Permanent Record

Resolutions

At the end of every year I always get asked what my New Year resolutions are.  My answer is always the same….I don’t make New Year resolutions (or even Chinese New Year resolutions— Gong hei fat choi! :-).  If something needs to be tended to that would require a resolution, I would just as soon get at it immediately. 

That being said, the gaps tend to get exposed at the end of the year.  This year it was a crazy fourth quarter led by the financial meltdown.  Like every other VC we were very busy helping the companies of our portfolio prepare for a very different 2009 than we could have anticipated six months earlier.  As a VC the portfolio is always my first concern and when the portfolio work expands to fill all the hours of the day not much else gets done.

For a firm that prides ourselves on our ability to make decisions quickly, this is a bummer.  We get introduced to thousands of companies a year and this year the number of introductions accelerated at the end of the year.  We met a bunch of companies in November and December that we are still coming up to speed on.  I think we’ve caught up with the backlog (if you disagree let me know ;-) but it has been a challenge.  

We have put in place some new processes to insure that we live up to our promise to respond to folks in a timely way.  The hope is that we won’t fall behind again no matter how many companies we meet.  It won’t be perfect and there will still be glitches, but I hope you will continue to reach out as well as let us know when we need to do better.

Congratulations to Sendori!

Congratulations to Ofer, Dave and the folks at Sendori for their acquisition by IAC.  We met them just over a year ago and loved their novel idea for an ad network selling domainer inventory.  Clearly IAC loved it too and so now Ofer and Dave are going to take over the world from a much bigger platform.

We look forward to watching your continued growth and we hope you will look forward to watching this video!

Next, We Drink Coffee

As you might imagine, the conversation du jour in VC and entrepreneur circles is around the current market gyrations, the Sequoia conclave (and kudos to those guys for kicking off this conversation), the subsequent very smart opinions from VCs and entrepreneurs alike, and what happens next. 

My opinion on what happens next?  Hell, I don’t know.   And in many ways, I don’t really care. If you focus on what you control, you shouldn’t either.

Listen, it’s not like we’ve just been through a time where the IPO cup runneth over.  We’ve seen nothing but bad news about exits for the last year and it’s clearly not going to get much better next year.   And, yes, it is likely going to be more difficult to get funding this week than it was two weeks ago.

I have, however, seen a lot of great entrepreneurs build great companies over the last four years; companies they started in very dark days.  The majority of them have not seen liquidity and now they probably have at least another 1-2 years before the liquidity window opens up again.  But they are psyched about their businesses and they are prepared to leverage the probable downturn to best position themselves for when we come out of this.

Over the next 12-18 months is again going to be a great time to start a company.   If you are thinking of starting one, read the deliciously vulgar and beautiful post by Dave McClure.  He says it better than I could. 

If after reading that post you want to start a company even more, or you aren't sure, or you just want a free cuppa joe, come talk to us.   Kent and I will be holding Office Hours at University Café on Tuesday from 11-1, coffee is on us.

Geography

I love living and working in the Bay Area for many reasons...the weather, the people, the landscapes, the startups.  It's the best place in the world to be a venture capitalist.  However, there are points in the venture-funded economic cycle where it pays to spend time out of the area and I have seen enough local FNACs ("feature not a company") lately to know that now is one of those times.

As such I have been spending time in Los Angeles, Portland, and Seattle and they are all great places.   But this cycle is the first that I have spent a signficant amount of time in Boulder.  I joined the board of Yieldex a year ago and started traveling there regularly experiencing both the rocking summers and the cold, but lovely, winters.  We recently made an investment in Gnip which means I get to spend even more time in Boulder. 

If you haven't been, you should.  It is an outdoor paradise with extreme skiing, hellacious whitewater rafting, and righteous venture capitalists.  Indeed, if I were starting out in a career, Boulder would be one of the places I would be seriously considering as a landing place.

The good folks of the tech community in Boulder are interested in seeing more people make their careers in Boulder and as such have created a brilliant event that you should be applying for.   An all-expenses paid trip to Boulder where you interview with a bunch of companies and in return they wine and dine you and maybe even give you a job offer.

What do you have to lose?

VCs and Risk Aversion

Paul  Graham writes another thought-provoking essay today on both why founders don’t sell early (or why they might) as well as castigates corporate development organizations and VCs for not being risk takers when it comes to valuing companies.  I think he is mostly right, as usual, as do a bunch of other people.

On venture investors taking risk, I get asked at least once a week something to the effect of “Where exactly is the ‘venture’ in venture capital?”  Frankly, I agree.   I am often surprised at how many venture capitalists aren’t very “venturesome”.

I think part of this is simply that venture capitalists have to put more money to work today.  I cannot overemphasize how many entrepreneurs tell me that they really only need $1MM but are asking for $3MM-5MM because that is what they have been told investors want to invest.  If I was a VC at a traditional firm and needed to invest $3MM I would be risk averse too.  Say that I am buying minimum 20% of the company.  That implies a $15MM post-money.  For me to get my 10x return on just my initial investment, I need an exit of $150MM to make it work.   It takes a darn good company to exit for $150MM these days (in fact, more than 75% of all M&A transactions in the last four years have occurred at prices lower than $150MM).  If I have questions about the team, the market, the distribution strategy, the competition, or even if I have a bad consultation with my ouija board, I am going to pass on the deal. 

This is why I like seed investment and the First Round Capital model so much.  Our initial investment is much smaller (our average initial investment is $500K) and the post-money valuations are correspondingly much smaller.  Which means to get to our 10x takes a much smaller exit. And hey, if you want to take the company big, I love that too.  The optionality is good for both investor and founder – I really enjoy the alignment that comes from sitting on the same side of the table with the entrepreneur.

