I have heard from a number of entrepreneurs over the past couple of months about how they wished VCs would give them a “quick no” more often. I think it’s a totally fair critique and have tried to improve in this area myself. In lieu of a “quick no”, I thought I’d give entrepreneurs 4 questions and 4 pressure tests to help you decipher a VC’s level of interest. These questions presume that you have already given the VC an initial pitch of your business, so they have enough information to at least be initially interested. After thinking about this post, I have a renewed personal commitment to make my interest level clear and prompt so that there’s nothing to “decipher”. A good working relationship should start before an investment is closed – so while I hope the advice is helpful in general, I hope that it’s advice you don’t have to take with me. If you feel like you do, feel free to call me out on it – I’ll respect you for it. Without further ado…
1. How quickly does the VC respond to your calls or emails?
This is more of a disqualifying question than a qualifying one. If a VC consistently takes more than one week to respond to your emails or calls in a normal work week, I’d say it’s pretty safe to disqualify their interest in 98% of cases. If they’re responding consistently to you with positive sentiments in less than 12–24 hours, I’d consider that a positive sign. Everything in between is a grey zone, but the more responsive the better.
2. Who is investing the time and resources in diligence – you, the VC, or both?
For a productive process, it should be both. If the nature of the diligence process is the VC asks you for information, you scramble to pull it together, and that’s it – it’s not necessarily a buying signal. You want to see an investment of time and energy from a team of folks at the VC firm including a partner. Such an investment could include: on site visits (especially if air travel is required), spending money on diligence (e.g. legal, technical, financial, etc.), clear commitment of time on diligence calls, or a partnership presentation (which is an investment of other people’s time).
3. Is the VC making progress “reportable” to a partnership every week?
Most VC firms manage a deal pipeline the same way any company might manage a sales pipeline. When an investment opportunity progresses to a stage of real interest and opportunity, they raise it to a level internally which presumes some level of weekly reporting to the team. Once it reaches that stage, the VC has every incentive to make “reportable” progress each week so that they don’t lose momentum internally with their partners. If you feel like a process is dragging and is slow, then you’re probably not at that level or you have come down from that level and serious interest may not be present.
4. At the end of the day, do you feel like you’re chasing the VC or is the VC chasing you?
Any VC worth his/her salt knows how to go 110% after a company they want to invest in. We all know we need to be aggressive in a competitive environment to win the best opportunities. So, VCs know how to chase great companies. If you feel chased, consider that the best buying signal. If you don’t feel chased, then consider a pressure test…
4 Pressure Tests
1. Ask the VC to sign an NDA.
I’d say this is the easiest test. There’s a widely held belief that VCs don’t sign NDAs. I haven’t found that to be true. Imagine if a VC said to their LP, “We didn’t invest in Google because Larry and Sergey wanted an NDA and we declined out of firm policy.” That wouldn’t fly. The reason VCs generally don’t sign NDAs is that it creates too much complexity if you’re meeting with thousands of companies a year to sign NDA’s for all of them. But, VCs will sign NDA’s if they’re seriously interested in a company and it’s important to you. As a ballpark measure, I sign about 1–2 NDAs per month and invest in 1–2 companies per year.
2. Schedule a partnership presentation, or specifically outline the process to get there.
No investment will close without you pitching the partnership. Many VCs won’t allow term sheets to be issued without a partnership presentation. Either way, ask the VC you’re engaged with to outline the specific steps and timeframe to a partnership presentation. If they outline something very clear or even schedule a date, that’s great. If their answer is hazy or unclear, then they’re not ready to put you in front of the partnership which is where they invest some of their credibility.
3. Ask to call references on the partner.
This is a qualifying test rather than a disqualifying test. If a VC partner lets you call their references, then it’s a clear buying signal because that’s an investment of time from their references (usually their CEO’s). They won’t use their CEO’s time unless they have very serious interest. If they’re not ready to give you references, I wouldn’t say it’s disqualifying but it’s a sign that there’s still work to be done before the finish line.
