeding a small number of strategic enterprise relationships to illustrate the enterprise use case and prove the ability to monetize? Spend too much time with the enterprise and you risk losing focus on your user. Ignore the enterprise and you might not develop a consumer experience that benefits from enterprise engagement. It’s not easy. You simply can’t serve two masters early in the company’s life. Complexity can distract, drain resources and impact culture.

• Know your source of competitive advantage. Another crushing drain on the early-stage company is trying to do too many things: not simply trying to sell to multiple constituencies, but engineering more than you need to beyond what’s truly core to the customer experience. For instance, if you’re parsing text together with numerical data to generate a “score” (for creditworthiness, influence, purchase intent and 1000 other use cases), is the value in the database where the information is stored? Perhaps it resides in the harvesting and cleansing architecture to bring in the data and put it in a usable format? Or is the value in the algorithms used to develop the signal? Or might the value be in the application that creates the engagement necessary to monetize the signal? I think it’s safe to say that the algos together with the application are where the real differentiation resides, while the database and data ingestion layers are better done by and purchased from companies whose sole mission is to be the best at these things. While there are companies that ultimately require a “full stack” solution to deliver the best customer experience and to create the deepest competitive moat, most companies can go a long way towards demonstrating and creating value by focusing on the areas where they are truly differentiated and not worrying about the less essential elements of the value stack.

• Know where you are in your evolution. As mentioned above, the answers to your questions potentially vary with time. While ruthless focus on a single goal has to dominate in the earliest days, this will necessarily evolve as the business grows. When does it make sense to approach a new set of customers with a different use case? Should we built our own proprietary [key part of your stack currently subbed out goes here] because it will enable us to [more rapidly/better] serve our customers and create a turn-key solution for potential acquirers? Managing growth while managing culture (and finances, for that matter) is very challenging, and only something that should be taken on after you’ve nailed that first use case. And by all means, don’t mistake revenues for a scalable and replicable sales process. The road is littered with start-ups that confused revenue growth with product/market fit, funding rapid expansion before the repeatable machine had truly been built.

I have seen too many potentially great teams and companies make these mistakes by trying to do too much, too soon. Please do not let this be you.

In the wake of my SXSW chat with Lauren Lyster of Yahoo! Finance, I once again began to think about the relationship between equity valuation and business decisions. In my perfect world, a business is financed in a manner that optimizes financial outcomes by creating a set of decision points along its growth trajectory.

This “optionality” is created by raising capital at times, in amounts and from investors that fund and support the business to the next series of key operating milestones, at which point an assessment can be made: is this working how we’d like? Are we doing a good job tackling our execution challenges? Has the competitive landscape changed? Is our company of particular interest to one or more buyers who are willing to pay for the next several years of growth? This necessarily implies that different kinds of investors can help at different phases of a company’s growth, and that long-term founder goals are essential inputs to the decision-making process.

This also encompasses the concept of founder liquidity, which at appropriate times can be used to re-align motives between founders and investors. As a business becomes increasingly successful, is scaling rapidly and third-party acquisition offers are an ever-present option, it is important to re-visit the goals of both founders and investors. When a business is first seeded, founder/investor alignment is generally tight because both parties want to prove out the business, achieve product/market fit and secure happy customers. But once this happens and the company moves from “proving” mode to “scaling” mode, this alignment can often diverge, especially with first-time founders who haven’t made much money and have gone all-in on their start-up. It may be that both founders and investors believe the business can grow into a multi-hundreds of millions or even billion-dollar exit, but that an M&A offer for $80 million that puts $20-$30 million into the founders’ pockets is just too compelling to pass up. This is the time when a new growth financing coupled with a secondary purchase of founder stock could reduce the founders’ risk profiles, still preserve that vast majority of their ownership and give them the peace-of-mind to redouble their efforts to build a huge company. This closes the yawning mis-alignment bred by success but can only emerge from an environment of partnership, trust and long-term vision.

This is a completely different mind-set than founders saying: “I want to maximize valuation, minimize dilution and treat investors as fungible sources of capital.” In my opinion, this is a dangerous game for founders to play as it sharply reduces the margin for error in executing the plan. In my experience the business-building process is anything but linear and the unexpected and unplanned is the norm. Achieving product/market fit at scale is, as you well know, insanely difficult, and no seed stage company, by definition, has achieved this or they wouldn’t be a seed stage company: they would either shun investor money altogether or jump from a bootstrapped rocket ship to raise a later stage growth round. So just to be clear this isn’t what I’m talking about; I’m referring to the 99.9% of start-ups that have an early product, have engaged with some early customers and are looking for money to continue to prove out the market and achieve a measure of product/market fit. These companies in the best of cases are fraught with risk and will not be fundamentally de-risked for quite some time. This is when having strong investors who are aligned with you is particularly valuable, as they can help provide interested and knowledgeable third-party perspective, serve as a healthy counterweight to the unbridled optimism of early-stage teams and work with management to devise a set of KPIs and metrics for the business. Should additional financial runway be needed because of a delayed product launch, difficult in recruiting the go-to-market team, etc., the strong and committed investor can help provide the resources necessary to achieve the critical operational milestones essential for raising the next round. Either a group of angels without a distinct lead or a firm that is pissed off because they overpaid for a seed stage deal will not be awesome to work with during this challenging time. 

Angels are terrific, and we work with them in almost all of our companies. Really good ones have great domain knowledge, expertise and contacts and are super helpful. They are, however, not a substitute for a strong deal lead with reserves held against the investment position who can help drive a round extension or a bridge to the next financing. And inexperienced angels can freak out at times of trouble and be a significant drain on management bandwidth. Also, venture investors who were induced to pay a high price to get a deal may use a hiccup in execution to extract a pound of flesh from the founders in exchange for bridge capital, as they feel a measure of “buyer’s remorse” and are likely unhappy by perceiving they were oversold at the outset. One might say “caveat emptor,” but let’s remember who holds the cards at times of stress: those with the money. The honeymoon is over. The slick fund-raising presentation is long since forgotten. All that’s being looked at is the business and the price paid for the business – and the investor isn’t happy. This is a lousy situation for founders to find themselves in, but is exactly what they’re singing up for by treating the investor selection process as a game of “Who’s the highest bidder?” instead of “Who’s my best long-term partner?”

I know some might say, “You’re talking your book” or “That’s not the way YC does it” and my response to those naysayers is as follows: you’re wrong. Building a company is far more art than science, especially in the earliest days, and having the right support systems around the table – both knowledge and financial resources – is essential for managing the risks and opportunities of a nascent business. If you have complete conviction that you can and will achieve product/market fit and scale to the moon without hitting bumps in the road, then by all means raise a bunch of uncapped or high-cap convertible notes from a dispersed group of investors, none of whom has enough skin in the game or commitment to impact the outcome of the business. Just know that you are betting the entire company on Day 1 by pursuing this strategy. Eyes wide open and acknowledgement of the risks is all I ask. Alternatively, if: (a) you feel you’ve got something hugely exciting where you’ve proven some stuff but have a long way to go before feeling confident that you’ve achieved product/market fit, and; (b) you believe that you’d benefit from the mentoring, experience, commitment and financial resources of a top-quality institutional investor, then perhaps you could re-think the wisdom of the prior approach. Put a more stable capital plan in place through partnership with the right investor for your business with whom you cement aligned motives. This may mean not taking the highest-priced offer on the table, but I believe it will provide the greatest opportunity for maximizing equity value over time. If you are playing a long game, as I am, you need to adopt a long-term mind-set. It’s not about winning the tactical battle of getting the highest price for your seed round: it’s about winning the war. Don’t let ego and crappy advice get in the way.

I started IA Ventures a little over three years ago with Brad and Ben. The original thesis: build an early-stage venture firm designed for the long-term that focused on companies seeking competitive advantage through data. Infrastructure. Platforms. Applications. All of it. We’d take a life-cycle approach to investing, building our positions early, working hard in partnership with our founders to achieve “escape velocity” and providing additional capital to support growth over time. This was the playbook I articulated to investors in 2009 and the same holds true to this day. We remain convinced that our approach is well-suited to building valuable, long-lasting relationships with great business-builders and generating superior cash-on-cash returns for our Limited Partners. 

While our thesis and approach has remained largely unchanged since our founding, much has happened in the meantime. We have raised two funds, our first fund of $50 million which is now fully deployed, and a second fund of $105 million which has more than two years to be invested and over 2/3 of its capital untapped. We have 31 portfolio companies across the two funds, and have averaged approximately 10 investments per year. This has all been accomplished with an investment team that has remained essentially the same - the original three partners plus an analyst (initially the highly skilled Justin Singer who left to work for a portfolio company, and now the incomparable polymath Jesse Beyroutey). The good news is that we’ve created a very tight-knit team with a strong culture that is working well with and for our companies. The bad news is that given our strong deal flow and hands-on approach to working with our companies, we feel that our investment team is bandwidth constrained. Further, we are interested in getting some new perspectives in the Firm to help us look at opportunities through a different lens. We believe this is a positive and healthy development for our companies, our Limited Partners and the Firm. The time has come to grow the investment team.

We are already well on our way to bringing on a new analyst to work with us. The candidates have been spectacular and we are excited to announce a new member of the team in the next few weeks. But this is only one piece of the puzzle.

Now for the big news: We are committed to bringing on a new Partner at IA Ventures. This will be someone who shares our passion for early-stage investing in the mode of partnership with our portfolio companies. The person may have been an entrepreneur before becoming an investor or may have been investing all their life. We don’t have a pre-conceived notion of the “just right” background. We expect that every likely candidate will be passionate, articulate, interested in engaging in constructive debate and strong. While we all have a technical bent, we can see a wide range of people “clicking” with us. As with our founders, most of whom we backed at the seed stage (almost always pre-revenue and sometimes even pre-product!), so much is based upon chemistry and how we see a long-term partnership evolving. What we aren’t looking for is someone exactly like us. 

We fully expect this process to take some time and we’re signed up to make the investment in our future. We are easy to check out. Speak to our founders. Speak to other venture firms and angels that have worked with us. We’re proud of what we’ve achieved thus far, but we’re playing a very long game. And we’re looking for that right someone to come and play with us. If you’re interested please send me a note and whatever else you want to send to roger@iaventures.com. I look forward to hearing from you.

Raising money is a hard and sometimes scary thing. Friends & family money might be relatively easy to raise but often comes with lots of emotional strings attached. “What if I lose their  money? Might this adversely impact our relationship? Will I feel horrible and guilty?” Raising angel money is somewhat harder, but with less drama and entanglement. “These people believe in me and are trusting me, which is a huge obligation. But will any of these investors actually be able to help me to build my business?” And finally, securing venture investment is generally challenging for all but the brand-name and heavily pedigreed entrepreneurs, but hard work on both sides leads to a more balanced relationship: there are certainly clear expectations coming for the VC and often symmetrical wants and desires from the entrepreneur. And this is a good thing.

Early stage VCs and founders are bound together by a spiritual relationship around the founders’ mission. This is made more complicated by the financial and legal dynamics introduced by a financing. Taking VC money is like getting married: when it’s good it’s great and both productive and fulfilling. When it’s bad, however, splitting up is hard to do, both emotionally and logistically. So bringing a VC into the mix is not something that should be taken lightly.

However, if you do decide to take venture money, there are few things I’d recommend founders do to get the most out of the relationship:

Trust your new partners

I have heard way too many times from people who are ostensibly “founder friendly” that founders shouldn’t trust their investors but keep them at arms-length: they are simply not to be trusted. I have one word for this advice: bullshit. It is incumbent upon founders to do their homework and to pick their investors as carefully as they pick their co-founders and early employees. Each of these key relationships can and generally does have a material impact on the culture and future success of the company. The relationship with a lead investor is no different. But once you choose an investor, the value of having a truly trusting and respectful relationship is hard to quantify. If you constantly find yourself managing information flow and creating knowledge asymmetry between the founding team and the lead investor, something is fundamentally wrong. That energy spent “managing” could be spent engaging the investor - who is really your partner - on issues that are truly material to the prospects for the business. Use this leverage to your advantage.

Invest in relationships

Even after picking a great investor whom you trust, in order to get the greatest benefit from their skills, experiences and relationships you need to commit to building the relationship. This requires time on both sides to identify the best means of communication, the areas where the founders need the most help and where the investor can help plug the gaps and the right cadence of communication given the company’s stage and needs. Good things don’t just happen spontaneously; they require hard work. This relationship should be framed in the same manner as that of a key person in your personal life: there will invariably be ups and downs, but each is deeply committed to the other and have a vested interest in having things work out. If you’ve done a good job picking the right investor / partner, this investment will yield significant dividends over time.

Clearly communicate your expectations, wants and needs

Every relationship is different. What one founding team needs and wants can often be quite different than another due to background, team construction and business challenges. Even the most committed investor / partner can’t read the founder’s mind, and can’t possibly know what goes on day-to-day within the business. It is incumbent upon both the founder and the investor to communicate succinctly and honestly, with a bias towards actionable take-aways, e.g., “Can you interview these three Lead Developer candidates for us, as your perspective would be really helpful?” or “We’d love to get two proofs-of-concept going in different verticals. Can you help us identify the best potential candidates in [adtech] and [financial services]?” Good investor / partners love concrete deliverables because (a) it specifically helps their investment, (b) it feels good to help and (c) being recognized as a real (not bullshit) value-added investor both cements the relationship with the current founder and builds reputation among prospective founder / partners. In short, good communication breeds goodness all around.

Building a great relationship with a lead investor isn’t hard, but requires work both before the right partner is chosen and on an ongoing basis as the relationship evolves and the company is built. Problems arise when founders either pick an investor that isn’t the right fit or don’t properly invest in the relationship. From the investor perspective, few things are more frustrating than when you’ve done a ton of work to identify a team you want to work with and a business you want to help build, but where the founders don’t want to engage with you. And it’s a shame. My most satisfying founder relationships have strongly correlated with business outcomes, and I firmly believe that the “money is fungible” mantra is a load of bunk. But it’s up to the founders to decide on the go-it-alone or partner-with-investors path. My message is that if you do elect to take venture money, by all means do it the right way. Eyes wide open. 

Solving an important problem is generally the credo of most entrepreneurs. However, the solutions can take a variety of forms: core technology (e.g., a new database); business model (e.g., peer-to-peer lending); or service (e.g., next-gen mobile optimized retail banking). Certain businesses give rise to differentiated intellectual property which is sometimes patentable and often salable. Others leverage business models and processes which themselves might not be patentable but which create valuable data assets. But sometimes start-ups give rise to neither, and are hoping for advertising, e-commerce or lead generation revenues to fuel profitable businesses - if they work - at scale. These dynamics beg the following question:

Does creating intrinsic value matter in technology start-ups, or are operating cash flows all that really count to a (hopefully) fast-growing early stage business?

