Fred Destin

Inside500 Startups: the fund as API

My partner AJ Shanley and I dropped by the 500 Pirates' Den the other week, more officially known as the 500 Startups accelerator in Mountain View.  For those who don't spend too much time inside the world of high velocity startups, it offers a fascinating look inside the engine room of modern company building.

500Startups is the poster child of high velocity seed investing.  I won't go into their quasi statistical investment strategy, suffice to say it's an adaptation of the Moneyball method to the startup world because, after all, 'no one knows who the next Mark Zuckerberg will be".  An experiment it certainly is, but for the record I am a believer, particularly well suited to the Valley Vortex.

In a building formerly known as the Doghouse, Dave McClure, Paul Singh, Christine Tsai and team took over an old 10,000 s.ft. RedHat datacenter in September 2010 and turned it into a dense founder hive.  150 desks on wheels (each costing a whopping $60) allow them to cram over 30 companies into their regular 100 day accelerator program.  Given the investment pace of 500startups, that should allow them to take every single investee through their analytically focused acceleration program.

Acceleration, baby

The acceleration program is a hands-on execution-focused mentoring and best practice camp where relevant mentors continuously rotate through the space and work with the teams on campus.  There are five events every week, batch meetings, tactical speaker lunches.  Mentors maintain regular Office Hours.  The first month tends to be focused on product, then the emphasis shifts to distribution and later data/revenue/funnel.  The grand ceremony of Demo Day rounds it off.

The program, as long as it maintains its quality and forces startups through an accelerated improvement cycle, constitutes the core of the brand appeal of the 500Startups machine.  Most of the 250 companies funded should have a chance to rotate through the program if they so wish.

As Paul Singh puts it, "functional expertise trumps everything".  By doers, for doers.

The stats are interesting: 44% international, 24% women, 90% have product and a full 50% have some kind of revenues.  The hive is full from 2pm to 2am every day.

Fluid space

The way the space itself functions is fascinating. Teams are forced to huddle together in pods to maxmimize informal interaction and generate real peer pressure.  The wheel mounted desks allow for continuous re-organisation of the space so the pods can constantly be modified.  Heavy industrial plugs hanging from the ceilings, despite by a health hazard (bandaged heads abound) are the simple enabler of this continuous flow of desks on the fully open concrete floors.  Heavy floors marks are a witness to the industrial past of the space.

As you walk through the environment, besides enjoying 360 views of downtown Mountain View, you see a mixture of heavy duty coding, ad-hoc meetings, whiteboarding and general business.  How-to guides and infographics cover the walls, mixed with layers of ideapaint drawings that constitute the memory of the space.

Meeting rooms are few, small and not ventilated, forcing a continuous flow of short (and heated) meetings.  There is one boardroom with broken seats and a photograph of Spock.  The main space is a mix cafeteria, lounge, event space and party space, with active DJ desks and AV equipment loosely wired.

In a nice touch towards #changetheratio, one of the small rooms turns into an ad-hoc nursery when required.

The venture firm as an API

The 500Startups name famously comes from the declaration by Dave that he planned to invest in 500 companies.  It also refers to the number of mentors that the group wants to attract, 500 strong.

As Paul puts it, "we want to design a system that can function without us".  Mentors and almuni provide sourcing and mentoring.  The value of the outfit is delivered through its component parts.  All companies that get invested come through some form of referral and usually feature multiple common connections.

Most venture firms (ours included) function as "destination sites" where a specific partner is the reason why you engage with the group in the first place.  With a strong parallel to OccupyWallStreet, 500 Startups aims to function as an API that connects ecosystem participants around a physical space and a distributed talent pool.  The leverage is obvious.  You can draw parallels to the likes of First Round Capital or the more classic incubators like Techstars.

The team is also moving the needle with its use of data.  I don't want to reveal too much but let's just day the word Hadoop got dropped a few times :-)  Operating leverage through better data.

I use the word API, Dave refers to it as platform, either way you're looking at companies that leverage the ecosystem around them hard in all aspects of their development, from investment to mentoring to market expansion.  It's no wonder then that 500 Startups also started using Angellist profiles and Angellist authentication as the backbone of its data model.  @Nivi after all we the first to push the idea of delinking funding from mentoring.  500Startus and Angellist were born to mate.

All coming together.  After the Oakland A's, here come the Mountain View Pirates.

 

 

 

 

 

 

 

 

I love it when geeks play bad boys with funky stickers

 

 

 

 

 

 

 

 

 

Watch your head, these industrial plugs hurt

 

 

 

 

 

 

 

The fluid office = not just a concept

 

 

 

 

 

 

 

 

 

A smiling team member never hurts (Bedi Yang)

 

 

 

 

 

 

 

#ChangeTheRatio -- the Mother's room notice

 

I will leave you with a video from LoicLeMeur:

Should Angels break free from angel groups ?

I hear a lot of commentary in the Boston area about how VC's have needed to replace angels in seed rounds.  In an area with some much technology wealth created over the years I always found this puzzling.

Angel groups in the Boston area are a force.  My simple question today is : do they work or are they de facto doing a disservice to the ecosystem ?

Entrepreneurs complain loudly about angel groups.  It seems that the typical process involves endless due diligence and months of process for check sizes that often end up being disappointing.  The experience leaves a sour taste for many, and the complexity of dealing with the groups requires dedication and even expertise in navigating what is perceived to be a tortuous process.  Angels should be expert funding available fast on the back of the demonstrated expertise of strong founders.  Instead they're painful and convoluted education processes.

The quick list of gripes include:

• worse overhead than VCs for a fraction of the capital
• tortuous diligence process
• slow consensus building and decision making
• investor overhead in refinancing
• difficulty in accessing the right talent / mentors post financing

The irony or the shame of this situation is that angel groups are full of individual stars; people who have deep expertise and accomplished much more than I ever will in my lifetime.

If you contrast this with say Dharmesh Shah, Dave Balter, Joe Caruso, Ty Danco or Jennifer Lum, you see fast acting money that gets engaged and delivers ad hoc but meaningful expertise, and delighted entrepreneurs.

I get the logic from an angel standpoint: carefully dip your toe into angel investing, get structure around the process and of course network with like minded individuals.  The issue is that it simply does not seem to work that well.  I suppose the root cause is that creating consensus from a large population of diverse and talented people with strong opinions is like herding Cheshire Cats.  I talk from experience: the investment committee of Atlas once numbered over 10 partners and it was completely suboptimal.  The process seems to get much worse when angel groups collaborate, with timelines extending for months in many cases.

I talked to one awesome individual who is a member of one of these groups and is an expert on databases.  His question to me was" "how do i get exposure to medical devices on my own ?"

My response to this is:

• You should not use angel investing to get exposure to sectors you know nothing about
• If the angel club process is that painful you are self selecting out of the best companies
• You would make way more money going deep on a segment you know better than anyone
• You could actually help companies and have more fun doing it

My thesis at this stage is that angels should break free of angel groups and invest in the stuff they know best, and make a real difference to the companies that they fund.  I am sure there are many examples of successes that started with angel group funding, but in the age of transparency that we live in, the model does not seem to stand up to the test of common sense.

By empowering a thousand strong angels who leverage what they know, we would get a much more vibrant and efficient angel ecosystem.  We'd bring fluidity into the system.  Jeff Clavier and others showed the way in terms of demonstrating how you should put together groups of individuals who each bring a facet of expertise to a startup.

My advice; get on Angellist, showcase what you are good at and start targeting the best next gen companies in spaces that you know.  Four $25K checks in A+ companies that you can help would make a world of difference.

 

Dustin Dolginow for President !