4. Reject the VC (nicely).
This is probably the ultimate pressure test. If you’ve asked the questions, done the pressure tests and your gut doubts the level of the VC’s interest – in as kind and as humble a way as possible, let the VC go. Just tell them that while you would have liked to work with them, it doesn’t seem like they’re interested, and there are no hard feelings. Perhaps the stars didn’t align this time, and you’ll keep them in the loop for any future financings. While I wouldn’t recommend this as a negotiation ploy, I think it’s fair game if that’s how you genuinely feel. If somehow you have misjudged the situation, and they are really interested – this should kick them into gear. But, more likely, it will lead to a clear no which is still helpful.
Once again, my favorite VC blog posts of the last couple weeks. It seemed to be a lighter couple weeks of blogging – clearly the summer is upon us. In no particular order:
- The Heart of the Matter. Mark Solon, Highway 12 Ventures (med device VCs really do cool stuff)
- Geeks Linked To Business = Success. Rick Segal, JLA Ventures (wish all of my companies thought this way)
- There’s “something called the Internet”. Seth Levine, Foundry Group (nostalgic video of how we talked about the Internet 15 years ago)
- Making the illiquid, liquid. Lee Hower, Point Judith Capital (this is an important trend to watch)
- Transcending Moore’s Law. Steve Jurvetson, DFJ (stop looking at stock charts, our business is about this chart)
The VCs covered are those in the Global VC Blog Directory. If you know of other VC blogs not covered in the directory, please leave a comment on that post. I’m planning an update in July.
I have been reading a book called Predictably Irrational by Dan Ariely which has raised some thoughts I’ve had for awhile about why human nature tends to define value on a relative basis rather than on an absolute basis. The first time I started thinking about this was when I would ask friends to pick which scenario they’d prefer:
- You make $80,000 in a world where everyone else makes $50,000.
- You make $90,000 in a world where everyone else makes $150,000.
Most people I asked that question to, after thinking about it, preferred scenario #1 despite making more absolute money in scenario #2. It shows that in this instance, they value relative wealth over absolute wealth. It’s clearly an imperfect example because it’s too theoretical, but it does start to uncover the issue at hand. Let’s take a more practical example – imagine you had to rate the “value” of the fish and chips on the following two menus:
- Fish and Chips: $15, Grilled Chicken: $7
- Grilled Chicken: $29, Fish and Chips: $15
My guess is if you conducted a study, the fish and chips on the second menu would be rated as a better value than the fish and chips on the first menu – despite the same absolute price. While not using this example, Predictably Irrational does leverage compelling studies that show that a highly effective technique to sell a given product at a given price is to put another product at a higher price right next to it. Again, this plays to our sense of relative value. Another example - imagine you had to rate the attractiveness of the second person in each scenario:
Somehow I think the results would show a higher rating for the middle picture in the second scenario than the first. In fact, Predictably Irrational talks (semi-seriously) about how if you’re going to a bar – the best advice they have to optimize your personal attractiveness is to make sure your wingman is slightly less attractive than you. OK, one more example, and then I will in fact relate this to the venture world and technology. This one is from the book – imagine you had to select in both cases whether you would make the drive:
- Drive 10 minutes to save $5 on a $15 pen.
- Drive 10 minutes to save $5 on a $500 suit.
Despite the same absolute economic savings and same cost (driving 10 minutes), a substantially higher percentage of people would make the drive in scenario 1 rather than scenario 2, because of its higher relative value. You get the drift.
OK, this dynamic does in fact play out in the venture world more often than one might expect. I’ve seen it in many different instances, but most classically during an acquisition process. Consider how supportive you would be of taking the deal in the following two scenarios:
- You have a $20M revenue software company. An acquirer comes along and offers you $20M and says you are worth 1x revenues. Then through your shrewd negotiating and creation of a bidding war, you’re able to walk up the price offered by that acquirer up to $100M. You have increased their offer by 5 times!
- You have a $20M revenue software company. An acquirer comes along and deems the company strategic and offers you $200M. But, then through the diligence process they uncover some issues and decide your company is “only” worth $100M – an insulting 50% less than their original offer.
In my experience, despite the same absolute value at the end, boards would more likely be celebrating in scenario 1 and angrily walking away in scenario 2. Why? Again, it’s all about the relative value against the starting bid.
