Archive for the ‘Uncategorized’ Category

New VC Blogger – Greg Gottesman (Madrona)

My long time friend and favorite Seattle VC Greg Gottesman has started blogging. Greg’s a great writer and super thoughtful investor so I expect his blog will be one to read and comment on. It’s certainly going to be in my daily blogroll.

Greg and I are currently on the boards of Cheezburger and Startup Weekend together. We had several shared investments over the years including both good and bad ones. I’ve always had deep respect for how Greg thinks, works, and acts. Plus, I just love hanging out with him.

Greg was half of the motive force behind bringing TechStars to Seattle. He and Andy Sack, the TechStars Managing Director, literally made it happen. Greg’s been an awesome partner in the TechStars journey and completely embraces the mentorship model and the notion of “give before you get.”

Greg – welcome to the blogosphere. It’s never too late to join.

When Should A Company Be Formed Around an Idea?

Question:

I participated in a company’s “app challenge weekend” (which they described as somewhere between a hackathon and a startup weekend). I am excited to continue working on the product that my team built over the weekend with 2 of the team members (my brother and the guy who pitched the idea).

My preference is to formalize a relationship by forming a company.  My fear is that the guy who pitched the idea will decide in a month or two that he doesn’t need us and tell us we’re not working on it anymore.  He formed a company 2 years ago that he talks about (though from the research I’ve done has no IP or product of any kind) and thinks that this idea fits into that vision, but doesn’t want to include anyone.

Should we form the company now, using fairness and our best sense of who will be doing what work to split shares and come up with a conflict-resolution/decision-making process (I imagine this would be the board) to compensate for the fact that my brother and I just met the guy who pitched the idea a week ago? Or should we continue working on the product and see what happens?

If you have any concerns today, then the last thing you want to do is continue and “see what happens.”  We always tell startups to deal with their issues immediately.  One, they don’t get any easier over time, but more importantly, the issues are easiest to deal with when the company isn’t worth anything / much.  As soon as one of the parties starts seeing dollar signs in their eyes, issues become much harder to deal with.

We’d suggest that you form a company (LLC or S-Corp is fine at this point), divide up the equity and make sure it is subject to vesting.  That way, if someone does decide to leave, they will not leave with all of their equity.  Make sure that there is a strong agreement in place that contributes all the IP that you created during the weekend to the new company.

As for dispute resolution, there are two ways that this can work.  One, the equity owners of the company can vote the issues.  In this case, if you all owned equal amounts of equity, two of the three of you could vote the issue to approval or veto.  Or you can have the board vote, as well.  In general, if you are a three person team and you are already planning on “dispute resolution strategies” it might be time to sit down and make sure that you are all on the same page going forward before you start a business together.  It’s not normal that shareholder and / or board votes are happening very often with companies this small.

Teaching With Our Book – Venture Deals

We’ve been flattered through the years to hear that several highly acclaimed universities have used our term sheet series to teach business, law and engineering students the ins and outs of the venture financing term sheet.  With the release of our book, Venture Deals:  Be Smarter Than Your Lawyer and Venture Capitalist, we’ve begun to hear that folks are using our book in the classroom, as well.  The book is much more broad than the term sheet series in that it discusses fundraising, negotiation tactics and potentially most importantly, how VC firms are organized and incentivized, thus providing a never-seen-before look into the inner workings of venture firms.

Jason co-teaches a class at the University of Colorado Law School called VC 360 with professor Brad Bernthal.  They’ve been teaching the class for four years now and both enjoyed teaching from the book, rather than cobbling together a disjointed coursepack on the subject matter.  (Okay, we are biased, but take our word for it).

We’ve also learned that Woody Benson and Philip Lowe are teaching a course at Bentley University using the book.

With that in mind, we’ve created a new page at AskTheVC.com: Teaching.  To start, the University of Colorado and Bentley University have open sourced their syllabi and we welcome other educators to join us by posting theirs as well.  If you want to get involved, just leave a comment and we’ll get back to you.

We’ve also created a forum in case we get enough participation that we can share stories and issues about teaching from the book. Finally, Brad Bernthal and us will be writing a teacher manual for the book to help future use in the education ecosystem.

Thanks Philip and Woody on being our first partners!

 

How Hard Is It For A US VC To Fund A Company In Brazil?

Question: How hard is for USA VCs fund an abroad startup? e.g. Brazil. There are not so many VCs here, so I would like apply for investors in the USA. Have you seen that before?

US-based VCs tend to fall into two categories – those who don’t do any deals outside the US (other than Canada) and those who do. So before you start talking to VCs, make sure you which category they fall into. For example, our firm – Foundry Group – doesn’t invest outside the US while our friends at Union Square Ventures do, although their portfolio is concentrated in Europe.