He's young, he's hungry, he's lean.  Here is the all new 2012 model of the Atlas Venture tech principal: Dustin "Double D" Doooolginow.

Dustin joined us almost two years ago.  It's not that we care much about titles, but when entrepreneurs reliably come in and tell you about how great the guy is, how they seek him out for advice and how they trust his judgement, you know there is something good going on.  Promoting Dustin to principal is simply reflecting what entrepreneurs think of him and recognizing what he brings to the team.

Proof that Midwesterners do it better, Kansas City's very own Dustin tried his hand at starting a company in the social payments space called SocialSwipe down in New York before joining us up here in Boston almost two years ago.  In that period, he's helped all of us think about investments in a smarter way, sourced investments and carried our brand with style.  He's thoughtful, rigorous and super entrepreneur friendly.  Real empathy + intent + business savvy.  A winning combination with sizzle.  Oh, and the guy is a yogi.

Right now he's involved with a number of our companies including fundraise.com, ObjectiveLogistics, PowerInbox, Kinvey and Adsafe Media.  Some of these he sourced and guided through to investment.  All of these he champions.

Dustin is also the inspiration behind our blossoming partnership with the JS and HTML5 stalwarts at Bocoup and our friend Boaz Sender, yielding a lot of knowledge and two new investment / projects currently in stealth mode.  Moving the needle.

Please join me in congratulating Dustin on this well deserved promotion.  You can follow the man himself on @dolginow, read him (sometimes) on dolginow.org.

For me personally it's a pleasure to work with someone who pushes the envelope, shares my love for design and helps me getter sharper at understanding the future of the web.  I consider myself very fortunate that D-Man is part of our team.

For all ye entrepeneurs, think of Dustin as open source VC with a better UX.  Your kind of guy.

Five reasons why SOPA is luddite legislation

SOPA may not pass.  What it tells you about the policymakers outlook on how to defend against piracy and copyright infringement is extremely scary.  I don't think I have ever read proposed legislation that was such a clear backward looking move that fundamentally ignores how the web is reshaping our lives.  Forget censorship and job creation for a moment: it's unfair, badly written and ignores the sense of history.

From Wikipedia for background:

The bill would allow the U.S. Department of Justice (DOJ), as well as copyright holders, to seek court orders against websites accused of enabling or facilitating copyright infringement. Depending on who requests the court orders, the actions could include barring online advertising networks and payment facilitators such as PayPal from doing business with the infringing website; barring search engines from linking to such sites and requiring Internet service providers to block access to such sites. The bill would make unauthorized streaming of copyprotected content a felony. The bill also gives immunity to Internet services that voluntarily take action against websites dedicated to infringement.[9]

The debate has been posed in the usual pro/anti way with on the one hand supporters saying "surely you agree copyright protection and the law matters" and on the other hand critics saying "you want to censor us; we're not China or Iran".  And both sides hold a banner saying "let's protect American jobs" and surely no-one can disagree with this.

I kept re-writing this post to try and make it comprehensive, but every time I end up writing a Paul Graham lenght essay.  So let me write you a short one instead.  Five reasons why this legislation is off target.   I am simplifying but before you think I am fear-mongering, just look at the number of lawsuits that even DMCA has already generated.  This law would be a wonderful way for defensive incumbents to lock everyone into legal battles for years.

1. Solving piracy by pushing enforcement downstream is incredibly simplistic

The main thrust of the law seems to be "pushing enforcement downstream", in other words (a) if you infringe, you're guilty, (b) if you facilitate infringement you're guilty (c) let me give you some immunity from prosecution if you're helping.  ISP's and payment processing companies are enlisted as tools in this battle, with a simple case: I might get sued for aiding infringement, let me shut off your support or redirect your DNS to be safe.  This incredibly one sided view of the world is bound to fail and push piracy deeper underground.  Want to automate DNS cloaking for the masses ?  Keep going...

2. SOPA is protecting the wrong people

When you think copyright infringement, you think of the artists whose work is being pillaged.  A lot of artists are rightfully angry about what the radical evolution of digital media has meant for their livelihood.  But the way I read this bill, it is mainly meant to protect "content owners".  Take major labels as an example.  Full of A&R people who are passionate about music and artists, but also technology luddites who take incredibly high margins and also will happily screw their artists when given half a chance.  Two examples:

(a) Know why they take equity in music startups through the corporate parent ?  So they don't have to share the proceeds with the artists (it falls outside of royalty contracts).  Ha !

(b) Collection agencies often do not redistribute anything to small artists since the collections are "too small" to be accounted for.  Guess who owns and runs the collection agencies.

Media companies know a thing or two about producing awesome content, managing artists, putting on great shows and tours.  It does not mean their business, today dominated by corporate animals who milk catalog and are experts at suing people, do not need radical change.

3. SOPA goes against the sense of history: we live in the age of platforms

We live in an "age of platforms" where users are both publishers and consumers of content and meta or hyper-distribution are a force.  Every value chain gets disaggregated into platforms that are incredibly fluid and efficient.  In the process, how you publish, market and monetize content is being fundamentally reinvented.  It's admittedly a painful transition for the industries being reinvented, and it's normal that the legal framework lags behind both technological innovation (say video sharing) and what society considers acceptable (say what constitutes privacy).

Technology disintermediates industries -- this one is no exception.  In the process of collapsing a value chain, it should really be bringing artists closer to consumers and allowing lower prices for end consumers AND more profits to artists.  The future of music has a name, it's called SoundCloud, not Universal.  Mark Suster has a good post on what may happen in TV if you like the broadcast flavour of this story.

SOPA is luddite legislation.

4. Solving Piracy requires a collaborative solution

It's easy to take a tough stance and point at all sorts of infringing websites.  Take all of MP3.com as an example to continue with the music analogy.   Industrial ripoff that has to be stopped.   Let's remember though that piracy was largely aided by the music industry who remain mostly technology adverse (at the leadership level) and has implemented wave after wave of technology solutions that either did not work for consumers (geo-licensing) or screwed them (The Sony rootkit lawsuits).  Heck, I recently moved to the US and had to buy a new TV, a new DVD player, a new converter for my old gear.  Needless to say I bought a popcorn box and recreated the collection I already own on MuTorrent when I got frustrated enough.  I had not had a torrent client on my machine for years.

The music industry developed a core expertise in suing people instead of a core expertise in the efficient generation, distribution and monetization of digital content.

At DailyMotion we started out with a product designed by Ben and Olivier to share their own videos.  People started sharing just about everything including copyrighted content.  We invested millions in anti-piracy solutions (from INA and others).  One issue we kept encountering was the lack of willingness by the content owners to collaborate in any way.  They wanted to keep the option of suing us open and did not want to be seen to be engaging.  If we had reliable hash databases of content we could run systematic algorithms to find and take down protected content.  But none of that: startups were left to create the indexes and databases themselves whilst large media company lawyers prepared their court cases to defend their shrinking pies.

If this was the banking industry, they would have set up a large common platform for access to metadata and content hashes that all players could have queried to find and track infringing content.  But no, what we go instead was lobbying Congress and effing UltraViolet.  Seriously.

Is it any wonder that Spotify, Soundcloud and Pirate Bay are the ones moving the ball forward ?  Is it not ironic that Apple (remember the rip and burn ads ?) is now owning the music industry's downstream business ?  How pathetic.

5. SOPA is America centric, the Web is global

There is a long tradition in American foreign affairs of defending the interests of America first and foremost anywhere in the world, with a notion that America has a right to defend its interests wherever they may be at risk almost regardless of what local interests might be.  That's actually served America well and I would argue the world, given the benevolent nature generally associated with American ideals (OK, there are too many exceptions but I am a pragmatist and not an idealist when it comes to foreign policy).  With the Web, it's different though.  It's global by nature and everyone relies on America's web infrastructure.  The proposed legislation is akin to giving a globally applicable set of legal tools to American companies who want to go after international businesses.