By “intrinsic value” I’m referring to the worth of a business if it were to cease operating, with buyers offered the chance to purchase all or part of its assets. In barest terms, if you were to turn off the lights, is the company worth anything? Given a founding team whose mission is to disrupt a large market or to create a new market, it is unlikely that the notion of intrinsic value comes up in casual conversation. But in the cold light of day, the chances of achieving parabolic growth and creating billions in enterprise value is pretty low. But what if a business that was taking a big swing was designed such that it had lots of exit options at different stages arising from the creation and compounding of intrinsic value?

In early days the value might largely be attributable to team, a tight-knit group of world-class engineers who have shipped beautiful software together. Later on it might be team plus an analytical framework for extracting insights from certain kinds of data relevant to the problem being solved, a framework that might be applicable to a range of potential acquirers’ problems. And eventually the business at scale might result in a hard-to-replicate data asset that can be leveraged and used as a channel for other types of commerce. This step-wise accretion of value can provide founders with a much wider range of exit options than simply focusing on the “flow” (dependent upon transaction volume) rather than the “stock” (asset value realizable in a liquidation). 

Don’t get me wrong, as an investor most excited by teams driven to build large and truly disruptive businesses over time I’m in this thing for the long haul. But I have the benefit of diversification. Founders don’t. What I’m suggesting is that there is no reason why founders can’t be a little more thoughtful about the process of creating asset value rather than less tangible measures of success. Going for the big win and creating asset value along the way are by no means mutually exclusive. But attention to this particular detail can be the difference between a nice, unspectacular but life-altering outcome and a goose-egg. You make the choice.

Do I wake up excited to start the day? Am I frustrated by the dumb things I do that I know I can - and should - do better? Can I feel myself learning, growing and developing in my role? Is there a sense, a hard to put into words but a know-it-when-I-feel-it sense that I’m making progress towards my career and life objectives? These have long been the hallmarks of roles in which I’m both personally and professionally fulfilled. But when one or more of these drivers are not at play, I’ve found myself restless and ready to disrupt the status quo and to find my next challenge. Having the foresight to know when I’ve started stagnating has led me to make some bold and aggressive moves in my career - on my terms. One thing is for sure: if you are coasting in your job, lacking passion and the drive to succeed, Mr. Market will find you and disrupt your career - and not on your terms. Do not let this happen to you.

Career management doesn’t just happen; it requires planning, effort and self-awareness. I’d argue that this is more important now than ever, as job security has become fleeting and employment by larger companies with richer benefits is generally contracting, not expanding. This renders career planning akin to a software release cycle: prioritize the development pipeline; build and release features; collect customer feedback; iterate in the wake of hard data and reset priorities (and therefore the dev pipeline). We’ve all become the VP Engineering of our own careers. Managing multiple constituencies (Sales, Product and Development) with an eye towards shipping the best product - the one with the features customers value most. Get lazy on the job, slack off of managing even one of these key relationships, and the whole system breaks down. 

Regardless of role, seniority or stage of career, I’d suggest that everyone ask themselves these hard questions on a periodic basis:

• Am I learning? If not, plan how to move into a new role at your current organization or consider looking outside for new opportunities. Not learning sucks. Unacceptable. Time to move on.

• Do I feel good about what I’m doing? Learning is great, but if you feel ambivalent about what you’re doing the situation is not long-term stable. As long as you are building your skill sets, experiences and networks, ok. But without true passion for your mission, you should begin thinking about either a functional or organizational change. 

• Does my role fit with my long-term objectives? Careers leverage our cumulative experiences as well as our hopes and dreams. You can be learning and feel good about your current role, but if staying in that role isn’t going to help you move forward towards your long term objectives than you need to be disciplined about deciding when it’s time to move on.

• Is my job meeting my short-term needs? Not everybody has the luxury of optimizing for the above when there are very real financial and geographic considerations that often come into play. Student loans? Children? Dependent parents? Whatever. Life happens, much of which is beyond our control. So while the questions above should always be kept in mind, sometimes the fact is that sacrifices have to be made to simply cope with reality. But proactively managing career through learning, the advice of mentors and outside activities can be done regardless of the situation. Just do it.

• When I look at myself in the mirror do I like what I see? This fuzzy litmus test is helpful for cutting through the BS and self-rationalizations that plague even the most introspective and intellectually honest of us. Sometimes things look good on paper and sound good when we tell other people, but when we look back at ourselves and can’t fake that smile, you know something’s up. Time to speak to a mentor, a career coach, someone who can serve as a trusted sounding board to help you get to the bottom of what’s really going on. It is often too painful to let the truth in, whether it’s disappointment with one’s career trajectory, perceived appreciation at work or finding oneself in a job that others think is great but you do not. Shake things up. Get some help. Do not accept simply muddling through.

Subjecting yourself to regular self-review is a challenging and often frustrating task. However, the the rewards of imposing this discipline are many: clearer thinking about your job and career management; plans and actions for moving forward, not simply marking time; bringing others in to help you achieve your objectives and avoiding going solo; and knowledge of where you really stand in the one person’s eyes that really matter - yourself.

Life is a series of interactions. How we manage these interactions plays a meaningful role in our future. This is particularly relevant for entrepreneurs and investors, between which exists a delicate symbiosis that teeters between cooperation and competition. This is further complicated by the fact that investors often work together, yet have the dueling agendas of doing right by their portfolio companies as well as their limited partners. It is difficult to apply game theory to this problem because of its myriad dimensions and the vastly different utility functions of the players involved. That said, there is one over-arching principle that applies in all cases which makes the math infinitely more straight-forward: karma.

Notwithstanding the trend towards short-term thinking and immediate gratification in Government, media and across society, there are a few immutable truths:

• Life is a marathon, not a sprint; and
• Relationships matter.

This creates stress when short-term behaviors are then viewed through the lens of long-term relationships. Old saws such as “What goes around comes around” and “Payback is a bitch” (or other notions of “karma”) didn’t spring from nothing: they came from the observation that those who act badly tend to have bad things happen to them precisely because they weren’t mindful of the longer-term implications of their behaviors. And the problem is that short-term thoughtlessness can take an awfully long time to overcome, as trust and credibility needs to be rebuilt and prior wounds need time to heal. It is much more efficient - and much kinder - to simply do the right thing in the first place, and to adopt a longer-term perspective from the start.

None of this is easy, mind you. Giving up your seat to an elderly person on the subway shouldn’t require thought: it should be reflexive. Few karma points for this. But when something is truly difficult, like a founder giving up a significant chunk of equity to bring on a great senior leader or a venture syndicate lead making room for smaller strategic investors, this is where the karma test is in play. Classic knee jerk responses to the above are often akin to the following: “I’m not hiring that person: no way I’m diluting myself like that” or “I refuse to make room for this investor: I want to keep the capacity for myself.” Sometimes it’s best to take a deep breath, step back and think deeply about personal motivations and the long-term implications. “Might this new hire truly transform the business and massively expand the equity value pie, separate and apart from my percentage ownership dilution? Perhaps it does make sense for the company,” or “While I’d really like to own those few more points in the business, the founders like and trust these investors and believe they can truly help the company.” This issue no longer becomes simply what I want for me, now, but what is best for me - and others - over time.

In short, it’s about the company, stupid. An easy concept to understand, but a hard one to put into practice when so many around us are perpetuating the myth that optimizing for the short term does not adversely impact the long term. I can tell you from experience that most (but clearly not all) of the time, short-term thinking is costly in the long run. It’s not altruism, it’s just good business. And good karma, too.

A new market entrant. A competitor that gets a bunch of great press. A peer that just raised a ton of money. The external environment presents myriad distractions that can cause founders and their teams to “freak out” and deviate from their established game plans. And in my experience, when plans and behaviors are quickly adjusted in response to short-term exogenous events, bad things happen. Well-conceived strategies and plans get tossed on the trash heap, rendering those in reactive-mode rudderless and adrift. While it may feel good in the short term to be “doing something,” just ask a professional trader what happens when the goal is to “participate in a trend” versus putting on a position that is carefully thought out, tested and looked at in the context of the overall portfolio. The answer: a bad trade that is soon regretted. 

This seems like basic stuff, but it is very hard to have confidence in a plan if there is lots of exciting activity happening all around you. And it is even harder to remain firm in your resolve if there is a lack of confidence in the plans themselves. So how can founders steel themselves against the noise and focus on executing their own plans with confidence and consistency? I’d suggest a very straight-forward 10-step process:

1. Develop hypotheses

2. Test these hypotheses and collect data

3. Interpret and analyze the data and adjust the hypotheses

4. Retest the hypotheses and collect data

5. Establish the base case plan in the wake of the new data

6. Create KPIs in order to be able to measure success versus plan

7. Execute the plan

8. Collect data throughout the plan horizon

9. Evaluate data relative to KPIs and develop new hypotheses

10. Return to Step 2 and repeat 

This isn’t rocket science. This doesn’t imply sticking your head in the sand while the market might be undergoing dramatic changes. It means creating a process and using objective data to assess strengths, weaknesses and challenges instead of reacting to non-data driven external factors that appear to portend big changes but might mean nothing. It is impossible to judge the quality of your planning and execution without good process, and process, unlike external factors, is the one thing you can actually control. And while the output of the 10 steps will look different for each company, I believe the approach is fairly generalizable and something from which every founder can take comfort. 

I get very frustrated when I see good people and companies knocked off kilter by glamorous, shiny stuff happening in their external environment without the discipline of thought, data and feedback. Don’t let this happen to you. 

Earlier this week it was announced that the Big 10 conference (which currently has 12 teams) is undergoing yet another “realignment” - Maryland and Rutgers are being added for NCAA football, substantially expanding its geographic footprint and, at least in this man’s opinion, further diluting its history and tradition. This was a brazen move by Big 10 leadership for which its motives are crystal clear: money. Greater geographic coverage in advance of a new broadcast rights deal. This isn’t Notre Dame joining the conference (which would have made much more sense in light of rivalries, geography and tradition), it’s two middling programs in completely different markets. But you can bet conference leadership looked at demographic data, ran the attendance numbers, projected incremental merchandise sales and thought about the new rivalries that could be created to justify the move. Tradition be damned. It’s about money, plain and simple. No apologizing necessary.

After calming down, it dawned on me that this move, and all the other moves involving conference realignment, are merely a fixture of the “great unbundling” that is taking place across our society. Where power was projected from the top down, more and more is being driven from the bottom up. If one takes this to its logical conclusion, I can foresee a time when each big-time college program acts like Notre Dame, e.g., cutting its own TV deal and establishing its own rivalries. This has worked for ND because of its national brand and rich history, but few schools have this luxury today. But in tomorrow’s world, where audiences can be micro-targeted and schools promoted cheaply and broadly, why couldn’t rights deals be cut a la carte and not on a conference basis? Because if conferences really aren’t conferences anymore in the historical sense, e.g., schools linked by geography, culture and history, can’t we optimize the financial outcome by having schools as independent contractors and removing the friction of the conference leadership and the NCAA? Establish schedules based upon the shifting sentiment and “hotness” of specific teams and rivalries? Schools getting to keep more of their own TV money and merchandise sales? Would this be riskier for the schools who aren’t big brands on their own and national powerhouses in their own right? Absolutely. But they could opt to band together along different lines and brand themselves separately. The permutations are endless.

Department stores. Computer software. And even education. Products and services are being broken into their atomic units and optimized for price, selection, features and, most importantly, customer satisfaction. This is an inexorable trend that cannot and should not be stopped. But make no mistake, there is a cost: history and tradition. Seeing that favorite department store go out of business is upsetting but ultimately a wound that heals with time. But seeing your school playing against teams for which you have no historical reference and no fundamental reason for even caring, it is a bitter pill to swallow. As with everything, I’ll adjust and life goes on. But when the great unbundling begins to chip away at centuries-old traditions, you know that nothing is sacred. 

Andrew Ross Sorkin’s missive on mistakes made in the Facebook IPO has given rise to some strong emotions. While Andrew sought to lay much of blame at the feet of Facebook’s CFO, some others (here and here) view the CFO’s responsibility as simply being to get the highest price for the shares offered, full stop, and in that light David Ebersman did an absolutely flawless job. I personally find it easy to put myself in either mind-set. I had deep concerns about the aftermarket performance of Facebook stock, and shared my thoughts in May. I felt that those who played the Facebook IPO game, especially retail investors who were unlikely to get fills both long and short and times and prices that gave them a chance to make money were likely to get smoked. But this fact or today’s perspectives on the Facebook IPO miss the central question:

What is the nature of relationship you want to have with investors? 

I’d posit that if the intention is to have a long-term relationship with your investors, then that should have a meaningful impact on how your price your offering and to whom you offer your shares. And this is the same for public and private companies alike. 

The Facebook offering was priced as a win/lose - those doing the selling won and those doing the buying lost. Those who bought and who hoped to cash in on the euphoria get little sympathy, and they shouldn’t. But by continually raising the offering price it is easy to imagine that the stable, supportive, long-term investors who believe in the Company’s long-term prospects got forced out because of valuation concerns. At $38, those with more sober financial models would see it taking years to grow into that price. No surprise there. So what’s left is “hot money” investors who care little about the long-term and only about the flip. Now one can argue that why should Facebook care about this? The Company and its insiders reaped a cool $10 billion at a premium price - isn’t that all that really matters? It is, if you expect that Facebook won’t be tapping the public markets again for the foreseeable future and that potential hires don’t look at its price action and sharply undervalue restricted stock and option grants. And the argument that existing option grants can simply be repriced? They can, but this also comes at a cost: savvy long-term investors hate this, especially if they believe the restructuring is too heavily skewed in Management’s favor. It can be highly dilutive and is a terrible way to start life as a public company. Google’s repricing happened five years after they first went public. They had lots of public operating history and a lot of credibility with the investment community. People had already made lots of money investing in the public Google. No such thing can be said about Facebook, and won’t be said for a long time. So that line of argument is a bit of a red herring.

The dynamic in “hot” private companies can be very similar. Sometimes founders can focus exclusively on valuation, riding a wave that brings in a boatload of cash at a price that sets the bar extremely high. The investors in question were willing to pay the highest price, but may or may not be the best and most value-added long-term partners for the company. In these cases managements’ have effectively bet the company: if operating performance doesn’t hit the metrics which justify the lofty valuation, if product releases take longer than expected, if new competitors enter which make the environment more competitive, it becomes painfully hard to move forward. Sell the company? The post-money valuation has sharply reduced exit opportunities, as the last-in investors will balk at poor cash-on-cash returns. Raise more money to buy additional time? You will invariably not like the terms. So unless progress is up-and-to-the-right and of sufficient magnitude to justify the valuation, investor goodwill will not be there to soften the blow.

Finally, there is the argument that these seemingly touchy-feely issues are a bunch of BS and that the Company should be focusing on one thing: product and customer satisfaction. I am here to tell you that this perspective is BS. Once a company, be it public or private, has taken third-party money, its relationship with investors and the stability it has created in its capital structure is an essential element of delivering the best product to customers. This is one of the key reasons for having a finance function. Financial control, budgeting and strategic planning are critical, but long-term access to capital is and strong investor relationships are, without question, a key element of a company’s ongoing success. How Facebook and its bankers dealt with the offering did not detract from the Company’s focus on product: it should have helped its ability to block out the distractions of a disappointing offering and protected its focus on product and customer satisfaction. Much of the blogosphere, in my opinion, has this dynamic backwards.

