Know thyself

The noise across the venture investing landscape is deafening. Is there a valuation bubble? Is the boom in angel investing about to tip? Should large venture funds be doing seed stage investing? Is small-ticket Micro VC a legitimate strategy? Can new venture managers get funded? Blah, blah, blah. Bottom line: I don’t care and neither should you.

Whether you are building a new business, investing as an angel or deploying the capital of others, the guiding principles are the same:

1. Have a plan
2. Speak to lots of smart people about the plan
3. Iterate the plan
4. Execute the plan
5. Constantly critique the plan
6. Adjust the plan as necessary
7. Rinse, repeat

In short, know thyself and stay true to the mission. Just because someone else’s mission looks cooler and more successful than yours doesn’t mean that yours sucks; it may just take longer to play out. And if you try and adopt someone else’s mission, odds are that people will know you’re faking it and lack the true passion necessary for its successful execution. And if your mission, over time, proves to truly suck, then it’s time to ditch the mission and reassess: the market has spoken. 

There is a huge difference between incorporating the feedback of smart people while preserving your core philosophy and changing missions as the wind blows. I can tell you that such a lack of rootedness will invariably lead to failure. Whether a business builder, an investor or both, it takes maniacal focus, passion and intensity to be successful. Only you can find your way; you simply can’t dial in the mission.

Worried about the macro environment? If you’re a company then raise 2-years of cash, not 9-12 months. If you’re a fund, make sure you are properly reserved for a hostile fund-raising environment where you’ll need to step up and support your companies until the market thaws. Otherwise, you’ll likely get jammed in pay-to-plays and get flushed at the worst possible time. These are things you can plan for and they don’t involve rocket science. Just plain good judgment and planning. It is perfectly reasonable to take a different view and be more aggressive, either by raising less and taking less dilution now (if a company) or by making more investments with lower or no reserves on the theory that the strong start-up market will continue to run (if you’re an angel or a fund). As long as you go in eyes wide open, I’m cool. You might get carried out in the end, but you took a calculated risk and lost. In my book that’s fine. Unfortunate, but fine. You proactively made the decision and followed through.

In short, I think both founders and investors are, in many cases, paying way too much attention to reverberations within the venture echo-chamber instead of just making good, sensible plans consistent with their missions. If a certain set of investors don’t like it, too bad. Find some others. If LPs don’t like your approach? Either take friends-and-family money or execute your plan as an angel and prove out your thesis. It’s within your control. Don’t cede control of your destiny to the oscillating waves of popular thought. Who cares what’s popular? Often what’s popular today falls out of favor tomorrow, so giving up on what looks like a contrarian strategy might be the worst decision you could possibly make.

NB: Know thyself and act with confidence: it will set you free.

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Speed can kill

Lately we’ve been witnessing an increasing number of entrepreneurs whom we’ve met previously, spent time, gave guidance and support, and encouraged them to stay in touch as develop their plan. Then out of left field we hear they are raising a round. Fantastic, we say. We’d love to get an update and hear all that’s transpired since we last connected. How about we get together week after next; between travel and meetings, we’re totally jammed next week. Hold on, they say, this round is coming together fast. Can’t we squeeze in something sooner? Well…

Late last year, my friend and co-investor Mark Suster wrote a seminal post titled Invest in Lines, not Dots. The key take-away from Mark’s post is that relationships develop over time, and given the importance and longevity of the VC/founder relationship it benefits from the cumulation of interaction and data sharing between the parties. Kind of like the precursor to a marriage. This post resonated with me. I did not take Mark’s post to mean that moving slowly is a prerequisite of receiving VC funding. Not at all. What it does mean, however, is that founders are as committed to investing in building the relationship as the VC, and that funding events become processes instead of panics and fire drills. In my experience, such frenzy is seldom necessary, but for some reason there appears to be an epidemic of “This deal is moving fast; if you want in you’ve got to hurry.” Invariably, my response to such entreaties is: No.

Unless you are investing on the basis of “social proof” (which works for some but does not work for me) or have a historical relationship with the entrepreneur (which means that the investor has a store of prior data from which to draw), it is hard to see how being forced into a rapid-fire decision is ever good for either the buyer or the seller. I use this verbiage because what should be a relationship-building process has become a transaction, something which gives me great concern in the context of early-stage investing where things seldom go as planned. How are investors with little knowledge of the founder or depth of understanding of the business going to react in a crisis, or simply in difficult, challenging times? I can tell you how: not well. Lack of knowledge and data breeds panic, neither of which is constructive for giving a founder sound, relevant advice. Shotgun weddings seldom make sense. So unless the entrepreneur wants to fight the odds, I’d strongly recommend against it.