 

Child of SOPA ?

In my view the supporters of SOPA are not dumb.  They loaded the boat with everything they could think of so the watered down versions would achieve their objectives.  We need to remain vigilant and make sure these laws are not design to protect the wrong status quo or kill Net Neutrality through the back door.

 

PROTECT IP / SOPA Breaks The Internet from Fight for the Future on Vimeo.

Further reading

Eugene Kaspersky broke ranks with the BSA to reject SOPA.

ArsTechnica's hearing review and a new article that indicates an alternative bill is in progress

Next Web early roundup article -- good as usual

Lamar Smith defending SOPA

 

#OWS 2: Hubris in the face of risk and a culture of entitlement

Insider view on the investment banking mayhem, take two.  My friend Sean Park (read Park Paradigm) dropped this excellent comment / beautiful rant on my previous "how banking lost its way" post.  Another guy who lived inside the belly of the beast.  You may wonder what Algorithms have to do with #OccupyWallStreet.  The answer is: everything.  You don't want them to rule your world.  Here we go:

[Banking] went off the rails when a toxic combination of Industrial Age (ie Baby Boom) HS Varsity Quarterbacks and early Information Age nerds came together to dominate the ranks of wholesale finance.

The old jocks were clueless as to what their geek minions were really doing but it made lots (and lots and lots) of money and they had been groomed since youth to believe they were special so they just assumed the money was fairly earned as a result of their awesomeness. The quant nerds reveled in their new ability to get laid and their collective autism blinded them to the reality of the mess they were creating: all they saw was the beauty of the math. And the Ferrari. And the Spearmint Hippopotamus platinum girlfriend that finally recognized their true genius and charisma (unlike all those girls in high school.)

F@cking train wreck.  As you know like you, I too left mainstream finance for the startup world and although it's a gross oversimplification / generalization but I would posit that the single biggest difference between the two worlds is hubris in the face of risk and a culture of entitlement.

Ambition, energy levels, creativity, intelligence, egos, etc. all abound in both worlds, but hubris and a culture of entitlement are largely missing from the entrepreneurial genome.

Of course accomplices were needed to allow the bankers to take everything beyond the limits and then still not satisfied hit the nitroboost, and - while we're in sweeping-generalisation-mode - lucky for them they had the baby boom generation who in the western democracies were perhaps the most selfish and self-satisfied generation in modern history, riding the demographic wave like Kelly Slater on the North Shore growing more and more convinced of their innate genius while spending the savings of their parents, their own (impressively produced) wealth and then their children's and grandchildren's (which is where the financial engineering really came in handy.)

In the process, the notion of personal responsibility was crushed like a bug to be replaced with a highly refined strain of personal entitlement. I've been very fortunate in my life - yes just plain lucky - starting with winning the ovarian lottery. But that doesn't mean I haven't worked incredibly hard to make the most of the good hand life dealt me. And so I believe that I have earned my good fortune fairly. But I sure as hell know that I wasn't entitled to it and that serendipity and luck have played a part (in both directions good and bad.) That's fucking life.

To conclude, the single worst legacy of the last 40 years isn't the trashed global balance sheet in my opinion, but this insidious, cancerous belief that we are wizards and can eliminate chance, eliminate fortune and if we fail it is not because it is impossible to eliminate failure or risk but rather because we aren't trying hard enough and just need to try harder. This culture of zero tolerance for risk or failure, this culture that dismisses serendipity as irrelevant, this culture of Newtonian certainty is killing us.

It gives us the abominations that are our legal, regulatory and tax codes that just get more and more and more complex (2600 pages just for Dodd-Frank, and that's going to make things better? really? really???) and allows our societies to absolve themselves of self-sufficiency and personal responsibility because after all in this world you are entitled to have it all and if you don't well it's somebody's fucking fault and can and should be fixed. The entrepreneurial world is impossible to remove from the greater human polity and so isn't without original sin, but it is one of the last corners of our society where there is least a preponderance of self-sufficiency, personal responsibility and a tacit acknowledgement that things can go spectacularly right (or wrong) JUST BECAUSE and the best you can do is work hard to put yourself in the best position to take advantage when the stars align in your favor through no fault of your own.

Having just come back from Paddy Cosgrave's f.ounders and mingled with some of the best entrepreneurs, I have to say that (a) healthy respect of the part that luck played, (b) tolerance for failure and (c) appreciation for how hard it is to make it all work well were palpable.  I am still concerned that we equate success with greatness and should always remind ourselves that it's not just about getting there, but that how you get there matters a whole lot more.

The f.ounders conference: Paddy Cosgrave's spectacularly successful connective tissue engine

In the last few days if you're a a twitter user you've probably been saturated with raving comments about this conference called f.ounders.  Whilst as a hashtag it does not exactly work, man, what a success it was. Whether it's Davos for geeks I don't know (and don't care), but it's certainly the best conference I remember attending.

Keeping audience low, keeping VC presence spare, keeping average quality of attendees very high, mixing it up with "unproven" up and comers, Paddy Cosgrave and team achieved greatness.  Whatever the echo chamber debates that keep trying to show that this cluster is better than that cluster, the 2011 f.ounders vintage brought entrepreneurs from Silicon Valley to Russia, China, Scandinavia, Eastern Europe, Boston and wherever else together in one place, creating the connective tissue that tomorrow will be driven by.

 

Paddy Cosgrave, the main man, with an Irish Water bottle.

Ready to roll

Where better to have an opening cocktail than the long room at Trinity ?

Dave will be Dave: McClure entertains the EDITD Founders

Cool Gift #1: bags made from the sails of Niklas Zennstrom's racing boat.  Seriously.

The Orchestra plays Daft Punk

The f.ounders conference room at Mansion House.  That's Werner Vogels on stage, who is one chilled and approachable dude.

We were asked to wear jackets to go meet the Irish President Mary McAleese.  That obviously became an entrepreneurial branding opportunity for the Conferize founder :-)

Did I mention the River Dance action at the Guiness Factory dinner that same night ?

Original startup pirate material.

Who says Tech can't party ?

Final night at Dublin Castle with an awesome folk band, I Draw Slow

Gift #2, an original Che Guevara print from Jim Fitzpatrick made with tiny heads of Steve Jobs, to reminder all Founders that they are (somewhat) Revolutionary.

Though it did not quite feel like the 99%...

 

Let's leave the last word to Twitter, till next year:

 

 

#OWS: one insider's view on how banking lost its way (and what to do next)

I spent the first years of my career in derivatives.  I made it Executive Director at Goldman Sachs before I decided to pack it in.  The year I left the City for a bubble incubator called Speed Ventures, I divided my compensation by 10.  But I never looked back. I wanted to share briefly my story and how I think banking went really, really wrong.

Truth be told, I have a terrible background to be in venture capital.  I started life in banking.  Even worse, derivatives.  In 1995, whilst not having a real clue what to do with myself upon my return from Hong Kong to Brussels, I vaguely interviewed for some marketing jobs, toyed with some entrepreneurial ideas, hung out.  I came out of this process convinced I would rather shoot myself than be a product manager at P&G.  I interviewed (exceedingly badly) for strategy consulting jobs.   In the end, I got a summer job at JP Morgan, primarily because the guy who hired me had similar music tastes (truth).

 

What's so seductive about banking ?