The issue with Facebook isn’t who to blame: it doesn’t really matter. But if the Company believes it has best positioned itself for a stable and constructive long-term relationship with the investment community, it is sorely mistaken. They may have “won” the battle, but the war is still very much in question.

I’ve lived through bubbles. Lots of them. They are powerful, make a few extremely rich and many wondering what happened to their pocketbooks and their pride. What I’ve witnessed in the seed stage venture environment has not had these hallmarks. Sure, some prices for pre-revenue and often pre-product companies in certain geographies, e.g., Silicon Valley, have gotten bid up, it hasn’t felt to me as if the market has become untethered from any sense of reality. What has become divorced from what I consider to be good investment discipline, however, is the structure of many “hot” seed stage financing rounds. And even more than poor investment discipline, I think these structures are placing the start-ups raising the capital in a very precarious, high-volatility position. What seems like sound fund-raising advice might, in fact, backfire to the detriment of the founders and their stake in the company.

The structure to which I’m referring? “Party rounds.” These generally come together in the form of a convertible note that is either uncapped or with cap prices substantially above where a priced round could get done, or if there is a priced round there is no ostensible syndicate lead. Seed rounds of $2-$4 million are not uncommon, and the syndicate is generally made up of a large group of angels with some participation by large institutions writing very small checks relative to their fund size. Frequently there is no Board at this stage, merely an informal confederacy of advisers and mentors working to support the founders. 

All seems rosy, right? Raise a lot while the sun is shining and to the extent we can push off valuing the equity, all the better for us as price is going up, up, up. Higher price means less dilution which means more for us and less for investors. Hooray! Unless…

What if things don’t happen according to plan? We’re building fast but we’re burning cash. Revenues? Still a ways off. Engineers cost more, we hit bumps in our development pipeline, and there are material delays in shipping v1.0 of our software. All this spells a worsening cash position with no help in sight. Lack of hitting key operational milestones makes raising from outsiders unlikely or at terms brutally punitive. What about insiders? Isn’t this the time that the deal lead steps up to lead a bridge round assuming management is executing well but simply needs more time? Yes. But wait, we have no deal lead. We don’t have an investor with enough skin in the game to care. But what about that rapidly rising valuation that was going to blow through the caps and beyond? How about a bridge at 50% of the strike of the caps, if it’s even offered at all? By not having a lead, a partner who takes the long view and has the resources to back it up, the founders have placed themselves in a very risky situation. Yet the party round seems to be the recommendation du jour among the West Coast technorati. The reason for this is beyond me.

Sometimes I hear that founders get advice that they shouldn’t engage with institutions too early, that they’ll “lose control” and give up too much of their company. Let me tell you, any institution that is in the seed round for “control” is a jerk and shouldn’t be in the business. But I don’t know too many firms that roll this way. An institution who is a true partner is going to work with the founders to create the best syndicate possible, which often includes several strategic angels along with their own investment. Term sheets are clean and founder friendly, but contain essential elements such as pro rata rights and information rights.

As for the claim that having an institutional lead will introduce potentially fatal “signaling risk” should the lead not re-up in the next round, in actual fact this point is specious and absolute garbage. Every seed stage firm we co-invest with supports their companies through their pro rata in the next round unless there are dire circumstances, the same circumstances that would make it unlikely for the company to be able raise outside capital, anyway. Everyone has their horror stories: I’ve just never witnessed one or been part of one. In most circumstances seed stage investing involves buying a “two ride ticket,” where the founding team is given time through the seed and either an extension round or a Series A to achieve product/market fit and prove out the business. A possible exception to this would include incubation-type R&D dollars to hack on an idea. If the hack doesn’t work, no harm, no foul, but no more dollars, either. And this covenant is communicated clearly and right upfront so there are no misunderstandings when the financing decision comes around.

Bottom line, I hate party rounds and think they do a disservice to startups. Cynics will say I’m talking my book and I’ll say no, I simply won’t make those investments because I think they aren’t healthy. They look fantastic in a market that is only going up. But let’s see what happens when the market softens and go-go West Coast start-ups have to go fishing for Series A rounds with their legacy $15-$25 million strike caps on their no-lead, broadly distributed convertible note offerings. Things won’t look quite so pretty then. And then you can bet the party will be over. 

The euphoria surrounding the upcoming Facebook IPO is reaching untold levels. Retail brokers have stopped taking orders. The offering price range has been sharply increased. And the amount of stock that sophisticated investors and insiders are offering has jumped dramatically. So what should one think about this in light of the upcoming IPO? I’ll tell you - buyer beware.

The market dynamic reminds me a lot of how investors were lining up to buy the Blackstone IPO back in 2007. The firm was on a roll. Private equity was scorching hot, supported by cheap debt that made almost any highly leveraged deal look good. And there was immense scarcity value as none of Blackstone’s peers had yet gone public (while certain specific vehicles of KKR and Apollo had floated shares, they did not represent shares in the parent company). And the firm was headed by the most visible figure in the industry, Steve Schwarzman, who commanded the respect of both public and private investors alike. Current operating executives such as Schwarzman and Tony James were selling large amounts of stock. Taken together this indicated to me that private equity in general and Blackstone in particular were on an unsustainable roll, and that the people who knew their business best - Messrs. Schwarzman and James - were sellers. Forget about asset allocation and estate planning; these gentlemen took home tens of millions to hundreds of millions of dollars a year in pay. So to say that liquidity was a primary motivator makes no sense: it was simply about buying low and selling high. That’s what these people do for a living. 

So how did the story end? It started its public life trading under the ticker symbol BX. The stock popped from $31 to over $35 on offering day and has been worse than dead money ever since. It has oscillated in the $10-$20 range for the better part of four years, and currently trades at around $12. In short, while Schwarzman, James, Tom HIll, Pete Peterson et al sold shares at $31, IPO investors have gotten shellacked. This should come as no surprise given a stock that was priced for perfection and a savvy management team that was smart and motivated to hedge their personal exposure.

So what about Facebook? Like Blackstone, a great company and a leader in its field. Also a beneficiary of scarcity value given that there isn’t a public company quite like it that represents an opportunity for institutional or retail investors. And while its principals might not be the market-driven sharks like those running Blackstone, their investors firmly fall into this category. And while its business is indisputably powerful, the multiples being applied to its revenues and cash flows stress the imagination. Might it grow into its IPO price? Certainly. Are there significant risks to achieving this? Absolutely.

My Financial Times Op-ed concerning the Blackstone IPO was written over five years ago, yet a re-reading leaves me feeling as if I’m seeing the same movie five years later - except the company is called Facebook.

Will Jamie Dimon go down in history as the John Meriwether of this generation? Or perhaps the Nick Maounis of our time? Either metaphor can’t make the current CEO of JP Morgan feel very good about his legacy. And if I understand the trade properly, the end of the story is nowhere near being written. 

Banks hedge risks. This is what they are supposed to do. And when they don’t, the results have been disastrous (see: the failure of the S&Ls when their long-dated mortgage books were suddenly funded with short term, de-regulated deposits in the sharply rising rate environment of the 1970s). The best way to hedge is always through the cash markets, e.g., I loan out money for a period of time and assume credit risk, interest rate risk, liquidity risk and timing risk, but match fund the loan and mitigate three of the four risks (with only credit risk remaining, the precise thing that banks should get paid to do). The problem is, with the scale of banks and the increasing range and complexity of both business and retail products, match funding is a thing of the past. This risk gap is generally managed using derivatives. There is nothing inherently wrong with this.

However, problems arise when hedging strategies become excessively complex in their attempt to be as close to costless as possible and overly precise. As a long-time risk manager, the goal should be to mitigate risk to an acceptable level but to place a premium on hedge liquidity, transparency and simplicity. While a hedge might effectively hedge “delta” but not “gamma,” the best way to address this is to simply take on less gamma, not try to construct a sickeningly complex and illiquid hedge that models out beautifully but is essentially a custom suit on a person whose weight fluctuates wildly. Sometimes the suit fits, sometimes it looks like crap. And in JP Morgan’s case, they are sporting one of the ugliest suits we’ve seen in quite some time.

It actually reminds me a lot of LTCM. Super smart team. Could likely have put a man on the moon all by themselves. However, the bridge between theory and practice broke down in such a way that the global financial system was clearly at risk. Over a trillion dollars of notional risk supported by less than $5 billion of capital. And the strategies broke down in spectacular fashion because of what? Lack of liquidity and rising correlations. Hmm, lack of liquidity and rising correlations…that sounds a lot like what JP Morgan is facing at this very minute. And there is one other dimension that hastened LTCM’s decline and why the JP Morgan story isn’t close to being done - market knowledge. Once the market knew that LTCM was in trouble, the leaned hard against their positions until they cracked. Now LTCM’s capital base is a tiny fraction of JP Morgan’s, but what if $2 billion turned into $5 billion? Or $10 billion? Every sophisticated market participant is causing JP Morgan maximum pain, and it is simply a question of high-stakes poker. But let me assure you, JP Morgan is not holding many cards right now. 

The JP Morgan debacle also reminds me of Amaranth. While Nick Maounis didn’t run the firm-destroying natural gas trade (a trader named Brian Hunter did), he certainly must have known about it and if he didn’t, he should have known about it. There was a total breakdown of communication, risk management and accountability. Regardless of whether the Managing Partner made the trades, what does it say about their culture that a trader was allowed to put a bet-the-shop position on of that magnitude that blew through billions of dollars of LP capital? One could say the same thing about JP Morgan, Jamie Dimon and the CIO’s office. While the transactions in question may have been for hedging purposes, the risk rebalancing exercise rapidly grew to a scale that placed the firm’s capital position at risk. That this was allowed to continue in the face of rising market awareness (which serves to exacerbate the problem) is incomprehensible, at least to this former Wall Streeter.

I understand why Dimon continues to lobby against the strictest elements of the Volcker Rule, because banks should be allowed and, in fact, have to be allowed, to hedge their books. But when bank managements’ lose sight of the hedging mission and risk management and common sense discipline break down, they shouldn’t be allowed to lead. This is what the Volcker Rule should really be getting at.

If the goal is to do something exceptional, nothing is more important than building a great team. It is very rare that success is a truly individual discipline. Whether one is talking about world-class researchers, top-tier tennis players or sought-after start-up founders, stellar results are the outgrowth of carefully coordinated and chemically-balanced team efforts. I had the benefit of witnessing this first-hand during my Wall Street career and subsequently in my time as an angel and venture investor. The best leaders consistently attract and retain the best teams. But doing this requires a level of self-awareness and humility that is hard to find in nature. 

Team-building is hard because it is partly a function of filling in gaps, not only in bandwidth but also in ability and skills. And for super motivated, opinionated, stubborn, high-performing individuals, it isn’t always easy to say “I suck at this: I really need to get someone who is much better than me and from whom I can learn.” But the best find a way to do this. And this isn’t just about Mark and Sheryl or Larry, Sergey and Eric, but about every start-up, every large corporation, and every focused unit where there is a concrete mission and a need for diverse skills and perspectives to achieve the mission. Running a bake sale. A Little League. A product team. It doesn’t matter: the requirements are the same.

My experience in constructing the IA Ventures team is a microcosm of the team-building challenge. When I first conceived of the firm, I recognized that to fulfill my vision of being the go-to seed stage venture partner for all things data I needed several elements, many of which I did not possess:

• Deep technical and product knowledge, Ph.D-level depth plus years of practical experience, that could be used to both assess and advise companies on technical issues such as scaling, managing the release cycle and bridging the gap between technology and product. This is a skill set and range of experiences I definitely did not have.

• Operational start-up experience, as one who has started a company, built the infrastructure, models and controls, yet has the skill sets of a financial manager that can help advise seed stage companies on modeling, budgeting and tactical decision-making. My experiences touch these areas but don’t represent the ways in which I can personally be most valuable as an investor, adviser, mentor, strategist and partner.

• Higher-order financial modeling skills together with a voracious appetite and aptitude for understanding markets, analyzing the competitive landscape and constantly asking questions to keep our firm’s thinking rational and pure. This is an essential part of the connective tissue that keeps everything humming among the firm, the portfolio and the market.

To this end I went out and was able to lasso Brad and Ben, and subsequently Justin and now Jesse. They are all awesome but they are awesome not merely as individuals but because of the separate yet distinct roles they play on the team. Brad sits on a handful of Boards but has helped most if not all of IA Ventures portfolio companies as a sounding board on technical issues, tech recruiting, product roadmap and myriad other topics. Ben also has his complement of Board seats but has certainly helped the majority of IA Ventures’ companies with their budgeting, staffing and financing strategies. And Jesse is a gem of a resource that has literally helped several companies rebuild their financial models, perform very targeted research and stay on top of market developments. And I lead several investments while assisting all companies in our portfolio with financing strategy, business development, recruiting and ensuring that our portfolio company teams know each other and ways in which they might help each other. Rather than feel threatened that I have teammates and partners who are better than me at a bunch of stuff, I am so thankful that our team - the machine - is working well for the benefit of our company partners, our LPs and our firm. It was a very deliberate process and it has been the single most important thing I’ve done since starting IA Ventures. Without all elements of the team we wouldn’t be where we are today.

For the last 25 years I’ve been in pursuit of the perfect machine, that just-right group of people with whom to pursue a shared mission. Sounds a lot like the challenges of our founders, no? It is. Team first. Because with a great team, achieving even big, honking, seemingly insane and audacious goals are comfortably within reach.

I’ve written a lot about the importance of focus among start-up teams. This is a very closely held belief. Develop a hypothesis. Test the hypothesis. If proven, move forward and add gas. If disproven stop, take stock, and determine whether or not to gin up a new hypothesis or go home.

The same is true for investors. All the noise around crowdfunding, party deals and all-angel rounds changing the face of the venture industry doesn’t resonate with me. What it does say is that there is more seed stage capital available from a broader array of sources that will give more chances to more people to start companies. All I have to say is: Bravo!

But to be clear, I don’t perceive this as a threat to early stage venture for many reasons. As a venture investor who is comfortable with the way I and my partners do business, I am confident that teams which see the value in working with us will choose to work with us regardless of the other options out there. Also, more interesting businesses seeded by others provides us with additional data concerning product/market fit, adoption and engagement that can go into our decision-making and relationship-building process. Nothing scary here.

Also, I’ve found that many seed stage start-ups actually want a heavier-weight, more engaged lead investor than a more diffuse group of awesome investors but where no single investor has a deep commitment to the company’s success. I completely acknowledge that lots of start-ups don’t feel they want or need this at the seed stage, and that’s totally ok. But those often aren’t the start-ups that we’re investing in. It’s just not our game.