I do want to take issue with something that PG said.  Specifically:

“I've tried to explain this to VC firms. Instead of making one $2 million investment, make five $400k investments. Would that mean sitting on too many boards? Don't sit on their boards. Would that mean too much due diligence? Do less. If you're investing at a tenth the valuation, you only have to be a tenth as sure.”

If a typical $2MM Series A is done at a $6MM pre-money, then the hypothetical seed investment Paul refers to would be done at a $600K pre-money, leaving me with 40% of the company for $400K. Good deal if I can get it but I don’t see a lot of those deals today. 

Paul:  If you know of any companies that are looking for this structure, send them my way! 

Maybe There Is Such a Thing as a Free Lunch

I had a great time at SXSW this year, but the conference has gotten so big that I missed a lot.  One session that I shouldn't have missed was titled "The Art of Self Branding."  Most of the session was spent talking about First Round Capital portfolio company Mint.com and how good a job they have done on creating a strong brand.  It was such a flattering picture of the company that some assumed the presenter is a paid Mint.com consultant.  She isn't, but Lea Alcantara, next time you are in San Francisco look me up and I will gladly buy you lunch.

That Hiring Time of Year

As many of you know, at this time last year we were looking for our first hire in the San Francisco office. The response was overwhelming, as were the number of really good people that we met through that process, and we ended up being able to work with a great guy.

We are again in hiring mode and looking for a Senior Associate for our firm, based in either our San Francisco or Philadelphia office. You can find out more about the job here, but I would encourage you to be creative if you are interested. Last year I received pointers to blogs, written business plans, some detailed financial analyses (for late stage private and some public companies, natch), as well as the standard resumes and cover letters. Feel free to express your interest in a way that reflects your understanding of the very early stage venture market.

We’ll look forward to hearing from you.

Customer Service Is The New Marketing

I wrote a while ago about our investment in Get Satisfaction and the thesis behind the investment.  Well, the Get Satisfaction team is spreading the love by hosting a one day summit, Customer Service Is The New Marketing, in San Francisco next week.

This is going to be a great show, with speakers in including Tony Hsieh, the CEO of Zappos, and Robert Stephens, who founded the Geek Squad.  If you want to learn how customer service needs to be thought of as not a cost center but a essential marketing function, this is the event for you.

As added incentive, use the code FOTFRC when you sign up and you will receive a 25% discount.  I’m looking forward to it and hope to see you there. 

When I Don't Have to Say No

As I was reading Fred’s post on "saying no” the other day, I was contemplating just how hard it can be to say “no.”  While most entrepreneurs take it in stride, I’ve had some that just look absolutely crestfallen (man, that feels awful), I’ve had others argue with me telling me how dumb I am (which doesn’t feel so awful), and I’ve had folks that address my reasoning telling me that they’d be happy to make whatever changes I think they need to make to the business as long as I cut a check (which is scary on many levels). 

The one thing I still don’t have a handle on is the quick no.  I know of investors who will schedule an hour meeting and ten minutes into it will tell the entrepreneur there is clearly no fit and will hustle them out of the office.  I have a couple of problems with this model.  First, even though I often think I know ten minutes into a conversation if the deal is interesting or not, there have been a few times where pitches that started out poorly ended up really winning me over.  I would have hated to miss those.  Even more problematic for me, though, is that it just feels rude.  Yes, time is my most precious commodity and yes, it can be excruciating to sit through a presentation I know I will never fund.   But if I have committed my time and the entrepreneur has taken the time to prepare a presentation, round up a team, and travel to the meeting, well, they deserve to be heard and to have a conversation about it.  Heck, if nothing else, maybe I can give them a little food for thought while learning something new myself, and then introduce them to someone who may be able to help. 

This all changed for me today when an entrepreneur did to me what I would not do to him.  I was on a phone call with Maz and this entrepreneur.  It wasn’t going great…we clearly didn’t see eye-to-eye on many of the core concepts of his business.  Fifteen minutes into the call we asked yet another question about the business but this one was met with a derisive laugh and a “Did you really ask me that question?”

Well, yes we did ask that question and it seemed valid but……

Again with the derisive laughter and a “I can’t believe you asked me that question.”  He then went on to say that if were asking a question as vapid as that we had nothing else to talk about and he hung up. 

Made me feel really good about my already conceived notion that we were not going to fund this guy.  And the bonus was that I wasn't going to have to tell him why.

It also reinforced my thinking about the short "no."  I'm still unlikely to end a meeting prematurely and shuffle you out of my office.  But if anytime you feel like getting up and leaving, feel free.  It sure makes my job a lot easier ;)

Talk About Satisfaction........

Satisfaction, the people-powered customer service site founded by rockstars Thor Muller, Lane Becker, and Amy Muller announced their company launch today, as well as an investment by First Round Capital, O’Reilly AlphaTech Ventures and great angels like Jeff Clavier and Mike Brown.

We are thrilled to be working with Satisfaction as they change the face of customer service online.  What originally drew us to the company was the founders’ ability to develop amazingly simple and compelling products that solved some basic problems with current customer support functions.  What sealed the deal is the notion that Satisfaction gives customers the tools to get satisfaction whether or not the particular company wants to get involved.  So while Jim Stengel, CMO of P&G, is declaring that the era of “telling and selling” is dead and will be replaced by relationship marketing and John Battelle sells out his Conversational Media Summit where the mantra was “brands are conversations,”  Satisfaction enables any customer of any company to create the customer service site they are looking for without waiting for that company to achieve enlightenment.

Next time you have an issue with a product or company and are frustrated by the lack of options presented, I can point you to a place where you might get satisfaction.