Permanent Record

Entrepreneurs Helping Entrepreneurs

We had a great event this week co-hosted by First Round Capital and Mayfield Fund called "Entrepreneurs Helping Entrepreneurs."  There were well over 150 seasoned and new entrepreneurs in attendance networking with each other for a few hours.  Additionally, a few lucky entrepreneurs won a mentoring session with some very successful entrepreneurs including Jay Adelson, Caterina Fake, Aaron Patzer, Gina Bianchini, Max Levchin, and Mark Pincus.

Founders face a unique set of issues when growing their companies from 2 to 20 people.  At this stage there is no better help than someone that has been there before you.  As a partnership we are always trying to find new ways to create support structures for the entrepreneurs both in our portfolio as well as the community at large.  We had this in mind when co-developing the structure of the event and it turned out quite well.  

Many thanks to Raj Kapoor and Emily Melton of Mayfield fund and the support teams in both of our organizations for putting on a great event.  Also, big thanks to the entrepreneurs mentioned above who donated mentoring time to help out fellow founders.  I look forward to the next one!

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.

Can Do vs. Should Do

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.

Welcome, Maz!

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!

$50 Million Is the New $100 Million

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.

Venture Investing in a Web 2.0 World

When I joined First Round Capital a few months ago, I discovered that the term “Web 2.0” had affected me personally.  The notion generated by Dale Dougherty that become a conference and was subsequently morphed into a class of companies was now a type of venture investor.  Not only that, but I was a Web 2.0 investor, surely because I have led some investments in companies that fall under the Web 2.0 nomenclature. 

Knowing that the Web 2.0 label will inevitably end up in the dustbin of overused company descriptors (where it can have a cup of coffee with B2B, nano, and any non-medical usage of the word “eyeball”), I was someone taken aback.  I don’t recall ever referring to any of my investments as a “Web 2.0 company” although others certainly have.  What does interest me is any idea that peels back another layer of the promise of the internet.  This promise – enabled by a ubiquitous, free, unlimited capacity, user-modifiable, general-purpose network that allows anyone to communicate with anyone -- is beginning to be made clear.   Giant corporations are communicating with (as opposed to “communicate to”) their customers, folks are building massive businesses out of their dorm rooms, and guys like Craig are accidentally destroying centuries-old companies.   Early stage investors require an environment of disruption and we are in the middle of one right now.

Don't get me wrong, I also see derivative, poorly managed, and otherwise unfundable companies, many considered Web 2.0 companies.  It’s a natural by-product of the start up cost of a company being close to zero in many cases.  But I am also a proud investor in a number of companies (also considered Web 2.0 companies) that I believe will be successful regardless of whether or not the term falls out of favor.   

Accordingly, you will find me at the third installment of the Web 2.0 conference next week, looking for the leading edge of the next trendy, overwrought, buzz-worthy set of companies setting out to change the world.  And only if I am lucky, I will invest in the ones that will do so long before there is a name for them.