Permanent Record

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.

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

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.

More than at this time last year, I am finding myself asking about the motivations behind starting companies.  It can sound like a hokey question, but the motive is pragmatic:  I’m trying to determine if the company was created because it can be built or because it should be built.

A “can do” company is built around some sort of feat of strength; often a show of technical prowess.   It’s as if the founders are saying, “Look what we can do!”  I have seen many impressive companies over my career which were clearly the result of “can do” thinking.  They developed feature-filled, fully-internationalized, highly complex products, all-things-to-all-people products.  Very few of those companies (or products) still exist.

“Should do” companies are based around a real need.  They solve a problem, scratch an itch, relieve pain.   Here at First Round Capital, we have companies in our portfolio that save you and me money, that can prove additional sales volume they drive for online retailers,  that help other companies manage and monetize their web APIs, and who simply help their users remember things.  Each one of these companies can point to a particular set of customers and tell me exactly what they do for them.

We appear to be at the part of the cycle where more folks are starting companies because they can rather than because they should.  If you cannot explain why your company should exist, you may want to rethink your strategy before you get too far.

I’m becoming convinced that the notion of “community,” when applied to a web company, is not well understood.  I hear at least every couple of weeks how a company is going to build some such community as a foundation of their business.  This is a problem for me as I don’t believe that entrepreneurs build communities but instead believe that communities build themselves.

If I were to translate this ill-conceived notion of building community to the very vibrant community where I physically live, then the entity that “built” my community would be the real estate developer(s) who re-zoned and cleared land, divided lots, installed water/sewer and utilities, and built the homes approximately 60 years ago.

Nope.

Those developers did play a very important role in defining what the community could be, but they could not have known that my town would transform from a summer home for fogged-out San Franciscans to a suburban village, that the local train service would be ripped out and the tracks paved over to created hiking and biking trails, or that eventually BART would reach out to provide a non-bridge commute option for the community.   The placement of schools and roads, configuration of lots, proximity of retail and commercial areas, and highway access were well thought out, but they provide only the backbone on which the community was built.  The character of the neighborhood – the community –  is more defined by the quality of the schools, the creation of a local park, the speed bumps on the street to slow down traffic, the ease with which most neighbors are quick to offer ad hoc child care when you need to make a quick trip to the grocery store, and the promiscuous sharing of baked goods. All of these features were created by the community itself.

Similarly, an entrepreneur who believes a community might be built around a company needs to follow three simple rules:

1) Create a thoughtful, lightweight infrastructure and set of tools around which might be useful to a group of folks with some shared interests.

2) Continually push the responsibility and decision-making ability for building the community back on to the members of the community.

3) Be patient.

Only then, and only if you are lucky, might a community develop.

The first rule is well understood.  Technology entrepreneurs are great at building infrastructure and tools.  A quick survey of the companies reviewed on Techcrunch in the last year show a ton of these companies.

The second rule is much more difficult.  “Letting go” is uncomfortable enough for normal folks; for entrepreneurs it can be terrifying.  I often hear questions such as “What if they take the community in a way I don’t want them to go?’ or “ How will I be able to monetize that sort of activity?”  Yep, those are problems.  Or, more definitively, those are your problems.  But they are not the community’s.  If you are depending on a community to become a big asset for your business then you are at their pleasure, not the other way around.  It’s dicey, indeed, but entrepreneurs who have successfully negotiated this narrow path like Philip, Kevin, Jimbo, and Pierre have seen staggering growth.

The third rule is tough for entrepreneurs and investors alike.  Growth in communities is usually not linear; it is bursty.   Look at twitter.  I had been a user since the beginning, liked the small community it had become, and blammo! something happened (in this case, SXSW happened).

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It couldn’t have been predicted, however, it did follow the three rules.  While you are in patience mode, all you can do is spend money behind the growth and manage your burn such that your patience runs out long before your capital does.

I’ve enjoyed attending the Under the Radar conferences over the last year so much that I jumped at the chance to judge some of the companies at their conference next week titled "Why Office 2.0 Matters."   