Here's what a trading room is full of: fascinating, fun and smart people.  This one wanted to be a concert pianist, this one is a PhD in physics who consumes Mountain Dew, this one never leaves his trading jacket, recites entire passages from Wall Street and seems to have visual representation of risk in his head.  It's fun, it's fast, it's creative.  One aspect that most people completely underestimate is that market divisions in investment banks are full of quirky interesting egos and creativity.  They also train people amazingly well.  I was quickly hooked.  It's like coke, except it's your work: fast, action oriented, a bit too smart for its own good.  Oh, and they train people REALLY well.  In our world where the value of training is sometimes completely forgotten, it's easy to underestimate.  It was an amazing school for structured thinking and fast decision making.  The 6 months training program in New York complete with 30th floor apartment above the Reebok gym was not bad either.  It took me a while to wake up and smell the coffee.

 

Derivatives for Risk Management

I started with pricing and marketing cross currency swaps.  Help a borrower get money in Danish Kroner and hedge it back to Belgian Frank.   Help a large corporate manage its interest rate risk on long term debt.  Help folks manage acquisition finance.  Help a utility swap inflation risk out.  And so forth.  People forget, but derivatives started as a really elegant tool for MANAGING risk.

At the time JP Morgan was at the forefront of managing credit risk (counterparty risk) dynamically.  The bank would famously issue the so-called 4:15 (Value-at-Risk) report that helped it understand every day at the same time what risk it had across its book to everyone else in the market.  Awesome stuff.  We started to dynamically price credit exposure on our counterparties, trade-by-trade, before anyone else.  JP Morgan also created a subsidiary called LabMorgan which itself spawned RiskMetrics to industrialize this knowledge and take it out to market.

Next we were on to banks.  We took the knowledge we had built and started pitching comprehensive risk management solutions.  We looked at the entire balance sheet (what types of assets they held that we could hedge or securitize, how they were funded and how efficient their regulatory capital structure was) and we would show a set of options to drive better Return on Equity.  Securitizations, subordinated capital financings that qualified for regulatory purposes, high yielding assets.  The drift was starting: I remember being part of designing and implemented a new type of tax-deductible tier I financing for Deutsche Bank using an obscure Luxembourg-issued quasi equity instrument.  Regulatory arbitrage had started.  The race was on to arbitrage the regulator and the tax authority.

 

Rotten from the start

Whilst I understood (and liked) what we were doing as risk management, the endless innovative capabilities of financial engineers and greed had already started polluting the system.

At the heart of it all was AIG Financial Products.  You've seen from above that counterparty credit risk was always going to be central to derivatives.  Whoever provides you with a derivative hedge, you get exposure to.  Well, a savvy team of hungry ex Drexel Burnham Lambert (remember junk bonds) guys had understood this early and went out hunting for an indestructible AAA balance sheet that they could leverage to put themselves at the center of the credit puzzle.  That turned out to be the large and venerable AIG.  Junk bond guys meet the unsuspecting insurer, good things are bound to happen...

Well these AIG FP founders went to work with a black box they simply called "the System" and started making money.  "We were all kind of artists," one of the founders said recently. "The excitement of it wasn't the money. The money was the scorecard. The drive behind it was creating something new."  AIG became the "unsinkable balance sheet" that stood behind so many of the transactions that creative minds at Bankers Trust, Merril Lynch et al.  They priced the type of credit risk that no one else would.

Early on, the potential of derivatives (and their beautiful complexity) was used to generate highly profitable transactions for the investment banks by fashioning investment products that offered ever higher yields (or ever lower borrowing costs).  Want to buy some Luxembourg bank exposure coupled with a barrier option on a given foreign exchange pair ?  We can do that for you !  And if you get in trouble, we'll restructure the instrument and make it even more impenetrable.  Early incidents that I was a witness to included the Kingdom of Belgium, that tried to reduce its debt exposure with some funky FX structures and ended up with major leveraged position on Sterling right at the time when Soros decided to attack the currency.  The net result was that the hapless employee at the Kingdom of Belgium who had put on the trades killed himself, and had a funeral complete with City Bankers in long coats at the end of the procession (one of the great untold derivatives scandals of the 1990's IMO).  I heard that when the barrier options came close to their limit, the Sterling dump that resulted contributed to Soros' efforts in pushing Sterling out of the EMS (Black Wednesday).  Nicely done Merril Lynch (more here).

Merrill Lynch late last year paid the Kingdom of Belgium $100 million to end a long-running dispute over a series of derivatives losses that, at one point, totaled $1.2 billion [...]  The losses stemmed from a series of currency knockout and “power knockout” options written between 1989 and 1993. Power options are enormously risky structures, since their payouts are squared—meaning the notional amount of a contract may only represent the square root of the potential liability. In this case, Belgium took naked positions to reduce its exposures to currencies—one of which, it seems, was the dollar—in exchange for premium. The losses peaked at $1.2 billion when the dollar weakened earlier in the decade, but its subsequent strengthening reduced the losses.

 

Arbitrage the shit out of everything (the "Beautiful Game")

By the time I decided to leave the City, here's roughly what was going on:

• Banks had securitized pretty much everything and their balance sheet was generally fully optimized though hard to comprehend.  The risk had been shifted to institutional investors and no one really knew where it sat anymore
• Insurers then reinsurers got involved (aka greedy).  First we shifted risks away from the banks, then we shifted it from insurers to reinsurers.  Entities like Centre Re were lauded for taking on all sorts of creative risks. Everyone was looking to create "their" AIG FP, which by that time was a money making juggernaut.
• And really everyone got greedy -- investors would buy principal guaranteed exposure on basket of hedge funds instead of bonds, equities or straight hedge funds investments.  Borrowers would use increasingly fragile offshore funding structures to optimize tax and so on.  Asset managers no longer felt that buying straight assets and a few simple volatility instruments was enough.  Everyone was into structuring by that stage.
• The banks had become impossible for the regulators to control.  The regulators were outgunned on modelling firepower and whenever they surfaced a strong exec, said person would be hired illico presto by one of the investment banks.
• The core issue became "how do we hide our insane P&L when we mark-to-market the instruments".  Not: are we putting our clients interest first ?  (Sorry, Goldman).

When your big concern is smoothing your P&L over time, there is a problem.  In the last year, I participated in "legal" tax minimization for corporations so they could avoid paying their dues in Argentina, in selling high risk Japanese banking assets repackaged into Austrian insurance bonds, and helped Greece massage its deficit, and so on.  Whatever happened to Risk Management ?   It was time to go.

Where does that leave us ?  #OWS ?

In the last 10+ years, I never looked back as I do my best to assist entrepreneurs in building companies.  I am not surprised by what happened, except maybe for the magnitude of the problem, and I understand the anger of #OccupyWallStreet and others.   But you can focus on the past ("who's to blame ?"), or you can focus on the future ("what did we learn ?").  The system needs to change, bottom up, for sure.  Between election lobbying, gerrymandering, filibustering and plain defrauding, it's a pretty screwed up system all the way through starting with the interaction of business and politics.  I share Umair Haque's anger (and enjoy his wit).  As for my views on #OccupyWallStreet, I am with Bryce.  For the record, I believe that an advanced society has a duty of care to its weaker members, believe in universal healthcare, separation of church and state, and building an inclusive society.  I am what you might call a sustainability-obsessed liberal.  But before you point the finger and say "it's all their fault", let's rewind for a second.

When I joined JP Morgan in 1994, the #1 issue raised by our Chief Economist at the time went like this: "the #1 risk to the global economy is the over-indebtedness of the American consumer".  That was 1994, people.  Not 2007.

Let's say that the following needs to happen:  we get out of a get-rich-quick and spending mentality and back to a more rooted view of a sustainable path of wealth creation.  We need to deeply change attitudes towards credit, spending and leverage across the board.  We need to reintroduce broad notions of respect of constituencies (society, employees, management, shareholders) in the way we run and build companies.