But the bottom line is that for us it isn’t necessarily about leading or following, small investment or larger check. It is much more about team fit and excitement for the mission. Because when there is great chemistry and trust between ourselves and our founder partners, the relationship tends to work itself out in ways that benefit both parties. We might want to buy up in the company, and the team is psyched to get us more involved and more economically aligned with them. And when this happens it is an incredibly exciting and fulfilling thing.

But the key message is: know what you’re about, forget about what other people are doing and be comfortable in your own skin. Successful venture investing is a long time scale business, and the results of investment decisions will stay with you for years. So be confident. Be comfortable. And by all means do not simply follow the pack because it’s popular. Make no mistake, it’s hard to stay strong against the trend when others seem really successful and are getting all the kudos. But don’t fall prey to this dynamic. Just play your game.

With the web afire with criticism over JP Morgan’s recently announced (and unexpected) $2 billion trading loss, a few “life lessons” came to mind as to how Jamie Dimon - and his PR department - bungled this badly:

Know the facts before taking a stand. When news of a “London Whale” came to light a month ago, and this trader was linked to JP Morgan, Dimon issued a strenuous denial that his was a big deal. According to the Wall Street Journal, and I’d tend to agree with them, Dimon didn’t understand the true extent of his trader’s activities or the risks it posed to the firm. Fast-forward to today: he looks like a terrible leader, one who allowed a trader one of the biggest risk books on the planet without knowing how it was impacting the firm’s financial position. Why on earth would he make a statement about this trader’s activities without truly understanding their impact in depth? His typical bravado backfired in this case. He should have heard the rumblings, did a deep forensic dive into the facts, developed a view and then communicated to the media. He chose not to follow this approach and got absolutely skewered. And deservedly so. He failed Crisis Management 101. Perhaps he should have learned from J&J’s handling of the Tylenol scare. Lives may not be at risk here, but given how far out on a limb he had gone in denying any problem (and now knowledge of the problem) his PR morass is pretty hairy.

Avoid taking self-righteous positions. For all the skill and opportunism with which Dimon navigated JP Morgan through the financial crisis, he has long touted his emphasis on risk management and on prudent risk-taking. He specifically sought to paint his firm as distinctly different than those “cowboys” at Bear Stearns, Lehman and the other investment banks. Better diversification. Greater breadth. Better risk controls. These were the hallmarks of JP Morgan as a world-beater, largely immune to the troubles of its bulge bracket peers. Both the communication breakdown and lack of risk controls giving rise to this massive loss are completely at odds with his characterization of the firm. If you put yourself on the top of Mt. Olympus, you are always prone to a nasty fall if messaging and reality are found to be mis-aligned - as they are in this case.

Stop thinking that VaR has any linkage with reality. While Dimon himself may not have been aware of the magnitude of the Whale’s risk position, certainly his risk managers were. And if they were using VaR, they should be skewered as should Dimon. Have we learned nothing? I was musing about problems with VaR and Sharpe Ratio six years ago, and in between we’ve seen the 2008 crisis and myriad mini-crises in between, and the fact that VaR is still a bedrock of financial disclosure - and financial risk management - is chilling. But hey, we’re still in a world where there are huge arguments over the imposition of true mark-to-market accounting rules, enabling financial firms to present something less than a true picture of how assets and liabilities are valued on a liquidation basis. We should isolate long-term assets and liabilities - those that are truly match-funded on a duration adjusted basis. Then we should look at those short-term assets and liabilities and look at the costs for hedging out the residual risks, understanding the market’s assessment of the true mark-to-market exposure. Why this isn’t current best practice for disclosure is beyond me, but at the very least these tools should be employed within all financial firms, not only the JP Morgan’s of the world (though given their systemic importance they should be mandated by both regulators and the FASB). 

Acknowledge that the SEC will forever be playing catch-up. The metaphors that come to mind are Network Security Specialists vs. Black Hat Hackers. Or WADA (the world anti-doping authority) vs. Steroid Using Cheaters. It is a classic good guys vs. bad guys conflict (though I am operating on the assumption that the SEC are the “good guys” - I believe they are trying, just failing). They are out-manned. Out-paid. Out-incentivized. Out of luck. The fact that Mary Schapiro just uttered “I think it’s safe to say that all the regulators are focused on this” is akin to the fire department showing up after the house has burned down. The system is broken. The accounting rules are flawed. Risk analysis and disclosure is flawed. And the regulatory framework is broken as well. Losses of this nature should not come as a surprise. They have and will continue to occur in the absence of common sense disclosure and elimination of all the obfuscation that has been allowed to pervade balance sheets for generations. It’s just that the ante has risen given the magnitude of the risks being borne, the inter-connectedness of the major players in the financial system and the complexity of the tools being used to take risk. It’s not your father’s bond and risk arbitrage portfolios any more: it’s derivatives of all shapes, sizes and liquidity. Until rigorous mark-to-market rules are enacted that facilitate the transparency required to regulate properly, the SEC is fighting a losing battle. All good things stem from transparency. But a broken SEC is good for shareholder-funded speculators. The longer it stays broken, the longer they get to continue making asymmetric bets in their favor (heads I win - tails you lose).

While to many the JP Morgan trading revelations might have been shocking, they should’t have been. The system for deeply understanding financial institutions’ risk is flawed, both inside and outside the house. Until this fundamental weakness is addressed, it doesn’t really matter what the SEC does. Our banks have more than enough latitude to get themselves - and our financial system - in trouble.

As a venture investor, I spend a ton of time trying to as helpful as I can be to my portfolio companies. Most of my regular contact is with the CEO and founder. I actively try to understand what they most need from me and to give it to them. Sometimes it is functional help: thinking through their financial model, hiring plans, financing strategy, etc. Other times it is help “closing the deal” with key accounts or recruits. But there are moments when what they really need is a confidant, someone whom they trust and who can give them truthful, unvarnished feedback and perspective in a safe environment. This is a role that I very much want to fill, but sometimes structural dynamics makes this hard if not impossible. The reason: as a Board member, I play an important role in reviewing and paying the CEO as well as potentially even relieving them of their duties. It is a relationship laden with potential landmines because of the issues such as fiduciary responsibility, money and power.

The role of the Board has been written about both extensively and well. Suffice it to say, a good Board is a very powerful tool for helping a CEO achieve a Company’s full potential. However, as noted above, members of the Board are not a proxy for a trusted advisers or independent mentors. They may act as advisers and mentors, but in a highly bounded manner because of their power to act on the CEOs words. External advisers and mentors have no such power and don’t have split loyalties, whereas the Board member has fiduciary duties to their own Limited Partners in addition to all stockholders of the Company. It is a delicate dance that by definition causes CEOs to avoid full disclosure and share the true depths of concerns weighing on their minds and in their hearts.

This is why it is critical for CEOs to cultivate a rich set of mentors and advisers to whom they can turn for hard questions and candid insights in a private manner. Building and running a company, especially a start-up, is incredibly difficult and stressful, and it is critical that the person bearing the brunt of expectations have a release valve. It’s just that this release valve sometimes can’t be a member of the Board.

As an investor and partner with management I believe deeply in the value of a strong Board of Directors. However, as an investor and partner with management I also feel passionately that CEOs have a portfolio of people outside the Company from whom they can get honest advice without worrying about disclosure. Both roles are essential to the building of a healthy Company (and the maintenance of a healthy and well-adjusted CEO!).  I have lots of experience playing both roles, and it is hard to say which one I like better. I think the potentially more interesting question is which role actually conveys the greatest influence - legitimate authority (as a Board member) or expert authority (as a mentor). It would make for an interesting debate.

Laser focus vs. keeping options open. This is an eternal struggle faced by start-up founders and corporate CEOs alike. While focus brings both purpose and increased odds of meeting a particular goal, leaders are plagued by the fear of “What if the goal I’ve achieved is the wrong goal?  I’ll have hurt the company, my reputation, my ego and my career in one fell swoop.” This dynamic was outlined in a recent Harvard Business Review article discussing Apple’s success in the wake of Steve Jobs’ return:

But then my Apple lunch companion wondered aloud: “Why don’t more CEOs bring greater clarity to what their companies should not be doing?” It’s a significant question. 

***********

In some ways, it makes perfect sense. CEOs often want to keep their options open. If they put all of their energy behind a single idea and it goes wrong, they will feel the full brunt of the blame. Yet, by pursuing too many priorities, these CEOs may actually be risking future success even more.

My friend and co-investor Mark Suster raised a similar point in a post published today:

It’s tempting to take on new projects, new features, new geographies, new speaking opportunities, whatever. Each one incrementally sounds like a good idea, yet collectively they end up punishing undisciplined teams. I like to counsel that the best teams are often defined by what they choose not to do.

This is an area where we spend a tremendous amount of time with our companies. We are passionate about focus, especially at the earliest stages where distractions often mean not shipping software, and not shipping means not being close to customers and getting feedback, which essentially means flying blind. Once a start-up begins living in its head and not in the market working to make customers happy, the chances of actually achieving happy customers and product/market fit fall off a cliff. This frequently happens in nascent markets, where the possibilites to make customers happy seem endless and inexperienced but eager managements want to keep all options open until it is virtually certain what customers want. In real life, however, this is not the way it works. 

Success - and failure - is bred of having a hypothesis, aggressively testing that hypothesis, collecting feedback, seeing if the original hypothesis has been proven or disproven and going from there. If the hypothesis has been proven, fantastic. Live close to the customer, identify KPIs, use cohort analysis to inform tweaks to optimize the user experience and scale like crazy. If the hypothesis has not been proven, however, there are a few options:

1. Pack it in - you are far away from something real people care about and the learnings you’ve derived don’t spark a new and better hypothesis;
2. Refine the original hypothesis - while you haven’t demonstrated product/market fit and created happy users, you have learned enough such that the original hypothesis can be modified in light of user feedback and a new product can be developed an introduced. 

Either of these are perfectly reasonable outcomes, because they involve being in the market, testing with real users and applying the full resources of the company to the challenge of achieving product/market fit with a single product. It is hard to do this in a disciplined manner with even one product much less a diffuse set of products, ideas or hypotheses. In order to really test a hypothesis I believe founding teams need to “burn the boats” - go all-in on a particular hypothesis and see it through. While it might seem smart to keep options open by spreading resources across several initiatives, in reality this only lowers the likelihood of any one initiative actually succeeding. Making customers happy requires maniacal focus, focus that is impossible to achieve when preserving optionality is a primary goal.

Venture capitalists have inherent optionality by virtue of portfolio diversification. Great entrepreneurs have no such luxury. They are all-in on a particular idea or hypothesis. It succeeds or it fails, is proven or disproven. If failure is done well, it can either lead to success in the current venture or spark success in future ventures. Founders who fail well are generally viewed with respect by the angel and venture communities and have the chance to start over. This is where valuable “founder optionality” comes in. But intra-venture founder optionality? I don’t think so.

Founding is hard and scary yet also emancipating. If you’re going to do it, then do it. Don’t hedge. Go all-in and do it well. Because if you do, succeed or fail, you will have the kind of optionality that really matters - the chance to try again. 

Building is hard. It just is. Great builders have bold visions, boundless passion and ample energy to achieve the mission. However, great builders also find it necessary to course-correct based upon objective data, subjective input or gut feel that synthesizes both quantitative and qualitative factors. At accelerators the term “mentor whiplash” is bandied about to describe the myriad perspectives received by start-up teams, much of which is conflicting yet delivered by credible people. Who is right? Who do you trust? There are no easy answers.

This is an issue I personally experience every day in the building of IA Ventures. I came into the business with several hypotheses about investment theme, investment selection and portfolio construction. I also had several hypotheses about the way we should engage with teams, participate in financing rounds and take board seats. There are a large number of variables at play with few clear “dos” and “dont’s” marking the path. And to make matters even more confusing, there are people whom I respect greatly that are taking vastly different approaches in how they invest in and advise companies as well as shape their portfolios (think 500 Startups vs. Union Square Ventures). Who is right? Who is wrong? Who knows. Nobody does. It is easy to get caught up in the advice and approaches of others and to lose yourself in the process. Successful builders do not let this happen. 

I’d love to say that if only founders followed a particular path they’d be assured that their company would achieve its maximum potential. Reality is quite different. Having deep conviction around solving a specific problem or engaging users in a meaningful way is the essential element for starting a company. From there, however, art and science diverge. As you build the company, shape the product and spend time working with and trying to acquire customers, you will collect a bunch of data. This data will give you a sense of whether or not you are on the right track and if a broader array of users perceive your product’s value in the way you do. You will also likely observe others in the marketplace, both direct competitors and those whom you aspire to be which will influence your thinking. You might also have mentors and advisers with relevant experience and perspective who will weigh in, filling out the information mosaic.

Distilling relevant input and shaping the product  without losing the essence of the vision and mission is the delicate balancing act most founders face. Some founders hit product/market fit just right the first time. But the overwhelming majority do not. They have to synthesize massive amounts of structured and unstructured data and make good decisions. This is the magic of great builders. 

As I reflect upon my own learnings, I have tremendous empathy for the challenges faced by founders. To have conviction but to avoid being pedantic or foolishly stubborn. To be flexible and adaptive but to maintain the essence of the mission. Being a great builder, whether in start-ups, large corporations or any other place where leadership matters is a matter of balance. And achieving balance requires confidence. NB: Great builders are confident - make no mistake about that.

My friend Dave McClure’s thoughtful and provocative post on the scaling of venture capital made me think. It definitely rubbed me the wrong way and I think I know why - because I don’t take it as a given that venture firms, by definition, should scale, whereas the premise of his post seems to be that we as an industry are failing by not doing what we are telling (and hopefully helping) our companies to do. I think this grossly simplifies what “venture capital” means and holds it to a false standard that isn’t helpful to building big, disruptive, awesome companies.

Entrepreneurs are the customers of the venture investor. A big difference between the VCs customers and those of, say, Dropbox, is that there is far greater heterogeneity among the VCs customers. While there are myriad use cases for Dropbox, the scope of product that satisfies those use cases is well-bounded. Not so among the VCs customers. The range of variability arising from different personalities, experience levels, competitive landscape, skills sets and team chemistry creates a need for what I’d classify as a “customized” product. It is more akin to a custom-made suit than a pair of athletic socks. It is not a game of portfolio diversification: it is a craft, with each company as its own discrete project warranting that level of attention, guidance and support. This, of course, presupposes that the venture investor actually adds value, versus the view that money is fungible and investors are undifferentiated.

I can’t speak for the entire industry but I can certainly speak to a sizable group of venture investors I know who definitely have a material positive impact upon the performance of their companies, and I certainly hope IA Ventures falls into this bucket as well. Because if money is really all that matters, then why is there a perceived hierarchy in the industry at all? Why should one firm’s historical performance or star partners give them an edge over anyone else? Answer: because it does matter. Great investors make a company more valuable by helping the team think strategically, recruit, react, problem solve, make difficult decisions and handle hard times. And it is this value that can sometimes lead a company to choose a lower offer from one partner they think can make the enterprise much more valuable than another. It actually can be rational to take the lower offer in the short term for a far greater payoff in the long term. 