Under the Radar is always a good mix of companies and investors with an atmosphere that is a bit more edgy than many other conferences, which I like.  One of the highlights last year was Ross Levinsohn telling Mike Arrington that Fox Interactive had acquired one of the companies in the room but he wouldn’t say which one.   The accusing glances were flying.

If you would like to attend, click here to receive a discounted admission to the day’s events.

A while back I posted a job opening at First Round Capital for our first Analyst.  After posting, I was instantly deluged with resumes from many excellent candidates.  And the resumes kept coming for weeks, most recently as the posting found it’s way to Doostang. 

Our goal was to find a person that was smart, energetic, and with the entrepreneurial spirit that we like to bring to our firm, and we have done that with Mazen Araabi.  Even though he wasn’t officially supposed to start until tomorrow, Maz has already jumped in to help us around a number of potential investments, all while trying to find a new apartment in San Francisco and getting his furniture moved up from LA. 

When you meet Maz be sure to ask him about his experience at Intermix when MySpace was first starting up.  Not many people get a "Woulda Coulda Shoulda" that early in their career

Welcome, Maz!

Back when I first started in the venture capital business at the end of Web 1.0, it was de rigueur to have a plan showing at least $100 million in revenue by year five.  It was always on that slide in the powerpoint deck that went by quickly, because everyone had one and they all said the same thing.  Most of them should have had a footnote that read: “Nudge, nudge, wink, wink, of course we’ll be trading on Nasdaq long before we have to even explain to anyone how we achieve that.”

Today’s business plans all have a more prudent revenue figure. I’ve been amazed, however, at the consistency of this prudence.   Five-year projections are now exactly one-half of what they were in early 2000.  All of them.  If I took the time to analyze the revenue projection slide for every company I’ve seen over the last year I’m positive I’d see an average five-year revenue projection of $50 million with a standard deviation of about $5 million.  Apparently $50 million is the new $100 million and I never got the memo.

Recently while talking to an entrepreneur about her plan she went through the requisite five-year revenue target.  We talked about where that number came from and she gave a very thorough description of the assumptions and levers in her model.  She then also told me that she was very recently attending a top local business school’s entrepreneurial program where the students were explicitly told that if they ever raised venture money they had to develop a revenue model that could show at least $50 million by year five.  Heh.

For the record, what I need is to believe a business can return at least 10x our investment, and potentially much more than that.  Often this does mean a realistic revenue plan that gets to $50 million by year five.  It can mean many other things, however, depending on what valuation methodology will be applied at time of liquidity.  I’m flexible, try me.

More importantly, though, is to convince me that you can make the hurdle.  Tell me where the sensitivity is in your model and show me what happens when that key variable ends up 25% below expectations.  Explain how the organizational structure and operational plan (and venture investor targets have been developed to focus attention on the drivers of your model.  Ensure that your assumptions do not show customers paying 2x their current cost for something that gives them 10% incremental value or that your plan does not require 75% of the U.S. population to become paying customers to succeed. Most of all, help me gain confidence that when your plan breaks, and it will, you will be able to figure out how to put it back together again.

I’m not expecting the $50 million revenue number to go away. Heck, it is a good number and I will always hope that every revenue number I see will be achieved.  These days, however, when we get to that slide in the powerpoint deck I will be spending some quality time discussing it.

First Round Capital is looking for a Venture Analyst to help us build and manage our growing portfolio of companies.  If you or someone you know fits the profile, take a look at the job description.  Send an email to jobs <at> firstround <dot> com with your CV, a pointer to your blog, or anything else you feel appropriate.  We’ll look forward to hearing from you.

I had a meeting this morning at the Web 2.0 "Sumference" with someone who lives in the East Bay.  (For those unfamiliar with the geography of the Bay Area, to get from the East Bay to San Francisco generally requires traversing a bridge.) 

Fifteen minutes before the meeting, I received a call from said person saying they would be late.  Reason?  Her Toyota Prius, which has a sticker allowing carpool lane access, had mechanical issues so she was driving her other car and waiting in the interminable toll lines with the other gas guzzlers.

Excuses that are bloggable always get a pass.