Assuming a firm invests outside the US, you should be able to easily check from their portfolio whether they’ve invested in your country (in this case, Brazil). If they haven’t, it’s a long shot that they will. If they have, they are likely a good target for you.

As US VC firms have expanded to Europe and Asia (especially China and India), they have built local teams in the countries they are expanding to. In some cases, firms like FIR Capital are affiliated with a VC network (in this case, the DFJ Network).

I don’t know anything about the Brazilian entrepreneur or VC market although a quick Google search for VCs in Brazil turns up some good data about firms both in Brazil as well as US firms that have invested in Brazil. Not surprisingly, there’s also some data on Quora. And in my exploration, I found Rodrigo Baer, a partner at Warehouse Investimentos in São Paulo, who is a VC blogger (and has been added to our VC Blogger sidebar). So there is plenty of info out there about VC firms investing in Brazil.

The basic message is “know who you are talking to and where they like to invest.”

Finding Companies to Invest In

Today’s great VC post is from my partner (and co-author of this blog) Jason Mendelson.  Jason post Where Do Venture Capitalists Find Their Companies? has a detailed breakdown, from Jason’s point of view, on where VCs find (and look for) companies to invest in.

And – as a bonus post – Mark Suster has a dynamite rant titled Is VC too Fat and Happy?

Should I Send My Business Plan To Every VC Firm I Have An Email Address For?

Q: Is it a bad idea to send a business plan to too many VC firms? I have access to a large list of VCs that invest in my type of company and I was thinking about blasting out a business plan to all them. My thought process is it is a numbers game and the more people that see it the better the odds are that someone will be interested in it. I am just a little worried about the intellectual property side of things and by sending it to too many firms it could be vulnerable.

A: (Brad) This is a terrible idea.

First of all, don’t send your full business plan in your first email to a VC.  Instead, send a short overview (in the text of the email) and an executive summary.  A VC should be able to quickly determine whether or not he wants to spend time with you from this information.

More importantly though, simply sending your business plan (or overview) out to a large number of VCs with whom you have no relationship with is unlikely to yield any results.  When you are raising money, it’s a "quality" game, not a "numbers" game.  The higher quality your introduction, the greater the change you will get an audience from a VC. 

Some VCs take a look at every email that comes in over the transom (I do – and I always try to respond.)  However, if it’s a totally cold, random, "Dear Sir" type email, I give it less weight than if an introduction is made by a colleague that I know and respect.  While there is a range that varies based on how busy I am at any particular moment, what kind of mood I’m in, and whether or not my dog woke me up too early in the morning, some sort of connection to someone or something I know is always better.

Finally, I wouldn’t worry to much about the intellectual property side of things.  Even though the theme that "VCs steal entrepreneurs ideas" seems to go around the system regularly, my experience (as an entrepreneur, angel investor, and VC) is that this is an urban myth.  Most VCs will simply ignore your email blast.

Do I Need a Team To Raise Venture Capital?

Q: How important is having a partner?  As a sole entrepreneur that’s investigating venture capital, is having a partner typically required? What are the justifications to requiring a partner?

If I pursue a venture capital firm without a partner or team, is that a show-stopper?  Can I explain that finding a partner is difficult, or are there no options at all?

A: (Jason).  In my opinion, it is mandatory to have a partner and / or team to raise venture capital.  There are several reasons for this:

1. No single person can do everything.  Everyone needs a partner to balance out his/her actual or perceived weaknesses.  I’ve not met anyone who can do absolutely everything from product vision, executing on a plan, engineering development, marketing, sales, operations, etc.  There are just to many mission-critical tasks in getting a successful company launched.  You will be much happier if you have a partner and / or team to back you up.

2. It’s not a good sign if you can’t get others to get excited about your plan.  It’s hard enough to get venture capitalists to write checks to fund your company, so if you can’t find other team members with the same passion and beliefs as you, this is a warning sign to anyone that might want to fund your company. 

3. If you don’t have a team, what is the venture capitalist investing in?  Just as important as the idea is the team executing it.  In fact, I think most VCs would tell you that they’ve made money on "B" ideas with grade "A" teams but that many an "A" idea was left in the dustbin due to a substandard team. 

The one exception would a repeat entrepreneur.  If the venture fund has had a good experience with an entrepreneur before and believes they can build a solid team post-funding, then he / she has a chance to get funded as a sole entrepreneur.

Does Having a H1B-Visa Founder Preclude Venture Investment?