Investors like Dave play a hugely valuable role in the startup ecosystem and help lay the foundation for others who manage smaller, more focused portfolios and are able to invest a lot more capital and to spend a lot more time on a particular company. I do not believe the industry would be best served by all firms looking like 500 Startups. Venture investing is its own “attention economy.” There simply isn’t a way that a great partner’s attention can scale beyond a certain point, and then the question is whether or not providing a lot of attention to a smaller number of companies into whom one has invested larger dollars makes sense. I personally think it does and have built my business around this premise.

I believe firms like IA Ventures play a vital role in the company building process, just a different role than investors like 500 Startups. And I can assure you, we don’t scale well. I actually think scaling in venture capital has rapidly diminishing returns beyond a small number of investing professionals, when the weight of organization begins to place a tax on attention beyond what is spent working with companies and getting valuable input from one’s partners. This is why I respect firms like USV and Foundry who have a commitment to remaining small and working closely with their portfolio companies.

In sum, I applaud Dave and the transformational effect he has had on the seed stage investing scene. I think start-ups could definitely benefit from more firms like 500 Startups. However, I think it is a valuable but insufficient component of a robust venture capital industry. I fundamentally believe concentrated attention can be value accretive, but that this type of engagement doesn’t scale. So what - why does it have to?

A recent tweet from friend Aaron Pressman reminded me of a long-standing deception that needs to be corrected - clarity around the meaning of “free” and “no fee.” In the article Aaron cited, both BNY Mellon and State Street are are being sued by state pension funds over lack of truth in marketing around foreign exchange trades. In essence, trades which were represented as being “free” or “based on market prices” resulted in transactions which in a competitive environment generate small but low-risk profits for executing banks but yielded massive profits for these firms. Why? Because they played fast and loose with the actual exchange rates. Was there a “fee” in executing a foreign exchange trade that didn’t have an explicit charge but resulted in an actual profit that resulted from off-market execution? Is a trade based on “market prices” that takes that market price and increases the execution spread by, say, 10-fold? Well…

The amazing thing is that these techniques form the very foundation of the money transfer business. How often do you walk through airports and see words like “no fee money exchange” and the like over those little booths with the thick glass staffed by young, well-coiffed people sporting big smiles? I do all the time both here and abroad. And you know what? They make a fortune. Why? Because while there isn’t an explicit fee, the bid/offer on the foreign currency transaction is mind-boggling. It is among the most attractive businesses on the planet - at present. It is a shining example of false advertising, as well as lack of transparency around the economics of the relationship. And it’s not just the money changers that follow this practice but large banks as well. Try and wire money cross borders and people are focused on the wire fee, while all the real money is being made on the spot currency transaction. No risk. Almost infinite ROI for the banks. 

What we’re now seeing being litigated in the institutional markets has been happening in the retail markets since the beginning of time. It’s sleazy. it’s wrong. And it’s time to fight back. I have no problem paying for value and compensating parties for risk, but I don’t like being ripped off or seeing others getting fleeced, either. While BNY Mellon and State Street are have their practices challenged by deep-pocketed pension funds, what about the small retail customer that needs to send money home or move money across border to pay for educational expenses or rent? Aren’t they due the same square deal?

Talk about an area ripe for disruption…

I’ve had the words “deal hunting” written on a yellow stickie by my desk as a reminder to  write a post on how we compete for investment opportunities. Then Fred’s recent post Coming of Age helped to further clarify my thoughts on the matter. I think this issue is most relevant for younger firms who have yet to create the brand value and track record of a Sequoia, Kleiner, Union Square or Foundry, but is still important for the platinum-branded partnerships lest they get lazy and risk getting lapped by hungrier, newer firms. One need look no further than the impact of Andreessen Horowitz to know that new firms can - and will - disrupt the historical pecking order through innovative approaches to working with entrepreneurs. 

As the leader of a young firm, I think I’ve got a pretty good lens on the challenges of newness and competing in a highly competitive marketplace against much larger, more established partnerships. Ultimately IA Ventures’ success will be a function of partnering with great teams in areas ripe for disruption where the opportunities for building big, important businesses are high. But how do we even get the chance to work with these great teams when there are so many other firms from which to choose? And how do we convince these teams that we’re in it for the long-term, and willing and able to support them through the inevitable early bumps and stumbles?

Upon reflection, I think you can break IA Ventures’ strategy for differentiation into three essential elements:

1. Focus
2. Engagement
3. Long-term perspective

Focus

When I started IA Ventures back in 2009, I articulated a vision laser-focused on the creation, management and extraction of value from large, often real-time data sets. Why? Because data and its effective management is going to change the world and be the catalyst of change for a generation. It is a thematic, geography-agnostic approach that cuts across industry verticals. The vision encompasses both core technologies and applications and involves building an investment team with expertise and passion in these areas. Bringing on Brad and Ben were the first steps, followed by Justin, Drew and Jesse. Deep technology, data, infrastructure, hacking and financial expertise. And most importantly a passion for the mission. We put a stake in the ground and worked hard to build awareness across the entrepreneur, data science and business communities that we aren’t messing around in data: we are ALL ABOUT DATA. And it is crystal clear that our investment focus, skills, relationships and interests support this strategy. This has been a boon for our firm and our portfolio companies, as it has created beneficial network effects among our companies. Different companies. Different missions. Data and data-related technologies at their core, with IA Ventures being the connective tissue linking them together.

We have also sought to catalyze an ecosystem around our mission and focus, aided by our relationships across the various communities of which we are a part together with our portfolio companies. We have also worked hard and brought our energies, expertise and networks to awesome programs such as Techstars and HackNY. I don’t think there is much ambiguity at this point about what IA Ventures stands for, or the kind of value we can bring to our portfolio companies. Some companies will want it; others will not. But by being extremely clear about our focus and demonstrating this in myriad ways, we have sought to create an identity and an edge that helps us become the preferred partner for particular teams. 

Engagement

Different investors have different styles, and founding teams need to figure out what they really want because the range of engagement differs massively. At IA Ventures, we are unapologetic about our high level of engagement. Hopefully not in the annoying, stereotypical VC way of being micromanaging yet ultimately unhelpful, but by bringing our deep domain-specific knowledge and web of relationships to our partners. And make no mistake: we do not think of our companies as “investments” as one thinks of chess pieces arranged on a board. We work hard to function as partners with our founders, and to establish a level of trust and rapport that makes difficult but honest feedback safe to deliver. Vinod Khosla has been a great mentor in this respect: he hates referring to himself as an “investor,” when he really feels and acts more like a partner or as a co-entrepreneur. We completely buy this perspective and work hard to engage with our companies in this manner.

Part of the reason we run as concentrated a portfolio as we do is to have the time available to be active and productive partners, particularly in ways that can materially impact the outcome for our companies. The entrepreneurial ecosystem is pretty small and companies share notes. There is an efficient information economy in how venture firms interact with their portfolio companies, spanning the range of the good, the bad and the ugly. I believe that the way we engage with our companies has created a positive reputation that has helped us in the marketplace, and solidified our position as a preferred partner for many kind of companies. And while I don’t have any hard data to support this notion, the anecdotal evidence is pretty strong. Regardless, this is the way we roll, and ultimately believe that this is the way we can best help our companies achieve their full potential and to create superior financial returns for our Limited Partners.

Long-term perspective

If there is one thing investors in early-stage companies come to know, it’s that there is seldom a linear path to success. In fact, it is rare that the business which ultimately succeeds is exactly the business that was envisioned at a company’s inception. And coping with these inevitable zigs and zags during a company’s early days requires both a cast-iron stomach and model that supports experimentation, discovery and change. Writing a company off at the first signs of trouble? Not helpful. Being punitive and angry when early targets are missed? Also not helpful. Mentoring and coaching young teams with whom you’ve decided to partner because you believe in them and giving them time to test, collect data, fail, test, collect, adjust, iterate, move into production and mature? Much better. We believe that if you are truly committed to investing in early-stage companies then you have to provide the necessary support and time to discover the right business and model. Sometimes this involves providing additional financial runway. Sometimes it doesn’t. But it certainly means a mind-set of partnership and patience in order to let the team whom you’ve backed to give it a real shot. And if they ultimately do demonstrate product/market fit and traction that warrants additional investment, that you’ve reserved additional capital to support the next phase of their development.

Much as running a concentrated portfolio enables us to be truly engaged partners, it also provides us with the financial capacity to reserve heavily for follow-on rounds, such that we can lead seed, Series A and and even Series B rounds, and to do pro ratas when other great investor/partners join the investment group. We have always taken a life-cycle approach to investing while initiating our investments at the seed or Series A stage, and believe this is another way we’ve created a positive reputation in the marketplace that is valued by both our current and future founder-partners.

At the end of the day the most important thing is to be true to yourself, your mission and your partners. The IA Ventures strategy has been to line this stuff up and to execute our plan. And while we’re still a young firm and have a ton to learn, I think we’ve done a pretty good job creating an identity, reputation and track record that is appealing to many of the companies with whom we want to partner. But we can - and we will - get better.

Issues such as “portfolio construction,” “reserve policy” and “forced rankings” don’t make for sexy reading, but in my opinion are critical elements to building and managing a successful venture investment portfolio. Given that I am trying to build the best venture partnership I can for the long-term, I am seeking to optimize across three dimensions: (1) Generate the highest cash-on-cash returns for our LPs; (2) partner with and assist early-stage companies to build truly transformational businesses; and (3) earn a reputation among entrepreneurs as the “go to” partner in our key practice areas. Seems pretty straight-forward, right? In practice it is not a trivial matter.

Consider the breadth of the venture investment spectrum. On one end there are individual angels writing $25k checks into concepts scribbled on the back of napkins to quasi-private equity pre-IPO investing and everything in between. As a long-time market practitioner, my goal has always been to identify the optimal point along the “efficient frontier.” Most frontiers are not smooth lines but jagged functions where there are certain spots that yield superior returns for a given unit of risk. The question is: where, if any, do these points exist in venture investing?

It is easy to conceptualize the trade-offs at the extremes. Extremely broad angel portfolios are trying to capture the generational outliers (Facebook, Google, etc.), while having small absolute dollars and percentage ownerships in each of their portfolio holdings. More concentrated late-stage funds are calibrated around 2-3x exits with sharply lower risk with time horizons dramatically compressed relative to early-stage investors. But what is less clear are the risk-reward trade-offs among larger seed, early Series A, mature Series A, Series B and Series C rounds.  Obviously owning more earlier is better - if you are right. But being right is still a very risky proposition particularly in seed and Series A investing (though some professional LPs view even Series B companies as having experienced limited risk reduction), which begs the question: unless you are going to build a massively diversified seed portfolio, does doing seed investing really make sense at all? And if you’re not going to do a diversified mix of seed, Series A and Series B, does it make sense to play at these stages or rather move towards the Series C/D/E “growth” end of the investment spectrum?

From a pure math perspective, if someone wants the opportunity to secure truly extraordinary exit multiples, ownership needs to be established before the growth capital phase. While institutional LPs are generally happy with 2-3x cash-on-cash returns from this portion of the investment spectrum, it is because mortality is dramatically lower than in earlier stage investing and exit multiples reflect this lower level of risk through higher prices paid. It also follows that the variability of these returns is much lower than in early stage venture. In my discussions with experienced institutional LPs, my sense isn’t that they expect to achieve multiples well in excess of this across their early-stage portfolio, but that there is a meaningful chance that they can, e.g., a return distribution that exhibits positive skewness. In essence, whether they acknowledge it or not, that they are trying to isolate upside volatility while backing a set of managers with sufficient geographic, thematic and stage diversification to avoid extreme downside outcomes. Each LP has their own view of portfolio diversification which differs from that at the fund level. For instance. I can intuit that my partners are not interested in IA Ventures “diversifying” for diversification sake - they are doing that themselves at the portfolio level. They want me to try and identify potentially extreme outcomes and to invest as much capital in those few opportunities as I possibly can. But as a manager running my own business, I am conscious of trying to achieve my own optimal mix of risk and return, LP agendas notwithstanding. Besides trying to help my companies as best I can, this is the issue that gives me many sleepless nights.

Our thinking at IA Ventures has evolved during Fund 1 and into Fund 2. One basic premise under which we operate is that our tight thematic focus and domain expertise helps us filter, and requires a smaller portfolio in order to achieve the diversification benefits of larger, more generalized portfolios. For our $50 million Fund 1, this meant a portfolio of 20-22 investments from which to hopefully identify 4-6 investments that will generate >10x type returns. Further, it is necessary that we own enough of these >10x investments to drive an overall portfolio return of at least 3x (and hopefully higher). Given the ownership requirements in conjunction with our modest fund size, our belief was that we’d need to establish the lion’s share of our positions at the seed stage in order to achieve our initial ownership targets (and subsequent pro rata rights) and execute the plan. And this is exactly what we did in Fund 1 - 21 investments, almost all established at the seed (or pre-seed) stage, with a tightening distribution of who our likely breakout winners are and with reserves flowing to those companies as they scale. The good news is that we’re executing the plan. The challenge is that when you make 21 early-stage investments and hold 14 board seats, this kind of seed stage partnership takes tons of time and scales very poorly. It is a labor of love but make no mistake, the labor is extreme - and necessary.

As we’ve grown our Fund 2 to $105 million, we find ourselves re-thinking our philosophy around entry points, risk/reward and scalability. Let’s assume that our target portfolio in Fund 2 is 24-26 companies with 6-8 that will hopefully generate outsized returns. We could continue with our existing entry philosophy and start almost exclusively at the seed stage, and reserve massively for follow-on rounds. Or we could enter our positions across a range of early stages - seed, early Series A, mature Series A - and trade some skewness for risk reduction and scalability. As of now, we are pursuing the second option. We’ve already done our first “real” Series A as an entry point (Next Big Sound), an “early” Series A (Visual Revenue) and two seed investments (Drawn to Scale and one yet to be disclosed). In the cases of Next Big Sound and Visual Revenue, though still early they have fully-formed products, have achieved clear product/market fit and have built-out leadership teams. This is materially different than almost any investment we initiated in Fund 1, simply because they’ve been at it longer and have gone through the “seed hell” that every start-up naturally endures as they move through the idea-prototype-beta-commercial product life cycle. Did we pay more for these than we would a classic seed investment? Yes. Do we believe it has pushed us to a favorable place on the risk/reward continuum? Yes, we do. So using this model we’d expect to establish ~4-5 positions at the mature Series A stage, 10-12 positions at the early Series A stage and the balance in seed investments and incubations. So while true seed will continue to be a core part of our portfolio construction, it will not dominate as it did in Fund 1.