Pointing the finger at the Man may help people feel better, but for me, it's shared responsibility.

• People at large got hooked on consumption and leverage.  Did anyone really think that borrowing 100% of the price of your house was sensible ?  Really ?
• Retail banks pursued ridiculous lending policies.  Worst offenders: Swedish and German banks offering EURO denominated loans in Eastern Europes.  That's called a carry trade, it's criminally risky.
• Investment banks do what investment banks do: they innovate and oil the wheels.  See above.
• Regulators and the Government were drinking the cool aid of home ownership.  They helped make this happen.

For me, it's all about looking forward.  I don't think trying to take money away from banks or pointing the finger matters or will achieve much.  If excessive behavior happened, let's pursue it.  But personal responsibility matters more.  When nearly everyone becomes a day trader or remortgages their house to buy plasma TV's or spends their time watching reality TV, what kind of society are we building ?   Time for a reboot.  Greed and the politics largely got us into this mess, the silent majority will hopefully wake up and get us out of it, step-by-step.  And to take a leaf from Zen's book of life, it's not use pining for a different present.  The present is all there is.  It just is.

 

 

 

 

 

 

Lean is hard and (generally) good for you

I see so much crap being written for and against Lean Startups that I thought it was worth setting my simple thoughts down on what lean means to me.  Concepts to be valid need to be used with some form of rigor and consistency.  I am not attempting to rewrite Eric Ries but rather to give a layman's view of lean as an applicable set of principles.

 

Fact

In the real world, most companies do too much development and spend too much money too early (usually to hit some pre-defined plan that is nothing more than a fantasy and / or is not where they need to go to succeed) and find themselves with an impossible task of raising money at uprounds around Series B.  So founders get screwed and everyone ends up with a bad taste in their mouth.  That's fundamentally why early stage capital efficiency should matter to you, and why you should at least understand lean concepts.

Lean is a hard and disciplined method

Lean forces you to get customer feedback early and continuously.   It pushes founders and engineers outside of their zone of comfort, and outside of the building.  It is not an intellectually lazy copout to an absence of strategy, quite the contrary.  It essentially forces you to be very intimate with your customer.

Lean posits ignorance, but that should not be confused with an absence of strategy

Lean says: I have a set of hypotheses and assumptions (that's code name for a well defined strategy) but rather than assume I know I am right, I will test my insights against market feedback early and continuously.  I will pursue my vision with vigor, but be data informed throughout that process.

A Pivot is a well thought-out shift in strategy

When you dump your model because it did not work (say Odeo / Twitter) thats not called a pivot. that's a "fail & restart" with the same team.  Pivots is defined as a shift in one important aspect of your business (say go to market or pricing model) based on market feedback and validated learning.

Don't confuse pivot and iteration

Lean by nature treat most business processes as fast iteration experiments.  These are not pivots.  Or maybe they're nano-pivots :-)

Lean Startups are fundamentally designed to be capital efficient (and hence angel friendly)

With such a strong focus on doing more with less and a strong framework for getting your team and your investors to be aligned around how you build your company, Lean can be though of as the best toolbox for the capital efficient generation.

Lean Startups make me comfortable as an investor

Rather than try to convince me that you know exactly what your business model is out of the gate, we're entering into a partnership where we go out to market REALLY fast and usually monetize early.  You're admitting to me what part of the business is unproven and I am welcoming that, rather than locking you into some kind of trajectory that only exists in our collective mind.  And you're not going to scale your spend and resources until we have really strong evidence we've cracked some kind of code.  I love it, and so should you !

Lean Startups can/should/do scale and go big

There is a notion out there that Lean is only good for ramen entrepreneurs with a sad excuse for a business model and small problem companies.  I disagree with that.  You can raise $50M and keep operating as a lean company, meaning evidence based, aware of market needs, and driven by fast iteration processes.  As I have argued before, knowing when to scale is generally hard.  Most VC's and entrepreneurs are schizophrenic about capital for that reason.

 

The Disclaimers

Lean Startup is not new.  Agreed and so what ?  It's an attempt at codifying efficient startup behavior into a set of vocabulary that can be taught at university and helps entrepreneurs and investors communicate effectively around the concepts of product / market fit, MVP and so on. I have been in venture for over 10 years and I admit the concepts have helped me move my craft along.  Thank you SG Blank, thank you Eric Ries.

Lean Startup is a Cult.  Yes, can we please drop the capital L and be more humble.  If Eric Ries annoys you for making a living out of Lean (BTW he's a very thoughtful and rigorous person with real startup experience), that's no reason to throw the baby out with the bathwater.  Get over it: when concepts go mainstream, they get repeated ad nauseam to the point of being emptied of their substance.

Lean methods won't deliver the next Apple.  Probably not.  If you're Steve Jobs you can transcend data.  Lean is not for everything.

Normative Advice Sucks.  Amen to that.  I hate normative advice.  There is no right and wrong way to do much of anything in startups, it's all about the alchemy of the people involved, luck, market timing and serendipity.  But that's part of the point of lean thinking too: don't assume you're right just because you are brilliant.  Test yourself against reality every day.  Continuous innovation, baby.

 

Conclusion

Haters are gonna hate, but I have found Lean to be the single most useful advance in how to build early-stage business in a capital efficient manner.  Contrary to much of the chatter, it takes a lot more discipline, consistency and perseverance to run a lean business than to just go out there and raise cash and build what you think the market wants.  Lean is for marathon athletes and rowers.  That's typically how I prefer my entrepreneurs to be.

 

PS before it goes behind the paywall enjoy this video interview of Eric Ries from our brilliant friend Andrew Warner at Mixergy.

CrunchFund ?

The Uncrunching of Techcrunch.  It's been one of the most entertaining saga's on the web recently, in a reality TV kind of way.   But in the process, a discourse has emerged that seems to say "nothing matters except Influence".  I don't buy that.

Techcrunch = awesome creation, unique voice, machine for releasing breaking stories.  Great entrepreneurial achievement.  No question.  Fun, too.

M.O. = don't get into a brawl with an entrepreneur who is not afraid of taking the fight back to you.  Arrington method = be agressive, wash your linen in public, go for full disclosure all the time.  Set the tone as follows: "everyone is in it for #themoney #theglory #thewhateverrocksyourboat, we are the only ones being honest about our biases".

Want to take the fight back to Arrington ?  Think twice.  It's like trying to fight Eminem in the closing duel of 8 mile: "Once I have made endless fun of myself and shot my "image", I emerge strong and I can take anyone on.  Nothing can touch me".  Guess what, it works.  I would not take on Arrington in a pub brawl, or at poker for that matter.  I would break before he does.

Now let's take it to the next level: a blogging VC is the same as a VC blogger.  Easy.  See, everyone is doing it.  Guilty as charged.

Except that, no, it does not quite work that way.  Look carefully at VC's who blog: the M.O. is to talk about the business of funding innovation, the companies that they back, the ecosystem issues that they face.  What they are (normally) not in the business of doing is: breaking stories, leveraging confidential information, publishing the unpublished.

Believe me, it's tempting.  But would it be right for me to turn the unique insights I just received on, say, Apple's HTML 5 strategy into a blog post ?  I don't think so.

Fred Wilson is not Techcrunch.  Yes, he is careful about his messaging and he promotes his companies (elegantly as it turns out).  He is clearly smarter than me since he elegantly avoided giving a clear opinion on this whole mess.  Sure, he will occasionally leverage (generic) insights gained from startups to express a new investment thesis.  But he's NOT in the business of breaking stories.  Neither is Brad Feld, or Mark Suster.

As VC's we operate almost solely on confidential information. It's at the heart of what we do.  I am not sure how you can be a VC and at the same time be in a business that trades on breaking news.  I don't understand how you can split your brain in two that way.