While I’m not trying to make relative value seem irrational (because I don’t think it is) – it’s worthwhile to recognize how human nature can sometimes inappropriately define value exclusively on a relative basis to the neglect of all other reasoning. Perhaps we need to learn how to put aside our need to compare, and just be happy with what we’ve got. In an orthogonal way, this reminds me of a quote I heard years ago, “Being rich is not about how much you have (or how much more you have), but it’s about how content you are with what you have.”
In recent blog posts by Fred Wilson of Union Square Ventures and Bijan Sabet of Spark Capital, they have talked about how twitter and facebook (e.g. social media) will surpass Google in driving traffic to websites and blogs. In fact, Bijan shows direct data on how 17.8% of his blog traffic comes through twitter (his top referrer). I think the topic they both raise is a very interesting one because whoever drives traffic on the web sits on a very valuable piece of real estate. And, if there are wholesale shifts going on, then it’s truly noteworthy.
The question I asked myself after reading their posts nearly in tandem is whether their experience of who drives traffic to their blogs is perhaps unduly influenced by the fact that they are both twitter investors and are fully invested on the twitter platform. I decided to look at my own blog traffic to see if I saw the same trends given that I consider myself an active twitter (~1,850 followers) and facebook user. Here’s the most recent data:
Top 10 Referrers – Last 30 Days (# of visits, % of all referred visits, % of all visits):
- TechCrunch (3,748, 57.2%, 22.0%)
- PEHub (630, 9.6%, 3.7%)
- Google Reader (603, 9.2%, 3.5%)
- news.ycombinator.com (555, 8.5%, 3.3%)
- twitter (447, 6.8%, 2.6%)
- 37Signals.com (167, 2.5%, 1.0%)
- WSJ.com (164, 2.5%, 1.0%)
- Delicious (113, 1.7%, 0.7%)
- Boston.com (64, 1.0%, 0.5%)
- Altgate.com (62, 0.9%, 0.4%)
Over the last 30 days, this blog has had 17,034 overall visits and 6,550 referred visits. Here are some of my observations on the data with all due consideration for the fact that this is only one website in a massive universe of sites:
- Vertical content sites beat general content sites. Though this blog has been written about twice in the online version of WSJ.com and twice in print and online versions of the Boston Globe, those outlets don’t drive nearly the traffic that vertical blogs/news sites like TechCrunch and PEHub do. And this blog has only been written about once in TechCrunch and twice in PEHub. Hence, despite the fact that there have been more articles on this blog in WSJ.com and Boston.com than TechCrunch and PEHub, the latter two have driven nearly 20x more visitors than the former two.
- Other blogs matter. It’s also worthy to note that the corporate blog for 37Signals, a very successful young company, and Altgate.com drove as much traffic as WSJ.com and Boston.com.
- Organic traffic still looms large so SEO matters. 61.5% of the traffic was organic which means that SEO matters. I noticed a major change in organic search result placement for this blog after the TechCrunch article. The blog went from nowhere to the top 3 on Google when you search “top VC blogs”. In fact the other two sites in the top 3 are referencing this blog.
- Social voting sites have been more impactful than other social media sites. Ycombinator and Delicious are social news/bookmarking sites. They have driven more traffic than twitter and facebook by about 50%. Ycombinator is also a vertical content site further reinforcing the first point.
While it’d be foolish to discount the rise of twitter and facebook as important channels for web content delivery, it’d be equally foolish to underestimate the stalwarts like Google or solid vertical content sites and blogs. No matter how you look at it though, the tectonic plates underlying web content distribution are shifting. It’ll be interesting to see who the winners are 5 years from now.
This story takes place a few weeks after thefacebook launched.
It was March of 2004 and I was attending an alumni event for Harvard Student Agencies (HSA) – a student run company at Harvard. Being a past president of HSA, I made a point of attending this event just to stay in touch with the students and school. As the evening drew to a close, I asked one of the current HSA managers, “What’s the coolest thing on campus these days?” Her response with conviction was, “Thefacebook. It just came out last month and everyone is using it on campus.” Apparently some sophomores had set up a website intended to be a better online version of the Freshman Facebook – a physical book with the pictures of each member of the freshman class. The Freshman Facebook was the dating (or more realistically, scouting) manual used by all freshmen to keep tabs on the classmates that caught their eye.