The more time I spend in early-stage investing the better I understand why so many successful managers have migrated towards the $200-$250 million fund size. They are actively seeking to optimize just as we are, but have a distribution that is more skewed towards mature Series A (and perhaps Series B) entry points versus the average early Series A entry point that we have in Fund 2. They can do this because of the larger size of their bankroll: they can write larger initial checks and pay higher valuations in order to achieve significant ownership in companies with still a lot of room to run. But as the numbers plainly show, even assuming an average 20% ownership position at exit you’re talking $3-$4 billion in gross exit value to achieve a 3x return. This is a high bar, simply too high for us at our stage of evolution. But for seasoned managers who have been through multiple cycles and have a proven edge, I can get why this fund size is a kind of magnet. Lots of flexibility. Lots of reserve for a “rainy day” (or weeks, months or years). Yet not unmanageable.

The sphere of portfolio construction has fascinated me for years, first in the liquid markets now in the least liquid of markets. This will be an ongoing conversation…

GigaOm recently published an interesting article on Oracle’s challenges of shifting towards a “metered pricing” model. From my perspective it raises a series of fundamental issues addressing how enterprises buy and consume software: 

• Is the classic enterprise software licensing model a dying vestige of a prior generation?
• Can legacy enterprise software-driven firms make the cultural transition to a more flexible, SaaS-based approach?
• Can publicly-traded firms constrained by quarterly earnings targets make the painful financial transition implied by this shift?

Oracle’s circumstance is merely a microcosm of the larger issue. As a business owner, would you rather:

• Have multiple parties from which to choose with relatively low switching costs, thereby minimizing lock-in?
• Only pay for the stuff you actually need instead of purchasing at all times for peak capacity?
• Be able to ramp up and ramp down users and usage on an a la carte basis?

The answers seem fairly clear. The “as a service” (aaS) model is, in general, preferable to enterprise-wide software licensing due to smaller upfront investments, lower switching costs and greater flexibility for managing scale. This also enables centralized software upgrades, the ability to manage either in-house or cloud deployments and yields smoother operating cash flows.

So if more and more customers want software as a service, then why is the transition by the biggest incumbents, such as Oracle, taking so long? 

Selling enterprise software is like a drug. Big ticket sizes. Hefty annual maintenance charges. Heavy switching costs. This is why big-time enterprise software sales professionals get paid massive commissions and are often the best-paid people in the company. It is hard treadmill to jump off of, however, because the cash flow dynamics of enterprise software vs. SaaS are very different, and the impact of shifting from one model to the other is dramatic. Enterprise sales are about closing the big license then moving onto the next one (until the periodic upgrade, of course!). The result is large yet choppy cash flows (as annual maintenance is a fraction of upfront license value) unless you can continue to churn out big-ticket sales year in, year out at an increasing rate. Great companies can do it for years by continuing to sell license upgrades and closing new deals in a greenfield market. However, as the market gets saturated this becomes harder and harder, and when compounded by a sea change in the way businesses actually want to buy software the forces of gravity become too strong to withstand.

So what about shifting to SaaS? Well, there is good news and bad news. The good news is that SaaS companies, such as Salesforce, have successfully built huge amounts of something called CMRR - Committed Monthly Recurring Revenue. What this means is that as they sell more seats under 1 and 2-year agreements, they are building an ever-increasing cash flow annuity that is easy to value and kicks off large amounts of free cash flow. Selling costs are far smaller than in enterprise software because the upfront commitment is measured in the hundreds or thousands of dollars, not hundreds of thousands, millions or tens of millions of dollars. Let’s just say that the CIO and CFO aren’t getting involved in the procurement decision for a long, long time. Further, there are often big up-sell opportunities within existing accounts as they often start with small numbers of seats to test out the service and then grow over time, so it is not merely a game of finding a whole new set of companies to generate top-line growth. This is all good stuff.

HOWEVER, the bad news is that those big upfront sales that the legacy enterprise software model generated? Gone. And the time it would take for high-quality, recurring monthly SaaS sales to begin to approach the lumpy but large enterprise software sales is significant. This is a level of creative destruction that is hard to see being embraced by a large software company, particularly a public company. In fact, I think it would be almost impossible without building a Saas business line along side the legacy business line and eventually selling the legacy business to private equity investors who will see it as a valuable but depleting asset (not unlike an oil well). This way, the old-line company could leverage its long-term relationships during its SaaS transition before casting off its original but antiquated business. Alternatively, Mr. Market might eventually make the decision blindly straightforward. If the service-based software model does become the format of choice for acquiring a particular set of capabilities, then enterprise software multiples will plummet and render these companies takeover targets for private equity investors, anyway. Either disrupt oneself or become forcibly disrupted. This is the feature of fast-moving, innovative and highly competitive markets. Good for customers. Good for growth.

I personally saw this painful transition in one of my angel investments, a company called Global Bay Mobile Technologies. They have a great mobile data collection product that was initially sold into Government agencies. These deals were sold either direct or as a packaged solution through systems integrators. The sales cycles were painfully long. The working capital required to fund the business was significant. But when these licenses were sold, they were very profitable. However, the company saw uses for its technology that extended far beyond Government, into retail for inspections, “line busting,” and other store-based applications. Companies wanted to buy their software in small bites, testing it across a small number of stores before expanding across an entire geography or chain. In short, a SaaS sale. So the company made the tough decision not to sell any more enterprise licenses and to bet its future on SaaS. Revenues initially fell. Cash flow fell, too, as software needed to be re-tooled to function as a SaaS platform. But what resulted was a stream of consistently rising CMRR resulting from a great product, a low-cost initial sale and myriad up-sell opportunities within existing accounts. Eventually, the company caught the eye of VeriFone who purchased Global Bay in Q4 2011. It was a happy ending, but one that took a ton of work, wrecked the financials for 18 months and thankfully happened away from the peering eyes of the public markets. 

How enterprise software companies manage this competitive imperative will be fascinating to behold. But rest assured, this transition, be it going private or trying to make this shift in the public arena, will provide fodder for many case studies for years to come.

I have been thinking a lot about what a data scientist really is and how we, as academic and business communities, can help more people develop important data-driven skill sets. But every time I use the term “data scientist” to describe what I’m seeking something doesn’t feel right. Probably because “scientist” to me implies something being done in a lab, not in the external world. Perhaps it’s because when I think of data scientists I am thinking about people who pursue Ph.Ds and focus on research, while what I’m really talking about is something entirely different. What then?

The Data Entrepreneur. This is related but different field of study, one that is laser-focused on application versus research. It is a broad-based interdisciplinary program that integrates topics such as software development, data architecture, algorithmic development, database management, machine learning, statistics, optimization, user experience and web design, with classes in entrepreneurship, finance, management and leadership, marketing, data hacking (taught by people from start-ups) and extensive field work. Essentially, taking classic informatics that blend CS/Engineering and Math/Stats and melding it with Entrepreneurship, business foundations and workplace experience. These people will be equipped to both solve hard applied data problems and start companies. By having the knowledge of how to manipulate data and the empathy and experience of leveraging data for the benefit of the enterprise (social or commercial), these are people who will have the skills and perspectives to change the world.

This is a work in progress, but as data sits teetering between opportunity and crisis we need people who can shift the scales and transform data into real assets. And the conclusion I’ve come to is my attempt to re-define the Data Scientist is the wrong approach. I’m talking about a whole new class of people: the Data Entrepreneurs.

I’ve been thinking deeply about the need for more people facile with extracting meaning from data - or a “data scientist” for lack of a better term. My friend and colleague Drew Conway developed a useful model for thinking about the attributes of a data scientist. He essentially views this individual as sitting at the intersection of three spheres of a Venn diagram - Hacker/coder, Math/stats and Domain Experience. The data scientist, therefore, has the coding tools and analytical rigor that when applied to a specific domain can yield valuable insights.

I love Drew’s framework because it gets to the single biggest issue I’ve seen lacking in many brilliant Ph.D’s who have “data scientist” written all over them yet fail to translate knowledge into production code - applied knowledge. In fact, Drew is a very accomplished data scientist in his own right yet achieved this standing with only an undergraduate degree (and not from Stanford, Caltech or MIT, mind you). My point is this: the ivory tower notion of a data scientist is total bullshit. Can a Ph.D play the game? Sure. But does one need a Ph.D to be a successful data scientist? No way. 

I can easily see a cross-disciplinary undergraduate degree in Data Science conferred by the schools of engineering, information sciences or business. It would be a mix of classroom, lab and field work, with fundamentals of coding, CS and user experience, mathematics and statistics and marketing and strategy. For those wishing to delve more deeply into one of these areas, an optional fifth-year Masters degree could be offered. And yes, there will be those for whom a Ph.D is the goal either because of a desire to enter academia or to perform original research. This is perfectly awesome as well. But becoming a skilled data scientist focused on application versus theory does not, in my experience, substantially benefit from a Ph.D. In fact, it may do the opposite. 

The data scientist v2.0 will be out in the world applying their skills to real-world problems, not toiling away in a lab, in solitude. The will get better and better by having more of these real-world experiences from which to hone their hypotheses and glean their insights. And yes, collaborating with a larger pool of data scientists about better techniques for achieving these insights will help as well. Perhaps the Academy will not appreciate my perspective on this matter. But I am not of the Academy. I respect and value the Academy but believe there is much to be learned - that must be learned - on the outside. And this will be part of the fiber of our next generation of data scientists: of the people, by the people, for the people.  

Last week I spent two glorious days deeply engaging with my alma mater, the University of Michigan, and the Ann Arbor tech community. I had the privilege of presenting at the Ann Arbor New Tech Meetup (thanks, Dug!), exchanging ideas with the Wolverine Venture Fund, and spending lots of time with professors and heads of different programs and institutes such as the Zell Lurie Institute, the Center for Enterpreneurship and the School of Information. I also got to see Ann Arbor’s take on the collaborative start-up model, Tech Brewery, which houses some very cool companies. My 48 hours in Ann Arbor were a whirlwind that left me both amazed at the progress the University and the community have made towards fostering entrepreneurship while keenly aware of how much more there is to be done. It also reinforced my already-existant mission of wanting to re-think exactly what a data scientist is and, in its wake, how we help create more of these people towards building a better future. 

One thing I noticed at Michigan is how developed and entrepreneurial its Office of Technology Transfer is relative to many of its peers. My sense is that because of Ann Arbor’s physical location (a land-locked jewel of innovation), it has had to be incredibly scrappy and experimental in order to achieve its goals. There simply aren’t the deep network effects that exist in San Francisco/Silicon Valley, New York/Silicon Alley or Boston/Cambridge. And while it is still early in the game, they have done a great job cultivating relationships across the University and working closely with the departments to get technology successfully spun-out from the School (kudos to Wes Huffstutter for greasing the wheels of cross-institutional progress). But the fact that “tech transfer” at Michigan doesn’t conjure up thoughts of the usual hard-to-work-with, inflexible bureaucracy is a tribute to what they’ve accomplished in the past decade. Other schools have much to learn from Michigan’s progress.

I was also impressed with the pockets of entrepreneurship across the schools of Business, Engineering/CS and Information. Yes, these efforts are still way too concentrated within the programs as opposed to truly horizontal across the University, but these efforts give me hope that collaboration-as-necessity will eventually break down these artificial boundaries over time. But the energy an enthusiasm from the program heads, mentors and entrepreneurs themselves is palpable. It is hard not to get caught up in the excitement of what is going on and how much more could be going on, and better, too.

What Ann Arbor currently lacks is a bunch of successful exits where the entrepreneurs re-invest back into the Michigan ecosystem. Firms like Google, Facebook, Twitter and IBM descend upon Ann Arbor to hire the best and brightest, and several tech firms are establishing local presences. However, for the flywheel of entrepreneurship to take hold companies need to be be invented and built in Ann Arbor, with founders coming back and seeding businesses locally after they’ve had an exit. They also need to start new companies as experienced entrepreneurs in order to deepen the management talent that is sorely lacking. A local start-up will get funded but then relocate to Silicon Valley or New York, and this has to be ok. But it is important for people to remember where they came from and got their break. Ann Arbor needs this kind of memory to keep the Michigan diaspora engaged and invested in the University and Ann Arbor ecosystems.

Also, my sense is also that there is not yet a robust software-knowledgable base of angels around town. Life sciences has historically been very strong as well as businesses related to the auto industry, but pure software does not have the same shape as these legacy businesses. Start-ups in general, and software start-ups in particular, can look really ugly. A few coders in a little crappy office or shared work space is what a software start-up almost always looks like. Yes, they might be building a profound product but it doesn’t look like a “real” company to inexperienced eyes. More experienced angel eyes are needed in A2 to help nascent companies move beyond Friends & Family and get to a real seed round.

While I’ll deal with my view of the next generation of data scientists in a subsequent post, I am incredibly interested in helping to build a dedicated program towards this end at Michigan. All the pieces are there. It just requires some cross-departmental cooperation in order to bring it to life. This is one of my missions for my alma mater: help to pull together a data science program that empowers student/practitioners to solve tomorrow’s problems today. It can be done. It must be done. It will be done.

The facts are straight-forward. We just closed IAVS Fund II. This new fund, at just over $105 million, allows us to pursue the same investment strategy we followed in Fund I – investing in companies that create competitive advantage through data. Just like Fund I, we will continue to invest in strong founders at the Seed, Series A, and even sometimes Series B stage. As part of this fund we will reserve even more heavily for follow-on investments, continuing to view our initial investment decision as the beginning of a long and rewarding relationship.

While the facts may be straight-forward, the path to building a venture firm like IA Ventures is far more complicated and nuanced.

Over two years ago we launched IA Venture Strategies I with $17 million in initial commitments, hell-bent on executing a thematic strategy focused on Big Data. In those early days, we had the good fortune of investing in a number of fantastic companies. Building on our initial success we raised additional capital, eventually closing at $50 million in Q4 of 2010. This provided us with the resources to implement the early-stage life-cycle strategy of which we had originally conceived.  

Fast forward to late Q3 2011. We had a portfolio of 21 investments with significant reserves held for future rounds. We had led seed rounds, Series A rounds and even a Series B round. We had exercised follow-on discipline and invested as much time and capital as possible in truly disruptive companies as well as those which already had demonstrated traction. But when looking at our reserves, our portfolio companies needs, and our interest in supporting their continued growth, we concluded that we really didn’t want to make any new investments out of Fund I. We had established our hand. We liked our hand. And we simply wanted to play it. It was at this time that we decided to discuss our second fund. But how large? How many investments? What kind of investment period? What types of LPs? There were a lot of questions to answer before entering the fund-raising process.

So as a team made up of a former derivatives professional, a Ph.D in EE and Machine Learning and a data geek, what did we do? We developed a hypothesis, modeled it, tested it, subjected it to brutal peer review, iterated on it and finally arrived at an approach that felt good to each of us. 

There was much we liked about our strategy in Fund I including the number of portfolio companies and commitment to a life-cycle investment strategy. As part of Fund II we wanted to reserve more heavily for individual companies and address some of our “vintage concentration risk” concerns lurking in the back of our minds. While a two-year initial investment period for our first fund felt ok, it did not feel optimal. It felt fast. And while we believe we were fortunate in that we established positions at fair prices at a good time in the economic cycle, this is not a risk we’re happy to wear again.