In short, we love building long-term relationships with founders where there is a mutual interest to invest the time and effort necessary to really get to know each other. And I’d strongly advise this relationship-building to begin outside the context of a financing when perceived time pressure and stress is high and the ability to invest in a relationship is low. If there is a thematic match between founder and firm, reach out early, share information, get advice and extract value and really test the quality of the dynamic. Because should you end up partnering with a particular firm, you’ll be married to each other hopefully for a long, long time. Investing in the relationship will be the best investment you’ll ever make.

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The seduction of Israel

I have spent the last 36 hours in Israel, and have already met countless interesting people including old friends (Mark Gerson, Louis Toth), portfolio pals (Yaron Samid, Raphael Ouzan and the BillGuard team), co-investors (Yaron Carni, with whom I’m an investor in Vaultive), entrepreneurs, VCs, angel investors and service providers. It has been a whirlwind. But with all this energy and enthusiasm, I keep on hearing how there is a dearth of both angel capital and Institutional seed stage investment capital. It just seems so hard to believe - but it really seems to be true.

As a laser focused investor in and around the Big Data space, Israel is a natural hunting ground for me. Unit 8200, 9999, etc. - the sheer quantity of the intellectual power skilled at managing and extracting signal from data is truly mind-boggling. But it seems that there is a supply/demand imbalance of ideas/capital, as well as a shortage of mentoring, particularly at the seed stage. For a schmendrick from NYC to come to Israel and garner the attention I have is truly bizarre. And in the Big Data space no less, which should be right in Israel’s power alley.

Well, just a note to all those Israeli intelligence pros filled with data-driven ideas but lacking love from investors: drop me a note. If you have the leadership skills, the passion and the ability to adapt to rapid change, all necessary attributes for being a successful start-up founder, send me your stuff. And in the immortal words of The Terminator: I’ll be back.

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Maximum Viable Product: beware

When to release? Which features to include? Two key axes of innovation: timing and feature set. These are questions that weigh heavy on the minds of entrepreneurs everywhere, and can sometimes make the difference between success and failure.

There are those firmly in the “release early and often” camp, while others cling to the deeply-held belief “You’ve got one shot to launch; don’t f*&k it up.” Leaving aside the enterprise (which I believe has a fundamentally higher bar for release than consumer), the biggest mistake I’ve seen has been to delay getting a product out in the wild and over-engineering it in the lab. There is a fine line between putting forth vision and being a pedant, and iterating in a vacuum is a very, very dangerous business. What you feel is addressing a need may fall on deaf ears. Wouldn’t it be better to know that sooner? As long as the product is functional and you can extract enough feedback in order to make its release worthwhile, I’d have a bias towards letting people play with it, collecting input and iterating as often as you need to in order to achieve product/market fit. This necessarily means taking a streamlined approach to product release and keeping the early product straight-forward and clear.

Feature set is another important issue that strongly impacts the psychology of the founding team. If a team defines the minimum viable product as a feature rich, almost fully-baked offering (in essence delivering the maximum viable product), it runs the risk of both slowness to market and mis-judging product/market fit. Consumer-facing products and applications necessarily need to do one thing really well in order to cement engagement. UIs that are very complex, feature-rich but hard to navigate ultimately stunt both engagement and virality, potentially getting the product off on the wrong foot and negatively skewing perceptions. A clean, easy-to-use and focused offering is the best way to encourage use and sharing, and even if the feature set is watered-down relative to its end state it can still engage, elicit feedback and establish brand in the marketplace.

In summary, beware the maximum viable product. Ease of adoption, clarity of the value proposition and lots of feedback far outweigh the risk of people saying “Is this it?” IMHO. Don’t be afraid. There is nothing like seeing your product out in the wild. Go for it.

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The Entrepreneur/VC Dynamic

This strikes me as one of those really important topics that doesn’t get nearly enough airplay. I neither hear this freely discussed among industry participants nor among lead investors and the founders they are backing. Building a company is really tough, requiring incomprehensible amounts of effort, stress and personal sacrifice. Added drama is certainly not desirable, yet this happens all too frequently when mismatched utility functions cause disputes among owners at precisely the worst time - around a potential exit. The punch line is, as it is in every aspect of life: good, honest communication, trust and respect is absolutely critical. Without these essential relationship elements not only will outcomes likely be sub-optimized, but the pain and suffering along the way will make the journey far less enjoyable for all.