Crunchfund starts from a great vantage point.  Arrington is a machine for contacts, insights, networking and an accomplished entrepreneur.  In my mind, all the debates about whether Techcrunch had editorial independence missed the point.  Of course it has !  It was built on disclosing EVERYTHING including its own issues, complete with gory details.  That's what makes it so hard to beat for anyone who refuses to play the same game of judo.

However, I don't understand how you can say with a straight face that you are going to run a fund and publish on Techcrunch.  Every startup you meet comes with unique and confidential insights about themselves and the market they operate in, often the results of years of work.  It's just not part of my job description to go leverage that information in a journalistic endeavour.

Not everything is equivalent.  Conflicts exist, and they need to be managed (carefully). I must be hitting old age.  I just don't get it.

 

UPDATE and counterpoint from the ever excellent Scott Rafer

Sorry, Fred. I'm pretty sure that I'm a year or two older than you are, but you may want to hit those Omega 3s or whatever harder. Just because FredW, Albert, JohnB, Bijan, Bryce, you, and a few others set a particular style for VC Blogging 1.0, that doesn't mean the craft won't evolve. @arrington has unusual resources and he's going to use them. If pitching him (though Lumatic is too late stage for them at this point), I'd expect him to ask if parts were bloggable. I'd go in knowing which was which and expecting to be pretty darn liberal in the calculus. Helping him with his audience would help me with my business and be part of his funding process.

EURO: how short-term politicking is threatening our continent

The excellent Roger Ehrenberger is angry ("Geting Real"); so am I.  I am angry at the continued bickering that paralyses Europe in the face of is sternest test yet.

Note: This is not a post about the impact on startups -- for that you can go read the recent gigaom writeup by Bobbie Johnson.

Of course there is little to be surprised at; our supranationalist TechnoAuthority, defanged by fractious local electoralism, is yet again unable to produce a quality response.  We're collapsing under our own weight, but it won't be the politicians who pay the harshest price.

The EURO was the result of a great political project taken too far

When the EU was created, it was political in nature. Schuman famously declared the intent of the European project was to "make war not only unthinkable but materially impossible".  Whilst it was supranational in nature, its early development was limited to creating a free market for coal and steel, a free-trade zone.

Political undertones always drove the European project, and never more so than with the introduction and widening of the EURO.  Whilst economists rarely agree on anything, it's commonly accepted that marrying countries at vastly different stages of economic development is a bad idea.  Well, it was a bad idea.  We should have stuck to creating a free market for people and goods and left the currencies well alone.

Countries like Greece were always going to have a hard time

What do you get when you marry Greece and Germany under one currency, as seen from Athens:

• Interest rates are low, which is an incentive to borrow, but there's no inflation eroding the principal.  You have to repay in hard Euros, not cheap Drachmas.
• Low interest rates designed to suit Germany or France fuel an insane real estate and credit bubble, partly driven by northern pensioners and real estate developers.
• A ton of capital is flowing into your country from e.g. German banks who are seeing much better growth opportunities in your developing economy, making the credit and real estate bubbles more intense.
• You're now fighting head to head with the most competitive economy in the world with no ability for natural currency depreciation to help your competitiveness.  Good luck, Greek tools manufacturers !
• Oh, you've just emerged from dictatorship and are a young democracy, so there's plenty of corruption, low tax receipts and a fair amount of dodgy accounting, much of it with the benevolent help of London investment banks.
• You become a tourist destination for rich German mittlestanders with no manufacturing sector and a mega pile of debt.

German benefits, German virtue

I used to be of the strong view that the German argument that put the blame squarely on Greece was a great hypocrisy given that the EURO made it possible for Germany to hit its neighbours with the full force of its awesome productivity improvements, but it's clearly not that black and white; it's hard for me to tell whether it would be right to call Germany the great Euro winner.  After all, capital mostly flowed to the periphery and there is no hard data I could find suggesting massive windfalls from Euro introduction.   KfW recently came out with a report suggesting massive gains for Germany, but I guess it depends on one's view of how important a massive trade surplus is.  What is pretty certain is that the D-Mark would have made life harder for German exporters that the EURO -- just ask the Swiss how they are feeling.

Time to stick together

So if the EURO was a bad idea, surely it's time to let it go ?  Hold your horses there Northern Hawk, and think for a second.

It's one thing to let Greece "restructure its debt"or "exchange its bonds" (for the unitiated, that's a default, it's just that a different of technology will be used).  In fact that part is probably a done deal now given that contagion needs to be stopped and the ECB cannot protect all its troubled children.

Kicking Greece out of the EURO however would probably trigger a crisis on the scale of Argentina.  That means life savings wiped out, a defunct banking sector, full-on capital outflows, and a decade or two of rebuilding trust.  That's assuming of course that the Generals don't come back in...  If you look at the depth and violence of the Argentinian crisis and what it did to people, you'd think a few times about letting that happen.

On top of that it is probable that the snowball effect costs of a EURO break-up could be gigantic compared to the perceived benefits.  If there is an out, and the markets know this, who else is coming out of the EURO ? Where does this stop ?  The likelihood is that a 60% markdown hit on Greece debt whilst keeping these guys in the EURO would be vastly cheaper than opening the pandora's box on EURO breakup, let alone what you think of the social impact of a return to Drachma. See this Credit Suisse analysis.

Remember the 1930's ?

When Paul-Henri Spaak and co. started working on the Treaty of Rome, their brains were still flooded with images of the 50 million dead across Europe.  Remember the terrible drama that resulted from  a deep currency crisis in the 1930's and the emergence of a radical expansionist political party in Germany.  We have a different set of circumstances now and a profoundly changed Germany, but we also have a political landscape marked by petty regionalism (yes Belgium I am looking at you), racism, a difficult dialogue with Islam, a resurgent Russia, as well as a reluctance to accept issues such as population aging and globalisation.  The consequences could be dire.

Protect the EURO; redefine the boundaries of European power

Ever been to Alabama?  I hear it's not exactly a happy place.  America has the willingness to stand together as a country and you don't hear them talking of the introduction of Alabama Dollars.  We need to do the same and take the pain of supporting our companions, rather than cutting them loose.  I am convinced that the costs far outweigh the benefits.  Let Greece default, force banks to take the pain, but protect the EURO.

To avoid global irrelevance, we need to protect what we've built, continue to embrace Eastern Europe, and show some bloody leadership.  To me that starts with protecting the EURO, but it also means, once we're past this, reforming European institutions ruthlessly, redefining and most likely limiting the definition of the European integration project to something that is more manageable and transparent, and generally putting it back into its box.  No more parliament in Strasburg and complex committees ruling on the acceptable shape of a banana, we need to claim this project back.

The Dutch Prime Minister, when opening the door to countries getting out of the EURO, is in my opinion being an idiot.  I guess we have the politicians we deserve: small-minded local traders who put to shame those who started this project and threaten our long-term prosperity.  It's time we started voting again.

 

http://economicsnewspaper.com/policy/german/kfw-study-shows-that-the-euro-is-worth-it-65657.html

FutureM: Advertisers and Agencies engaging with startups

"My name is Boris and I'm from Russia".  This is how the CampusLive founder opens his pitch for the FutureM audience.  He's one of eight startups presenting to an assorted crowd of people interested in advertising.  "When you run a startup, burn your bridges.  If you have anywhere to retreat, you will inevitably, because building a startup is just hard".    His story is one of what he calls pivots but are actually radical tries at different models to harness campus monetization, towards what is CampusLive today.