Once we went through this exercise and received feedback from our Partners and mentors, we decided that $100 million was a size that achieved our objectives for this next phase of IA Ventures. We took a bit more than this because there were several amazing individuals whom we were honored to have as our partners and who can add immense value to our investment activities. It was an opportunity that we simply could not pass up.  We have a fantastic group of deeply experienced Limited Partners who measure relationships in generations, not years. It feels like family. Exactly how we wanted it to be. We have quarterly advisory board calls, and I reach out to my LP mentors in between these calls all the time. I can’t stress enough how great Partners can be assets well beyond their money, just as we strive to be perceived and treated in the same way by our portfolio companies. This kind of active management takes work by the GP. But from my perspective, my time has been incredibly well-spent.

I am so excited for what the future holds and so thankful for my IA Ventures partners and colleagues, our LPs and our portfolio companies. The responsibility of running a firm like IA Ventures is awesome, but joy of the pursuit of delivering on our promise is even greater.

1. recruiting.
2. selling.
3. raising money.
4. thinking about risk.
5. worrying about running out of money.
6. focused on firm culture.
7. selling.
8. recruiting.
9. having fun.
10. aware of your utility function.
11. honest with partners, employees and investors.
12. evaluating yourself against objectives.
13. humble.
14. identifying and leveraging mentors who can help you grow and achieve your objectives.
15. “paying it forward” by helping others grow and achieve their objectives.
16. worrying about not running out of money.
17. cognizant and honest about stress and digging the start-up gig all the same.
18. selling.
19. recruiting.
20. trying to change the world.

This is my Top 20. You need to come up with yours. Ours are unlikely to be identical, but the key elements of selling, recruiting and protecting the firm’s finances should be hallmarks of every Top 20 list. Because without customers, the best people and the liquidity to hire the best people and deliver a great product, the whole effort is destined for failure. So do whatever you can to increase the chances of success - including self-preservation… 

Last night’s Giants/Patriots game was another epic contest, displaying the greatness and intertwined fortunes of two of the best teams of the era. However, what underpinned the contest were the widely divergent paths of the teams who had reached the pinnacle of the sport: a 13-3 Patriots team with arguably the best quarterback (Tom Brady) and coaching mastermind (Bill Belichick) of our generation, and a much-maligned 9-7 Giants team with an oft-chastised quarterback (Manning) and an old, out-of-touch coach (Coughlin). It wasn’t that long ago that the Giants, 7-7, hobbled by injuries and with calls for the coach’s head, appeared irretrievably lost and done for the season. Yet somehow the team was able to turn it around, not only to finish the regular season 9-7 and to make the playoffs but to steamroll their way through a brutal postseason schedule and to defeat the mighty Patriots looking to cement their “dynasty” label. But let’s be clear, this wasn’t a Patriots team that was coasting along with little to prove: they had everything to prove. And they weren’t going to make it easy on the Giants. No matter: the Giants were able to get it done in the face of their own adversity and the determination of their worthy opponent.

So just how did the Giants do it, and what lessons might we extract for those facing a similar set of circumstances - namely, just about every start-up on the planet?

• Don’t panic. How many times have we seen release schedules slip? An unexpected new market entrant? A hostile fund-raising environment? Regardless of the challenges, staying calm and clear-headed is absolutely essential for overcoming them. Just because things don’t go according to plan doesn’t mean it’s time to freak out. Quite the contrary: hard times require cool, rational thinking unburdened by fear-mongering and hysteria. Many in the Giants diaspora panicked: neither they nor their ownership did. They were confident that they had a strong leader and solid players (with several on the mend as the season wore on), and let them do what they were meant to do: lead and play.

• Embrace uncertainty. If there is one thing that’s certain, it’s that the world is uncertain. Every - not many or most, but every - start-up faces a host of “known unknowns” and “unknown unknowns,” and simply has to roll with them as they become known. This requires a flexibility of mind and spirit that is crucial for achieving long-run success, otherwise a team will get emotionally ground down by constantly reacting to uncertainty. It shouldn’t be surprising. It should be programmed into one’s psyche. Every football team knows that bad things will happen during a season - injuries, suspensions, fines, new tactics by other teams, historically bad years by team members, etc. - and they simply accept it as a part of life and dynamically adjust. The Giants did a masterful job of his throughout 2011, and it paid off when it mattered most.

• Focus on the mission. It is perilously easy to get distracted by both internal and external influences. Finger-pointing due to shipping “misses.” Not enough customer feedback to inform development. Poorly-received PR strategies. External criticism that threatens firm morale. All of this is garbage. There is a mission - lots of happy customers. Everything else is noise. Executing the plan and adjusting the plan, when necessary, to get there is the bottom line. There will be the natural non-linear path of getting there, but the mission has to always be the beacon illuminating the destination. The Giants never forgot their simple mission - win the Super Bowl. Now, they used the tactics above to achieve the mission, but it was always crystal clear what they were pursuing to everyone involved, both on- and off-the-field.

• Remember there is no “I” in “team.” Successful start-ups are made up of super-talented and motivated people, many of whom will often rate as “stars.” However, when pursing the mission it is critical that the entire team, both stars and the mere talented, work together as a single unit in its pursuit. If engineering misses a deadline, everyone misses. If sales is having a hard time closing accounts, everyone has a hand in it. Shared losses and shared wins. Individual performance isn’t really the point if you are confident that you have the right players. The Giants could easily have gotten down on any number of individuals for less-than-stellar performance. The players could have created a bad locker room dynamic that poisoned Coach Coughlin’s chances of leading a turn-around of the season. None of this went down. They stuck together and shared their painful losses and their decisive victory - as a team.

• Always remember where you came from. If a start-up becomes successful and really begins to scale, there are many who had a hand in its success. It was invariably a function of all the learnings above plus a healthy dose of luck, and even in success it is important to remain humble because fortunes can, and often do, change. Being classy in victory is as important as being classy in defeat, and Tom Coughlin’s words in victory are words of humility, thanks and shared success. Coach C has had more than his share of ups and downs in his career, and to have finally reached such a high level of credibility, achievement and respect is not lost on him. And he wears it well.

As a Giants fan, it was an exciting and satisfying end to a crazy roller-coaster season. But the metaphor of the Giants season and the start-up life cycle was particularly resonant having been immersed in both. Upon reflection, these are not just start-up lessons but life lessons…

I was recently watching a funny YouTube video with my kids titled The Crazy Nastyass Honey Badger and having a few chuckles when it hit me: that Honey Badger actually has many of the essential characteristics of a start-up founder:

• Determined. The Honey Badger goes after what it wants - hard. It has the same kind of laser focus and persistence as every great founder I’ve ever known. Hungry? Chase down and eat the snake. Tired? Dig a hole in record time and chill. Just get it done. Period.

• Thick-skinned. The Honey Badger has loose, thick skin, which enables it both maximum freedom to maneuver and incredible protection. The start-up founder is likely to hear of a chorus of “You’re crazy” and “That can’t work” along the way, and need to adjust plans and pivot as the market opportunity becomes clearer. These barbs and arrows just bounce off the Honey Badger. No problem. You can’t stop me.

• Ability to withstand pain. The Honey Badger can withstand snake bites, bee stings and countless other assaults from targets seeking to defend themselves against attack. The bottom line is that the Honey Badger can take it all and move forward undeterred. The start-up founder? Exactly the same make-up. Cash crunch? Disappointing customer interaction? Lose that great engineer to Facebook? No matter. Just press on. The Honey Badger just shrugs it off. So does the successful entrepreneur.

• Just doesn’t give a s*&t what others think. The Honey Badger is a beast. No manners. No decorum. In short, a heat-seeking missile. See prey. Pursue prey. Conquer prey. Messy? For sure. Successful? Without question. Sometimes the start-up founder can seem insanely intense, brusque, and paranoid, all because they want nothing to keep them from achieving their objective - building an awesome company and doing everything in their power to make it happen. Sometimes manners and niceties get checked at the door. Just ask those on the receiving end of the Honey Badger’s attentions.

• Adaptive. The Honey Badger can dig prey out of holes. Chase them down on the plains. Even grab them out of trees. Prey simply has no place to hide from the Honey Badger. The start-up founder is able to just get s&*t done. Build product. Recruit. Evangelize. Sell. In coding sessions, Meetups or boardrooms, the great founder just figures it out. The do what’s necessary given the context. The Honey Badger does it for survival: so does the start-up founder.

There are obviously other skills that come into play when founding a company that ultimately becomes successful (I’m not sure that the Honey Badger really has “vision” beyond its biological imperative), but those characteristics demonstrated by the Honey Badger are certainly essential elements to achieving success. I find metaphors in business to often be both helpful and entertaining, especially when the going gets tough. So when the s*&t is hitting the fan and you need to tap into that single-minded focus, passion and energy deep inside you, just remember this: be the Honey Badger.

One of the hardest dynamics I’ve had to manage throughout my career is loyalty. I, like most of my friends and people whom I respect, have feelings of faithfulness and devotion to those with whom we interact - partners, employees, investors, vendors, etc. However, there is a point beyond which loyalty can become costly - too costly, in fact - for historical relationships to remain as they are because of the negative impact on business. And when the problems spread into areas which can effect either individual or firm reputation, loyalty necessarily needs to take a back seat to pragmatism and protecting one’s (and one’s colleagues) own interests. This is, without question, an area fraught with ambiguity and confusion, where the pain of dealing with issues head-on can lead to procrastination with potentially expensive outcomes. And while procrastination is never ok, the question remains: when is it appropriate to sever ties with a person (or a firm) to whom you feel loyal?

A useful rubric will necessarily take into account the impact of one’s actions on the relationship. For instance, an employee who has done good work for a long enough period of time to foster loyalty but then runs into a patch of diminished productivity. Do you cut them loose as soon as performance drops? Generally not. I think tools such as GE’s performance matrix as useful in this regard.

On one axis is Performance and the other axis Attitude. High performance with great attitude? A star. Low performance with lousy attitude? Fire immediately. High performance with lousy attitude? Coach the employee and give them the chance to remediate, but if they remain solo stars without regard for the team or its norms they have to go. And low performance with great attitude? Provide concrete feedback and coaching to help the under-performer raise their productivity, but if they are unable to turn things around then they have to go as well. So in the case of someone to whom you feel loyal (so, by definition, has performed well in the past and with an attitude that supports the team) but whose performance isn’t what it used to be, give them a chance to fix things and lend support. This demonstrates loyalty. However, letting them go if they continue to perform poorly is not disloyal - it’s protecting the team and the firm. And both you and the company can help ease the transition in many ways. 

But think about a situation where the impact of a mistake, a lapse of judgment or simply bad behavior is so bad that it fundamentally affects the trust people have in the individual or firm? It is hard to see how the rubric above can apply. For example, what if an employee does something to damage the reputation of the firm that materially impacts its brand and position in the market? This would seem to trump any notion of loyalty completely. And what if a service provider, such as counsel, made an error that ended up putting the company in badly compromised position due to shoddy work? It is hard to imagine retaining that firm again any time soon even if there had been a successful pre-existing relationship. The essential element where historical feelings of loyalty rapidly become marginalized is when basic trust has been breached. Without trust, loyalty cannot be reciprocal.

Except in the case of bad actors, severing relationships is almost always difficult, especially among those who pride themselves on being loyal. But sometimes circumstance overrides loyalty: it just does. And at these times, it is critical to address the situation quickly and honestly, for the good of the person being let go and the company which has to move on. That’s just life.

Every so often a term becomes so beloved by media that it moves from “instructive” to “hackneyed” to “worthless,” and Big Data is one of those terms. When I started IA Ventures in 2009, I used “Big Data” as a quick and easy way to describe the thematic focus of my fund. And it worked. People got that it implied tools for managing large amounts of data and applications for extracting value from that data. It also implied a high level of technical and product expertise with specific relevance for assessing, investing in and supporting these kinds of companies. And perhaps most importantly, people understood that this wasn’t a cyclical theme but a secular phenomenon, one that would eventually touch every business and every consumer, wherever they may be. Taken together, pursuing this market opportunity in such a focused manner resonated with corporations, LPs and entrepreneurs alike.

But since this time the term Big Data has become diluted. Very diluted. So much so that it is almost totally meaningless. Does Big Data mean new kinds of databases? Sure. Does it mean innovative ways to visualize data to create actionable intelligence? Absolutely. Can it be applied to the health care sector? Without question. Has it contributed to the rise of the Data Scientist? Mos def. The reality is that solutions for managing, analyzing, generating predictions and acting upon insights gleaned from massive amounts of data are not confined to a particular vertical or geography and span both public and private sectors. Data is everywhere, we are generating more of it, have the ability to store increasing amounts of it and it is moving at speeds that soon will approach the speed of light. This is happening. It is not my view: it is a fact. But identifying a market opportunity and capitalizing on that opportunity are different things entirely.

Large, scared, fossilized bureaucracies (both large private enterprises and Governments) are frequently hard to sell to and in the best of cases have long sales cycles. This necessarily means a larger amount of start-up capital to bridge the gap between product shipment and cash receipts, and oftentimes a “minimum viable product” that has more features and is costlier to produce than a consumer-facing web application. This means taking more seed stage risk than many investors are comfortable with, but the potential payoffs can be very, very large. Further, these enterprises always have legacy systems and often employ the people that installed them in the first place, rendering a wholesale “rip and replace” strategy a long-shot at best. So creative grass-roots tactics are frequently helpful to avoid selling to the CIO, and instead getting usage in the ranks that forces enterprise adoption (a la RIM across Wall Street trading floors). And this has to happen in areas where there is a lot of noise (database architecture, business intelligence, cloud storage, etc.). Bottom line, there is a lot of domain knowledge and experience in selling to the enterprise that comes into play when pursuing these opportunities. 

There are also new kinds of businesses founded by data-savvy founders that don’t look like classic “Big Data” opportunities at all. We think businesses that build platforms to harvest user data, such that the learnings from that data are used to benefit all contributors, which then results in a better product for all new users who contribute their data, is a non-intuitive application of our Big Data theme. BillGuard, Coursekit and Simple firmly conform to this notion. Each company started with zero data and isn’t a tool specifically designed to manage general data sets (such as databases or business intelligence tools). They are growing up in their own respective verticals and leveraging collective data for the benefit of the individuals in the collective. The businesses were set up to do this from Day 1 because of the “data DNA” of the founders. Every business generates data, but it is a far smaller number that view data as a strategic asset that is actively managed for the benefit of their customers and the bottom line.

Greater access to data and the technologies for managing and analyzing data are changing the world. We are at the beginning of a secular trend that, in my opinion, will sharply increase the aggregate quality of life across the globe. Better health through prediction and prevention. Richer education through collaboration and access to the best teachers and programs at a much lower cost. More satisfying and effective communication across vast distances. Greater personal data transparency and portability for better decision-making. The list is endless. But let’s be clear - the term Big Data doesn’t begin to explain what’s going on here. Whether the data is big, small, fast, slow, structured or unstructured, everything that is going on now is attempting to do one thing: making data smart and actionable. And this is a mission driven by the passion of the entrepreneur - and their investors.