Intrigued, I went home and checked out thefacebook.com (which I will now refer to as Facebook). The site was only open to those with a harvard.edu email, but fortunately my post.harvard.edu alumni email worked liked a charm. After logging in and checking out the features, I had an “aha” moment. The founders had made a simple yet brilliant innovation which did not exist on any other social network. They had uploaded the Harvard course catalog into the network so that with a single drop down menu, you could sort the entire network by those taking the same class as you. The limitation of the Freshman Facebook was the limited content and the fact that if an upper classmen caught your eye, there was no reliable way to find out that person’s name or learn more about him/her. But now with Facebook, you could come back from class, go online, sort the network by that class, click through the photos and once you found that person – voila. You could see everything about that person that they cared to share which was a lot more than the Freshman Facebook. Facebook was the killer college dating application.
Since at that time I was at another venture capital firm which invested in start-ups, I was eager to meet the people behind Facebook. Maybe there was an investment opportunity. I looked around the site and saw that it was “a Mark Zuckerberg production”. I messaged Mark and scheduled a meeting for the very next afternoon at Henrietta’s Table – a restaurant at The Charles Hotel in Cambridge, MA. I showed up to the restaurant at 3:00pm and there was Mark Zuckerberg and Eduardo Saverin waiting. We decided to sit outside given the unseasonably warm weather in Boston that day. We ordered some drinks, and they began to tell me the nascent but exciting story of how they, along with some others, started Facebook.
Mark and Eduardo had a complementary aspect to their partnership. Mark struck me as the alpha male. He had a profound confidence about him that exceeded his youth. He exuded killer instinct. He was not shy about sharing his aspirations of dominating the college market. He was also the technical visionary behind the scenes. Eduardo was polite and unassuming. He could have been your college roommate. He was jovial, relational, and likeable. He seemed to be the fast follower. He was also apparently the business mind. While both exuded a certain naivete, they were both convinced that they were going to change the world. They were right.
After that meeting, my mind was consumed with the potential of Facebook. It was only a couple days later that I had a second meeting with Mark and Eduardo. Yet again, we met at Henrietta’s Table – but this time for breakfast. I arrived first, and as Mark and Eduardo came in – it was obvious they had woken up early for this meeting. In fact, Mark’s first comment with a broken smile was that he normally doesn’t get up this early. I was truly appreciative. We got down to business, and I asked Mark and Eduardo about their plans for Facebook and their interest in raising venture financing. They said that they had not yet met with any venture capitalists, but had some initial discussions with a couple angel investors. Mark also expressed his intent to leave school and move to Silicon Valley to lead Facebook full-time. Mark seemed deeply committed to it while Eduardo tried unsuccessfully to project the same confidence. I asked them if they had thought about how much the company was worth. Mark confidently articulated a valuation that some angels had given him. Eduardo stared, paused, and tentatively nodded in agreement.
I invited Mark and Eduardo to my office the next week. While I was unsure of whether this was a good fit with the firm I was at, I decided to take a couple hours that day, and walk them through a blank term sheet. I figured whether we invested in Facebook or someone else did, Mark and Eduardo would benefit from understanding the standard financing terms. I felt a certain obligation to make sure they were educated enough to not sign up to a bad deal. So, we sat there each with a copy of a blank term sheet. I walked through each term and explained in the simplest language what they meant – “preferred”, “voting rights”, “anti-dilution”, “protective provisions”, “registration rights”, “information rights”, “board of directors”, etc. I explained to them the range of options under each, and what was normal. This time Eduardo exuded the confidence. He nodded with assurance after nearly every provision articulating that he knew what that provision meant. He said he had “studied it in school”. I found that to be curious since during my time at Harvard, not a single finance course was offered, let alone one on venture capital term sheets. Maybe things had changed I thought. Nonetheless, I continued to explain things in detail presuming no prior knowledge.
After the session, Mark and Eduardo informed me that they had no transportation home and they had taken a cab to come visit me. Feeling guilty that it never occurred to me that they didn’t have a car, I drove them home myself and paid for their cab fare. We had a nice conversation on the way home. We talked about Eduardo’s girlfriend at Wellesley who he was clearly infatuated with. We talked with Mark about the Bay Area and moving to California, which he was enthusiastic about. And, after the quick drive down the Mass Pike, we took the Cambridge/Allston exit, looped back towards Harvard and I dropped Mark and Eduardo off at Johnston Gate, the main entrance to Harvard Yard.