Your Future looks like a 5-person startup

"You may not fully realize it, but the future of the ad agency is in this room, in these little startups that are reinventing the ad unit".  In his case, the ad unit is challenges and engagement.  From a "25 year old with limited experience" (by his own admission), a simple message:  "You don't have to be a startup entrepreneur to change the world, but you absolutely have to work with these entrepreneurs if you want to understand where the world is going, and play a part in changing it".

The Ad World does not engage with startups enough

Boris' message is simple, and aimed at a simple reality: brands and agencies are simply not running any form of structured programs to engage with startups and test budgets on them.  Compared to what the VC or the Tech Industry is already doing today, there is still too much desire to control client access.

Response from an Arnold (Havas) exec: "We've done trials with entrepreneurs and got burned.  In marketing situations, we love having entrepreneurs in the room.  But unless we're tightly synchronized with the media buyer, we end up failing when the time comes to run the actual campaign.  In our case we might be working with our sister media buying company MPG, but if we're not both hired by the client we end up failing" (paraphrasing).

Kudos for laying it out, and there you have it: it may be in the best interest of the client and the agency long-term to embrace ad innovation early, but the client-agency relationship is such that real experimentation (with a budget and creative attached) is hard because failure is not a tolerable outcome.  And as we know, failure is the natural companion of experimentation.

If you look at what Microsoft has done with BizSpark, or Google, or Amazon, you can see what a sustained and systematic program can do in terms of identifying disruptive technologies early (e.g. Google acquires Splurk, Microsoft acquires Massive), attracting talent and building engaged ecosystems.

I feel that the ad world knows well by now that they have become a segment that uniquely mixes tech and creative.  Whilst Chief Data Scientists are showing up all over the place and all major media buying groups have created Trading Desks, I am not sure there is a complete acceptance that commoditization is inexorable is much of the media buying world.

Just like in financial services, adertising organisations need to be extremely clear about:

• what part of their business gets commoditized by technology and becomes a scale play
• where sustainable high value / high margin business can sustainably be built

Investment banks went through this a long time ago.  Today they are a mix of highly effective trading platforms for commodity products, global high-value advisory business, and proprietary operations.  But at heart, they are built on tech, they choose where value is sustainably created.

Helping agencies deal with chaos

Agencies are in the process of doing the same process of sorting through what's a tech business and what's advisory, but if they want to avoid getting railroaded by the consolidation platforms, they should embrace early stage technology with more gusto.  The reality today is that despite their best efforts, it's a nightmare for them.  RTB in particular gives the industry a great opportunity to finally make online media buying more efficient, but so far it has had the opposite effect.

Although algorithm based buying sounds great on paper, the reality is most agencies (and their trading desks) have not gotten there yet effectively.  They are struggling to digest the copious amounts of data and organize strategies that encompass 1st party, 2nd party and 3 party data (let alone context and placement level data) and analyze effectiveness whether through attribution or engagement related data.

Large agencies created trading desks to make their buying more efficient (and generate better margins) but it is still way too manual and complicated and the ecosystem is too fragmented.

The innovation ecosystem needs to also realize that it's job (last time I checked) was to make its clients lives easier, and right now we're not doing that too well.  I can see a clear role for startups and tech companies to help the advertisiers and agencies to

1. build the algorithms
2. provide information for the algos
3. tie together performance data or attribution modeling for the feedback loop

Dataxu, Adsafe

Both of the companies we've backed in the space (a) create lasting competitive advantage and (b) work with both publishers and advertisers to help understand, wholistically, the value of brand exposure in this new environment.

In the case of Dataxu, the game is giving full visibility and enable spend decisioning across channels for large advertisers and their agency partners.  the company is helping agencies evolve to use big data & analytics to transform themselves with a focus on high value analytics.

In the case of Adsafe, we're helping people with 2 and 3 above and in particular establishing a common language that buyers/sellers are using to ensure performance and maximum results - the objective is to ensure both sides benefit and not be a negatively disruptive force in the ad tech ecosystem.  We're also constructively helping brands get full visibility on how well they are spending their budgets.

 

Meet my new partner: Ryan Moore joins Atlas Venture

How can I describe my mood right now:  elated, delighted, pumped, uplifted, intoxicated, exultant, exhilarated, glad, jubilant, joyful or dare I say, ghetto fabulous (wink, Colette).  This morning we are delighted to announce that Ryan Moore will be joining Atlas Venture's tech team.

Ryan Moore (no, not the golf player !) is a co-founder and partner of  GrandBanks Capital.  He leaves behind a strong portfolio at GrandBanks Capital, including two recent exits:  Enpocket (acquired by Nokia in 2007) and Where (uLocate) investment which was acquired by eBay/Paypal in April, 2011.  He's got other exciting companies in his portfolio such as the rocketship known as ILoveRewards or Glasshouse, and we've been working together some on InsightSquared.

I've discovered that everything in our ecosystem somehow links you back to Softbank: my partner Jeff Fagnan (the "one man economic development team") began his venture career at Seed Capital Partners, a SoftBank seed fund here in Boston, for which GrandBanks’ Charley Lax the investment representative and advisory board board member.  Other alumni of this mafia include Brad Feld, Fred Wilson, Covestor founder Rikki Tahta, Angellist founder Nivi, the current Softbank team including Jordan Levy and many others.

Mulitple top VC firms have been on his back for a while and we're really delighted he decided to join us.  I ran the references on him and you can probaby summarize them in the following way:

• Loved by his entrepreneurs for unwavering support
• The hardest working VC they know
• Reliable, self-aware, humble, tenacious
• Always pushing, but always constructive
• A good nose for what makes money

As we try to build a truly integrated team of partners who will win or fail as a team, the addition of Ryan is a massive boost to me personally.   Moving to the US was not an easy decision, leaving behind my beloved continent and uprooting the family, and god knows we have had some tough times at Atlas.

I now feel completely vindicated that this was the right decision for me and for the group -- we'll work hard over the coming years to build great companies with our entrepreneur partners and have a ton of fun doing it.   We're coming for you.

 

 

Ten years on

Today's a meaningful day.  Like everyone else, I remember exactly where I was and what I was doing when the planes hit the tower.  For those of us who have not known war, this was the closest we came to experiencing it.  And in a way, it was the start of an odd war, the so-called War on Terror.

I was hesitant about how to mark the day and but wanted to spend some time reflecting, so I decided to take the family to the Mission Church on Tremont St, where mass was being given in honor of my neighbours' brother, a fireman on Ladder 5 named Manny Del Valle, who lost his life on 9/11.  You can read the story here: a young man who raced up to the upper floors to put the fire out.

Peter Moyer's talk about his bro' at the church was both simple and moving.  It was a simple statement of loss and a story of brotherhood and togetherness, involving his family as well the New York and Boston firefighters.  The Moyer family did not come out of this with a thirst for revenge.  Instead, they've been embracing the people around them and recognizing that war, especially when fighting an enemy as vague as terrorism, is not the answer.

Manny Del Valle could not sit on the bench that bears his name – he was killed when the North Tower of the World Trade Center collapsed on Sept. 11, 2001.  But his mother, Gricel Zayas-Moyer held a photo of her son as family members from as far away as Puerto Rico gathered around the memorial to remember Manny Sunday, Sept. 11. They were surrounded by members of the Brookline Police and Fire departments, representatives of the Fire Department of New York, and a crowd of residents who came to pay respects to Del Valle, the other victims with Brookline connections, and the more than 3,000 people who died as a result of the terror attacks. (courtesy of WickedLocal Brookline)

A tough decade

Whilst I am just a spectator in all this I cannot help but reflect on what the last ten years have meant for America.  From the bursting of the bubble in 2000 to the downfall of Worldcom in 2002, from the Iraqi invasion in 2003 to the collapse of the financial markets in 2008 and the inexorable rise of China, it's been a tough decade for the world's only superpower.