Many entrepreneurs want to build companies with the assistance of venture capital. VCs bring cash, experience and often valuable connections to the table. They can help mitigate financing risk and provide the resources necessary for the founders to execute their plan. It might also be that the founders don’t have the resources necessary to bootstrap or that the nature of their problem or target market has a higher bar for what constitutes the “minimum viable product” (as is the case with many enterprise-facing applications). Bottom line, the entrepreneurs have made the decision that either a bootstrapped or purely angel-financed enterprise is not the way to go, and open themselves up to taking venture money.

Venture capitalists want to help entrepreneurs build great companies. In the best case, they want to help entrepreneurs build great - and great big - companies. VCs have Limited Partners (LP), and the way venture math works is that achieving cash returns of 3x, 4x, 5x or more on LP capital necessarily requires “hits.” While one can certainly debate both the magnitude (“singles and doubles” versus “home runs”) and frequency (“Can I achieve a better mortality rate than the historical norm?”) of hits required to achieve LP return objectives, the real deal is that VCs need and want hits, and they want to be as heavily invested in the hits as possible. And the fervent hope of VCs is that the entrepreneurs with possible hits on their hands want to shoot for the home run and eschew the chance to stop at first or second base (to continue to torture the baseball metaphor). The alignment of entrepreneur/VC motives around exit potential - the Holy Grail.

As fortune would have it, while I actively seek The Grail, it is hard to find. And it is a holy mission, to be sure. Just why is this happy place of overlapping spaces in entrepreneur/VC Venn diagram so hard to find? And why don’t entrepreneurs and VCs always see eye-to-eye on the exit? So, let’s say you’ve got a super founding team with a great idea. Let’s also suppose that this team, while awesome, hasn’t had a big win yet. Most great teams are like this. You read about the unicorns in the paper, but there a lots and lots of other winners out there who are building great things and solving huge problems but toil in relative obscurity. And this might be their second, third or fourth try at greatness. Read: they don’t have tons of coin. Sure, they might have a nice life, but they haven’t taken millions out of a deal. So personal money matters - potentially a lot.

In the early days things are great. Company is doing well, growing, building great stuff, and the entrepreneur and the VC are in La La Land. Happy Happy Joy Joy. Everyone is working hard and working together to make the company a smashing success. Then it happens. The unsolicited offer from you-know-who. Distraction. Chaos. More distraction. More chaos. And let’s say the offer is low, way lower than the entrepreneur and the VC ever contemplated as being in the ballpark, but it is still a shitload of money. VC is thinking “In the nicest of ways, tell them to f*&k off. This offer is grossly inadequate. Why would we ever give up the future growth potential of this rocket ship for such a pittance?” Entrepreneur is thinking “Uh, uh, uh, what is my spouse going to say if I walk away from ($5, 6, $10) million dollars? What happens if something goes wrong, the business fails and I was the dumbass that walked away from ($5, $6, $10) million dollars?” BOOM! Misaligned motives 101. La La Land? No more.

This happens all the time. It is part of life. And I don’t want to hear about protective provisions, veto rights, etc. If the basis for decision-making is the legal hammer that the VC has over the founders, then you’ve got a big, big problem. Trust is lost - likely for good. Board dynamics will never be the same. I believe that there is one feeling that each party needs to have, and it is the only way to effectively navigate this emotional and financial minefield: empathy. Regardless of where the entrepreneurs got their money, IT IS THEIR COMPANY. And while they, as does the VC, have fiduciary obligations to all shareholders, it doesn’t mean having to say no to a bona fide acquisition offer simply because the VC thinks selling is a mistake. The entrepreneur needs to understand the VCs goals and the implicit covenant that was entered into upon taking venture funding, that building a big company was the shared objective. Now things can change in the stark light of day. The VC needs to understand that this deal could be a life-changing event for the entrepreneur, and while they might think the exit is dumb and can and should make the case as to why it is, they shouldn’t take a scorched-earth approach and burn the relationship with the entrepreneur - because THAT is dumb.

At this point the possibility of a little founder liquidity and other creative problem-solving approaches can be explored, but it can only happen in an environment of trust and respect. Both parties need to recognize that no matter what happens, the utility functions of the VC and the entrepreneur simply do not match in an early-stage exit scenario. They just don’t. And this has to be ok. Because if it’s not, the chance for establishing healthy long-term relationships between VCs and entrepreneurs goes way, way down. Investing in an early-stage company isn’t merely investing in a product, technology or service, it is investing in a person (or people) and a relationship. Building companies is necessarily a people business. And approaching these relationships from the perspective that “life is a marathon; not a sprint” is, in my opinion, essential to building a healthy venture firm for the long haul, and will ultimately optimize long-term returns as well.

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