That was the last time I saw either Mark or Eduardo because an investment ultimately did not work out. Since then, Mark has obviously gone on to change the world – just as he expected to. Mark has accomplished everything he said he would and more. But, when I think back on this experience, a big part of me wonders what happened to Eduardo. I’ve heard about the break-up with Mark early on which makes me wonder what happened behind the scenes. I wonder how Eduardo was treated in the whole process. When people tell the Facebook story now, it seems like Eduardo gets deleted from many versions and included in some. But, from my vantage point, Facebook will always be about Mark and Eduardo. No matter what is written out there, I’ll always believe that Eduardo Saverin is a co-founder of Facebook.
(Eduardo, if you read this, give me a call. Let’s go grab a bite to eat. Henrietta’s Table – I’ll drive.)
[Related Post: Why are 80% of Harvard Students First Borns]
[Related Post: The Letter Given to the Valedictorian of Harvard College]
To subscribe to other VC blogs click here: Global VC Blog Directory
This is the second installment of the Best VC Blog Posts which I aim to do bi-weekly. I think a more accurate title should be my favorite VC blog posts. Maybe I’ll change it next time. The posts were made by VCs covered in the Global VC Blog Directory and were made in the last 2 weeks or so. Without further ado, in no particular order:
- Will Apple Make An Actual Television? Bill Gurley, Benchmark Capital
- Singularity: rise of the ignorant e-commerce geniuses. Fred Destin, Atlas Venture
- Grumpy Old VCs. Todd Dagres, Spark Capital
- Navigating the “CEO Question”. Mike Hirshland, Polaris Ventures
- Are social networks destroying knowledge? Mike Speiser, Sutter Hill
- Conferences. Fred Wilson, Union Square Ventures
- Israel Venture Keynote: When Failure Is An Option. David Cowan, Bessemer
- New England’s Top 10 Innovators. Jeff Bussgang, Flybridge Capital
I was at a wonderful dinner last night with a number of CEOs/Presidents of private and public technology companies. The conversation evolved to being a very candid one about the level of stress we feel in our daily lives and how commitment to work can really take its toll. The experiences have ranged from having to make dramatic life changes after near-death experiences to finding ways for a regular tune-up. It seems that in a connected world, the level of stress is magnified. Our minds don’t relax, so we don’t relax. We ended up having a very real conversation on how people have learned to compensate.
- One executive talked at length about how he has learned to meditate after a year of practice. He practiced at a monastery for a whole year with the goal being to have an empty mind for even a few minutes. Now he meditates for an hour every morning after he wakes up.
- Another executive talked about having found a great 70+ year old Chinese acupuncturist who he visits every month. Despite the 50 needles, he said it’s the most rejuvenating hour and a half nap he has.
- Another person talked about how fishing was his way to clear the mind. Fishing is the one thing he could do that hours could fly by and he wouldn’t have a thought or care in his mind.
- There also were a number of folks who consistently exercise as a way to decompress. I would put myself in this camp.
It seems in this connected world, the holy grail for many executives is just to have a relaxed and unencumbered mind. It’s great to drive 120 mph, but you have to turn off the engine every once in awhile. It is hard to come by but everyone recognized the value. If you have any great lessons learned on this topic, please do share.
For every consumer or mass market company I have invested in – there has been one consistent product management theme: simplicity. While many competitors try to build in more capabilities, more functionality, more content, more, more, more – the winners tend to be incredibly skilled at keeping things very simple. It plays itself out again and again, you don’t have to be first to market, nor the most full featured, not even the most attractive – you just have to be the simplest. Some examples:
- SurveyMonkey is the market leader in the online surveying space. They have barely touched the product in 5 years. There are hundreds of online surveying options but they continue to dominate because they are the simplest.
- Craigslist is drop dead simple, and I’d argue drop dead ugly. But, they are the market leader in online classifieds because of the former, not the latter.
- I just got the Flip UltraHD video camera. It’s the perfect example of out of the box simplicity. They are not the only digital video camera, but they are the only one that Cisco bought for $590M.
- You can’t talk simplicity and not talk about all the Apple products – Mac, iPod, iPhone. Again and again, not the first to market, but just the simplest.