Q:  Does having an H1B founder (among other non-H1B founders) inherently prevent a startup from being funded? For example, what if a U.S. citizen creates the company which receives funding, and then applies for the H1B founder to join as a regular employee and then issue a founder-sized portion of the company stock?

One possible problem is that the founder will be working on the idea in their spare time while employed, but at least in the state of California this isn’t a problem if the H1B founder’s work isn’t related and he does it on is own time and resources. Are there other issues? I’m just trying to figure out the general "gotchas" of an H1B founder (who is sufficiently skilled and productive to make it worthwhile to have on board).

A:  (Jason)  I am not an immigration lawyer, so the "gotcha" part of your question isn’t something that I can answer, be I can provide the VC perspective.  The answer is "no."  Having a H1B co-founder is not inherently a problem to get funded.  So long as the co-founder can work full time and provide comparable contributions to the company, then VCs shouldn’t care. 

A couple things to consider:

1.  Timing of grant.  If the grant is only going to occur upon the issuance of the H1B visa, then you should consider the timing issues of your grants being made at a different time than the other founders (and potentially at a higher price);

2.  Timing of the visa application.  It seems like the U.S. is running out of H1B visas earlier and earlier every year.  You should take this into consideration when forming the company and sponsoring the application.  Short answer:  get this done early in the year before the visas are exhausted.

Good luck with your venture.

Do I Pick A Venture Capitalist Based On Money or Guidance?

Q:  I self-financed and run a profitable Internet based start-up with more customers than I can handle. I can take the business to where it needs to be without outside funding. However, it will take much longer to grow organically. I’ve considered working with financiers for guidance and capital.

What is the best route to take?  I’m in a position where I have several VCs interested and their terms are different.  Do I go with no money?  The best money terms?  the best guidance?

A:  (Jason).  Venture Capitalists bring 4 types of "capital" to any transaction:  Monetary, Social, Interpersonal and Experience. 

Monetary is simply money – a checkbook, if you will.  Social is the network and connections that a good VC can bring to the table.  Interpersonal is the capital that VCs bring that allow them to mentor their investment executives.  It also helps them to be helpful board members.  Experience is just that- having been there and "done that" time and time again. 

The question to ask yourself is which of these types of capital you need more?  Is it all about the money, or do you really need help that you don’t have inside the company?  And which one of your potential VC suitors do you find better equipped to provide this non-monetary capital? 

We’ve found that many of the companies we invest in are more interested in the non-monetary capital that we can bring to the table and we are quite proud of that fact. 

What’s the Difference between a CEO and COO?

Q:  Can you please clarify the distinction between the roles of a CEO and a COO?

I had my own impression of the roles of a CEO, which included managing and motivating the team as a whole and ensuring the execution of day-to-day tasks.

However, after speaking with a mentor, who has been a CEO and a COO of Fortune 500 companies, he informed me that the CEO’s roles are first and foremost, obtaining financing (a large majority of the CEO’s time), along with setting the vision, followed by finding talent and creating alliances. Additionally, the CEO should guide top-level management, but not be very involved in the day-to-day.

The COO is supposedly responsible for ensuring the execution of all of the day-to-day tasks necessary to achieve the company’s vision, managing the company’s non-senior level employees, and "making things happen."

Can you please confirm or refute the roles as defined above, and provide an explanation? Additionally, can you please mention some of the necessary skill sets that each role requires (e.g., CEO: strong grasp on finance, general knowledge of all aspects of a business, etc.).

A: (Jason) There isn’t really a definitive answer to your question.  In my opinion, you are both right.  There are two components which weigh heavily into what the CEO / COO distinction is, but there are others too.

The first question to ask is "what stage is the company in its lifecycle?"  Many early stage companies don’t have COOs, so the CEO is doing "all the above."  See Brad’s recent post on why he doesn’t like COOs in early stage companies.  In later stage companies (especially Fortune 500 companies) you’ll usually see the CEO as the "front man"  in organization with investor relations, overall culture, vision and strategic direction being very important, while the COO, or other operations person (CFO or General Counsel) responsible for more other day-to-day tasks.

The second question is what "style" the CEO employees, as well as what his/her previous area of expertise is.  Some CEOs are master delegators to their executive staff.  Some are detailed orientated and want to be involved in every decision.  This is purely a factor of management style.  Furthermore, depending on where a CEO "grew up" experience-wise (sales, tech, marketing, finance, etc.) you may see them be more or less involved in certain functional areas. 

So there is no "one size fits all" CEO job description.  And because of this, there really isn’t a "necessary skill set."  I think for all CEOs it is important that they are good communicators, create a healthy culture at their companies and are someone who inspires – both employees and the outside word alike.