Starting a company is, by its nature, an “all in” affair. You’ve either got the passion to run through walls, suffer painful failures and do unnatural things to achieve success or you don’t. And given the challenges of building a company and the tremendous amount of hard work and stress borne by the founders, they are generally focused on finding people who share a similar passion for the mission as they do. Building a successful company is the outgrowth of a team effort, not a series of individual efforts, as important connective tissue needs to be established across members of the organization to deliver a great product to end-users. But as companies grow beyond the founders and first few employees, the risks of bringing on people who don’t share the same level of intensity and focus in pursuit of the mission rises dramatically. And if a few bad hiring decision are made and people focused on short-term financial rewards and titles infiltrate the firm, they can have a marked negative impact on culture, morale and team performance. 

It is hard to overstate the damage that these kind of people can visit on a firm. They complain. They foment “water cooler talk.” Time that should be spent problem solving with colleagues or making progress on one’s own gets diverted to politics, personal positioning and other disruptive agendas. And the more time these people are allowed to remain in the firm, the more that super motivated high-performers get angry and frustrated and begin to ask themselves, “Why am I killing myself to build this company when these lazy complainers are getting paid and vesting their stock options on my efforts?” Shortly after these thoughts enter the high-performer’s mind doubts about management begin to creep in, further poisoning the employee’s attitude towards the company and its leadership. And from there it is a downward spiral towards a culture crisis that can shake a company to its core. Oftentimes the founders aren’t aware of the problem, being so focused on shipping, recruiting and selling. Invariably they are told of problems in the ranks but rationalize as to why things will improve, and besides, things aren’t really that bad, right? Wrong. And don’t think that these problems are the province of larger firms. They’re not. They afflict companies large and small.

There is nothing more important than a sense of shared mission and a culture of cooperation in a start-up. These are essential elements of a team that can develop, ship, grow and flourish. When selfish or underperforming parties enter the mix, they have to be removed immediately for the good of the team and the company. Problem employees don’t take care of themselves, and they are ignored at the founders’ peril. While it is difficult to fire people, sometimes it simply has to be done. Strong, decisive action sends a powerful message to the team, that self-centered behavior and anything but high performance and dedication will not be tolerated. This is music to the “A-players” ears, as they want to be surrounded by people just like them. Quite frankly, they deserve it. And so does the start-up founder. So aggressively manage your human capital and don’t let it manage you: it will pay dividends over the long run.

You and a pal have what you think is a great idea. You hack some code together and build a simple prototype. You get some feedback, like what you’re hearing and decide to go all-in on a start-up. You build some more, maybe convince another jiujitsu developer to join your little cadre on the come, and build enough product to demonstrate a vision that is ready for some angel capital. You take in $500k that will enable you to hire a few more engineers to get a beta product shipped. With the angel money you hope to build early customer traction and achieve a series of key operating milestones that will set you up for a Series A: then it’s off to the races. Scaling the technology team. Front and back-end engineers. Some product managers. Maintaining enough big-picture perspective not to lose sight of key architectural decisions. Pushing releases on a regular schedule. In short, it can get very complicated very, very quickly. Yet plenty of technical founders don’t have the experience of building and managing high-performance teams that meld creativity with productivity, a feat that is challenging even for the most experience engineering leaders. So what is a start-up to do?

I have seen this movie many times over the years, and I would say there are two principal elements every first-time founder needs to get this right: an emphasis on culture and a desire to be coached. Yes, there are tons of tactical details to be hammered out, but these are the two overarching points that, if gotten right, can have a material impact on the company’s achievement of its product and business objectives.

Culture sounds like a fluffy issue, but its importance cannot be overstated. As Steve Jobs once uttered, “Great artists ship.” In many tech-heavy start-ups founded by newbies, there is often a strong emphasis on the “art” and a less strong emphasis on the “ship.” Why? Because solving hard problems is cool and tends to attract awesome 10x type engineers. These people are essential elements of a high-performance, super successful technology team. However, they are frequently not the right people to run the show because (a) they’re world-class coders and should be coding, not managing; and (b) they are artists and not necessarily the right people to put boundaries on themselves or others, which makes it very difficult to ship. So the great tech leader is one who can foster an environment that honors creativity but also is focused on delivering real-world product to real-world customers. So often this can become a tug-o-war between the developers (the “real engineers”), the product managers and engineering leadership. Badly managed, this dynamic can create a toxic environment not just within the tech team but across the organization. A culture that has been nurtured to respect each constituency and recognizes the importance of each to building a commercially successful enterprise is one that will avoid these life-threatening challenges. But fostering this delicate harmony can only come from strong and credible business and engineering leadership, which necessarily means building a real organization around what started as a few coders with a passion for solving a problem.

So what should the functional technical organization look like in an organization ready to scale? While there is no right answer, I think it safe to say that there are two or three key roles that can exist individually or in some combination:

• VP Engineering: Often the missing piece separating a brilliant tech team from a brilliant tech team - that ships. This person is often more of a manager/traffic cop than a coder, yet knows enough code to be dangerous. They key thing is that they can keep the engineering team on task and can manage to timelines, which becomes essential as the company’s release cycle becomes more frequent and releases increasingly complex. While these people might not seem critical during the company’s early days (and they’re not), they rapidly become among the most important resources standing between a company’s technology stack, its product and its customers.

• CTO (or sometimes the CTO/Chief Architect): While the VP Engineering is focused on getting code in production and product out the door, the CTO is generally charged with keeping an eye on the release cycle, interfacing with product management and having responsibility for the larger architectural decisions that govern issues such as scaling and performance. Is is not unusual for the CTO to have mad coding skills and to be a kind of “Yoda” figure within the company, having the respect of coders and product people alike. But sometimes there is a unique individual, call them a 100x engineer, who is a world-class problem solver but is never more comfortable than tapping a keyboard behind a very large monitor - in solitude. These gems need to be insulated at all costs and kept from management issues and office politics. They should simply be allowed to code and think deep thoughts, and sometimes this individual acts as a Chief Architect whose input is critical to the CTO’s big-picture decision-making. 

In summary, where the VP Engineering’s critical responsibility is managing the engineers, the CTO has a broader but more technical array of roles. Each is vital in taking a pool of talented engineers and product managers and transforming their efforts into shippable, world-impacting products.

In my experience the role start-ups have the hardest time filling is the VP Engineering, both spiritually and in actual fact. Bringing a manager into the engineering organization is frequently a cultural leap for a tech-oriented start-up, yet it is only a matter of time before the coding stars begin to see the importance of coordination and synchrony in their efforts. A team made up of All-Stars without leadership generally falls flat in real-life: to borrow an NBA metaphor, the Bulls (and the Lakers) needed Phil Jackson. The Heat could have used him last year. Instead, a less talented team but with better management and chemistry won the title. The dynamic in start-ups is no different. But when you combine All-Stars with great leadership, you get the chance for a dynasty. Companies and their tech teams have to evolve as the business evolves. It is best for the organization and the transition from early product to production to scaling that this is acknowledged and planned for up-front. The alternative is a painful yet necessary culture shift that takes its toll.

One of the most difficult issues I’ve grappled with during my transition from angel investor to venture capitalist is that of pacing. By pacing I mean the rate at which capital is deployed, particularly with respect to initial investments in companies. Every fund has the notion of an “investment period,” the span of time over which the portfolio is built. It is commonly between 2-5 years in duration, but varies substantially by fund size and investment approach, e.g., larger funds with more concentrated portfolios tend to have longer investment periods. It is important to note that this is different than “fund life.” as follow-on investments are made for many years after the initial investments and are often 10-12 years in length.

As an angel I seldom thought about this stuff. I looked for great teams working on interesting problems in areas I understood and where I felt I could be helpful. Full stop. If I made 10 investments in a year, that was fine. 2 in a year? No problem. I followed on frequently and leaned in hard when I felt circumstances warranted. The notion of “vintage risk” never really entered my mind, and over a 5.5 year angel career I organically made 40 investments. Not crazy.

My fundamental view has been that there is greater risk in turning down an opportunity to work with a great team simply because I had invested too much capital over an arbitrary time period than by making a group of investments over a concentrated time scale. However, it is intuitive that by making a large number of investments within a small window I was incurring unhedgable risks associated with the macroeconomic environment or event-driven shocks. No doubt about it. My own sense, however, is that if a company is performing, is properly financed and has strong investors, that these unhedgable risks should be substantially mitigated. Over any given 10 year period there are ups and downs, but as long as your bankroll is big enough, a good business should have acceptable exit opportunities at some point during this time frame. And with my own money I certainly expressed this view with abandon.

But running a fund is different. There are certainly data which indicates that pooling many investments in a compressed period can yield highly volatile outcomes, and most LPs would likely accept a less risky 3x than a more risky set of outcomes with a greater expected value. However, I want to reach deeper into the data to really understand the nature of the businesses being financed, the stage at which investments are being made (Are they capital consuming Series B investments where price has outstripped risk reduction? Or more capital efficient and less expensive Seed and Series A rounds?) and the make-up of the investment syndicate. I suspect that there would be substantial risk mitigation by financing a concentrated portfolio of earlier-stage investments, applying rigorous follow-on discipline with respect to the Series B and C (e.g., no lazy check-writing to simply prop up a failing business and deferring the pain of admitting a mistake) and investing with others who share a similar view of investing. This way, the good businesses that should survive will survive, good money will not, on balance, follow bad and these same businesses will be supported until a more favorable exit environment by committed investors with sufficiently deep pockets. At least is the way I think about it.

But the fact of the matter is that we see way more interesting people and businesses than we could possibly finance. The “bar” I had as an angel simply wasn’t as high because I didn’t impose the same pacing discipline we work to apply IA Ventures. But man, it’s a struggle. I think about it every day and it’s one of the hardest challenges I face as a venture investor.

In my experience, exceptionally bright, driven, visionary people commonly share a particular attribute: a high need for control. These characteristics are also hallmarks of the startup founder, who brings maniacal focus, evangelical passion and a penchant for multi-tasking to the table. As they bring on co-founders and early employees, you can often find the founder speaking with investors, working on the product, writing code, recruiting, and spending time with early customers. This is the province of the Founder CEO and is the right way to be early in the game, both out of necessity and in order for there to be a “single point of failure” with responsibility for the early product and customer experience. However, as businesses scale, functional specialists are increasingly retained to drive specific aspects of the operation, e.g., VP Engineering, VP Sales, VP Product, etc.  This makes sense as the complexity of servicing a rapidly expanding set of customers explodes, while also continuing to iterate on the product and scaling the back-end to meet these challenges. In other words, it takes a village to ramp a start-up, and part of this necessarily means that the Founder CEO give up a measure of functional control in order to lead an integrated organization forward. But this is easier said than done.

I guarantee that at least half of the IA Ventures portfolio companies think that this post is about them and they’re right: it is about all of them plus many of the companies I worked with during my six years as an angel investor. There are few start-ups I’ve seen where this issue of diminution of Founder CEO functional control hasn’t been at play to some degree. And it makes sense. The start-up is like a baby: you birth it, feed it, take care of it when it’s sick, protect it, watch it crawl, then walk, then run. And when it is time to run, you’ve got to let it run. And to help it run fast, far and in the right direction, you need a bunch of people to help out. The parent is still important, but child’s needs have outstripped only parental involvement. But sometimes the parent is the last one to figure this out. 

Part of the difficulty comes from the fact that most Founder CEOs have a “power zone” - technology, product, sales, etc., and find it hard to empower others to lead in those areas. The problem is that as a business scales, there is a bunch of stuff that a CEO needs to do that goes beyond functional specialization: fund-raising; recruiting; medium- and long-term strategy; getting the most out of the Board; and managing culture. And deep CEO involvement in any one of the functional areas can both be distracting and disruptive to the team, hurt morale and potentially make it hard to attract and retain the best people. This is not a call for a brilliant product-driven CEO to avoid being involved in product decisions. But as a company grows, product features and functionality become increasingly complex and multiple customer types and requirements come into view, a robust product management organization is needed to help meet the challenge. And if this team lacks the power and authority to execute the vision, it will be hard to get the best people and the CEO will necessarily be falling short in other areas that require their attention and focus. But again, easier said than done.

My friend Jeff Bussgang recently wrote an excellent post about the challenges of scaling a business. It is both very exciting and totally overwhelming, and company needs explode in a way previously unthinkable. It requires a phenomenal amount of self-awareness and self-confidence for a Founder CEO to recognize when personal needs and company requirements begin to diverge, and to bring in world-class leaders to help manage and drive growth. This is when the Founder CEO needs to be at their best, recruiting not only those with the best skills but those who are the best and who will positively impact firm culture and elicit deep founder trust. This is one way a Founder CEO can get comfortable with letting go, surrounding themselves with awesome people who will make them - and the company - even better.

While there is certainly a connection between power and control, I believe that power is having attitudes and displaying behaviors that are focused on doing what is best for the company. And this is simply a definition of leadership. Therefore in my world power does not equal control - power is reflective of leadership. So do not optimize for control. Be a leader.

…to those who read and contribute to the dialogue on Information Arbitrage. I have learned a ton from the process of writing and from the interaction I’ve had with my readers and commenters. 

…to my portfolio companies. While I do my best to work hard for you and to help in your quest to achieve your missions, I can safely say that I am learning more from you than you are from me. 

…those who contribute to the dialogue on Twitter. The Twitter ecosystem has a material, positive influence on my life and whether you follow me, I follow you or both, you’ve had a marked influence on my learning and enjoyment during 2011.

…to my critics wherever they might be. While taking criticism (regardless of its packaging) is never fun, it has helped me think deeply about ways I can improve and accelerated my learning and personal insight.

…to my friends outside the venture and technology ecosystems. Given the immersive nature of my chosen line of work, it is great to step outside and gain perspective from those who see what I do in a more clinical and objective way than I ever could.

…to my friends inside the venture and technology ecosystems. I have never had so much fun in my career or worked with a smarter, more interesting, more energetic or more positive group of people than I do every day of my “new” life.

…to our IA Ventures Limited Partners. We’ve been fortunate enough to assemble a group of LPs who aren’t merely investors but mentors. As IA Ventures is my own start-up, I’ve been incredibly lucky to identify and attract a group of such smart and experienced investors with which to partner. 

…to my colleagues at IA Ventures. What started just two years ago as few guys starting a small fund has blossomed into a laser-focused, thematic investment firm with an exciting and fulfilling set of partnerships with founders, co-investors and strategic partners. I couldn’t be working with a more awesome group of people, and I am thankful every day for the team I get to work with each and every day.

…most of all to my family. As IA Ventures is my own start-up, I put in crazy hours, am obsessed with things going on with my business and am just insane about my desire to win for my founder partners, my investor partners, my IA Ventures partners and my own sense of worth and achievement. While I try my best to be my best for those in my life, invariably I fall short. But because my family knows my work isn’t work - it’s just my life - they are the greatest source of love, happiness and support that I could possibly imagine.

A happy and healthy New Year’s to all and best wishes for a healthy, happy and successful 2012.