Over the years, I have come to appreciate that building a product, service or application that is defined by its simplicity is extraordinarily hard. It takes real talent and ingenuity to create simplicity. And once you have achieved it – it is as real a barrier to entry as a slew of patents or technical secret sauce. Simplicity is that valuable.
Some tidbits to end the week:
- Sometimes I think if you want to know what to invest in now – think about what was the rage 7–10 years ago. We tend to get things way too early in this business (mobile?, nano?, storage?, etc.).
- On the flipside, a friend once told me that the best investment strategy is to build whatever IBM is advertising because they’re usually spot on about what the market wants – but it will take them 7–10 years to get the product right.
- This blog is now available on Kindle. I decided to try it on a lark and it took <30 seconds to get up. I wish I could charge $0, but Amazon controls pricing. The world of digital information still amazes me. Three weeks ago, I had written zero blog posts. Now, there are thousands of folks coming to the blog, aided by my twitter followers (thanks!), a distribution channel through Kindle, and healthy organic traffic through Google. Total cost? $0. Old line publishers beware.
- Long live enterprise IT. With Solarwinds’ IPO (it’s a network management co that has nothing to do with solar or wind), the bidding war for Data Domain (de-duper in the storage space), it’s just a great reminder that while the press likes Web 2.0, there’s tons of money in enterprise IT. Always has been and always will be.
- I worry that I spend way too much of my waking hours looking at a screen. From morning until night, I am either looking at a computer screen, Kindle, TV, Blackberry, or iTouch. Even my meetings with people are often looking at a projection screen. Some days I think 80%+ of my waking hours are looking at a screen. And the screens are getting smaller and more luminous. It can’t be good for me.
- Which makes me wonder whether some time way in the future, property values will soar in regions where there is no broadband, no wireless, no fiber, no cable, etc. Will the disconnected real estate suddenly become “pristine” because of scarcity?
- What made me happy this week from this blog? I noticed that folks in the Global VC Blog Directory with only 1 subscriber at the time of the publishing now have 40+ and growing. If only 40x in the VC business was always that easy.
Have a great weekend!
For 3+ years now, I have had the continued pleasure of serving with two luminaries of the VC industry – Bob Kagle of Benchmark Capital and Jim Breyer of Accel Partners – on the Board of Directors of Prosper. Bob is most noted for having served on the boards of eBay and Ariba among many others. Jim is most noted for being on the boards of Facebook and Wal-Mart among many others. Both are great guys who have been as kind as they have been insightful throughout the Prosper experience.
A conversation yesterday reminded me of my first meeting with Bob Kagle just prior to our investment in Prosper. It was January 2006, and Bob happened to be in Boston for a ZipCar board meeting. We decided to have breakfast at the Nine Zero hotel which is right by Boston Common. As we got to know each other over the breakfast, I took the opportunity to ask Bob about his key learnings over what has been and continues to be a very successful venture career. What he said was rather simple. He said that he has learned over time to only invest in what he’s truly passionate about. In his own words, if a company does not occupy his “shower time” – i.e. he can’t stop thinking about it even if he’s in the shower – it’s not the company for him. When a company consumes his thoughts 24×7, that’s when he knows.
With each successive year in this business, I appreciate Bob’s lesson more and more. Earlier in my career, I would sometimes unconsciously support investments in companies that I had only fallen “in like” with. You know, it’s the good company, with the good market, with the good team, with good performance. It’s the good opportunity. I have learned that the odds of success aren’t great for those companies. One of the key disciplines in this business is learning to wait until you see the great one, where you have fallen “in love” with a company. The company that occupies your “shower time” and many other waking moments – those are the investments to make.
The other thing I appreciate about Bob’s lesson is that the shower represents alone time (no snide remarks please). In investments, there are two competing forces at work. You have to want as much quality information, advice, diligence, and external wisdom on a prospective investment as you possibly can get. You need to be relentless about turning over every source of information you can acquire and to listen to as many reputable voices as you can. And, then at some point the switch has to flip. You need to shut everyone else out, hear your own voice, and have complete conviction around that. At the end of the day, if you make decisions based on how other people think, there’s no constancy. Your true north can’t be the moving target of someone else’s point of view – it has to ultimately be informed by others but come from within yourself. And, if it takes a hot shower to figure that out – that’s time well spent.