When I grew up, America was an aspirational force.  Sure, my parents grew up with the Marshall plan but regardless, I considered America to be the home of great music and courageous politics.  How that has changed.

Misguided foreign policy and loss of legitimacy

America has done itself a ton of damage over the last ten years.  But unlike what many people here seem to think, it's not down to some idiotic anti-Americanism, but quite simply to what the US Government has been willing to do to other nations in the pursuit of its self-interest.   American foreign policy is extremely blunt in asserting that it will use unilateral means in pushing its interests abroad.  That was fine when fighting communism; it's short-sighted when directed at, say, the world's 1.6 billion muslims.

The world has changed.  The War on Terror was clearly one of the most flawed foreign policy concepts in memory.  Anyone with some common sense and some experience of terrorism knows that terrorism is overcome with a mixture of vigorous intelligence action but first and foremost deep reforms that take away the roots of terrorism.  Ask the English. they occupied the tiny Northern Irish territory with overwhelming force since the second world war and only recently achieved a peaceful solution, that fundamentally came from inside.

In much of the world outside America, the invasion of Iraq was generally perceived as a move to get access to oil based on fabricated intelligence and a rather bizarre linkage between the 9/11 attacks and a mostly secular second rate dictator.  Tackling the Taliban, a former ally gone awry, was a good response.  Tackling Iraq led the entire world to scratch its head (with the possible exception of Tony Blair).  The net result was loss of life on both sides, the strengthening of Iran and the creation of a lawless zone of torture called Guantanamo Bay.  With great power comes great responsibility, etc etc.

Yet America holds the key

By the same token, I cannot see another nation able to be the aspirational leader that the world aspire to.  Not by projecting its military might arrogantly, but by showing the world was a dynamic and inventive democracy can be.

America's at a unique crossroads where it's dealing with high long term unemployment for the first time in its history, it's financially constrained, it's being overtaken by China, it's politically deadlocked.  Yet it's also this incredible vortex of creativity, passion, creation, invention and change.

Here's to hoping that everyone takes stock of the lessons of 9/11, takes a moment to reflect and remember, and moves on to a more humble and at the same time more aspirational role for America moving forward. A great democracy that can overcome partisanship and put lobbying back into its box, that embraces a more caring vision of society whilst preserving its fundamental drive to achieve and innovate, and continues to shower us with great ideas and innovations.

 

 

Seedcamp and Angellist Partner for Europe

We're all delighted to announce today a partnership between Seedcamp and Angellist.

Seedcamp has been running strong for 5 years now; it will continue to be a work in progress for many years to come but it's clearly doing a fantastic job in helping startups from Europe and beyond in accelerating their progress at the earliest stages.  I am always amazed at what energy, goodwill and a common purpose can achieve.  Just check out the video below.  The big "aha!" moment for me was to see how much talent, energy and passion we've discovered coming out of Eastern Europe.

Like all initiatives, success is about focusing on what you're best at.  In our case that's:

• sourcing startups, mentors and investors
• making the whole thing gel in our events and other ongoing activities
• investing our money wisely in those we feel most strongly about
• nurturing and developing a sustainable ecosystem for innovation, including through SeedSummit.

Where Angellist shines is as an all-out, product-centric, high velocity funding marketplace.  Whilst Nivi and Naval have developed their own idiosycratic methods for how to run development, it's in spirit a true Lean startup: Angellist continues to test, churn, optimize its features.  It's viciously efficient today at creating social engagement loops and has taken information refinement to its extreme.  The brand itself almost disappears in what is fundamentally a high efficiency environment for startup / investor / talent discovery. 

With the partnership announced today, we're hoping to augment both entities' value to the ecosystem.

No one owns Angel.co, it remains by and for the community.  Likewise Seedcamp, with its diversified group of investors and mentors, is a broad ecosystem effort.  Like all good companies, they aim to deliver much more to the ecosystem than they take out of it.  Join both and help us make Europe innovation a greater success.

So if you're an Angel in Europe and want to see awesome dealflow and what the West Coast is investing in, get yourself on there now.  Here is what my profile looks like. And if you're a startup / mentor / advisor / angel, get in touch with the Seedcamp team as we'll be endorsing people onto the platform.

Premature Scaling Kills Startups: the Genome Data

The new Startup Genome project tries to bring structure and data to the following question: why do so many companies die from premature scaling ? I was impressed by the first report the Startup Genome team produced so when Bjoern asked me to comment I was more than happy to comply.

The first Startup Genome Report dealt with understanding causes of failure during the Lean, iterative phase of a startup's lifecycle.  This time, they decided to attack the complex and more nebulous area in a startup's life when a company decides that it's ready to scale and gets it wrong.  All companies get it wrong to a certain degree and as Ben Horowitz rightly pointed out, "product-market fit is not a discrete event".  [Reminder: If you only read one blog, read his].  The interest of the report lies in looking at data and trying to systematically determine when these errors lead to ultimate failure.

In their own words:

Startups are temporary organizations designed to scale into large companies. Early stage startups are designed to search for product/market fit under conditions of extreme uncertainty. Late stage startups are designed to search for a repeatable and scalable business model and then scale into large companies designed to execute under conditions of high certainty.

A startup can maximize its speed of progress by keeping the 5 core dimensions of a startup Customer, Product, Team, Business Model and Financials in balance. The art of high growth entrepreneurship is to master the chaos of getting each of these 5 dimensions to move in time and concert with one another.

Most startup failures can be explained by one or more of these dimensions falling out of tune with the others.In our dataset we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.

I encourage entrepreneurs to think through the full Lifecycle all the time and I think this is a great initiative.  I jotted down some of the reasons why I see companies scaling before they're ready to throw some quotes at Bjorn:

• Illusions of product market fit or price discovery: The classic mistake is to confuse a few early adopters with a market.  This was perfectly documented by Geoffrey Moore and is still relevant today.  Not being able to replicate early successes also occurs in consumer businesses, usually through the rapid degradation of customer acquisition and conversion economics.  It's one thing to spend $50K a month through online marketing channels with high marketing efficiency, but quite another to spend 5 or 10 times that amount without shooting the economic contribution of each new user or consumer.
• Confusing Founder Heroics with a Repeatable Model: As Peter Lynch famously said, "go for businesses that any idiot could run, because some day one will".  The parallel here is that it is an easy mistake to assume that hired salespeople or marketing people will be able to replicate the same rate of success as an incredibly motivated, tenacious and compelling founding team did in the early days.  Of course that's rarely true.  The commercial proposition needs to be baked enough and repeatable enough that possibly less talented and less determined sales organisations will be able to shift product efficiently enough.
• Unprofitable Scaling / Absence of operating leverage: You may be able to sell more faster, but you might not be ready to scale profitably.  The more customers you get, the more bugs, new requests and support issues start to bog your infrastructure down and ultimately come back to rest on the door of your salesguy.  I have lived through one experience of a company that had not understood that it had a total quality problem on its hands and kept ploughing money into the front of the funnel, to no discernible end.
• The Tail Wagging the Dog (Board Pressure): You've raised a fair bit of money on the back of an ambitious set of projections, anod now you feel compelled to hit these numbers.  Never mind that the market may change or that you may discover these new verticals aren't as easy to crack as you thought, it will be difficult to go back to the board and tell them you won't spend the new cash, or hit the numbers.

The Priebatsch versus Lauzon debate, as old as startups

Scvngr's Chief Ninja, speaking at the recent Nantucket conference, clearly made a few people uncomfortable with his (fun) pronouncements about how every startup should raise as much money as early as possible.  Whilst I enjoyed his wit and style, I was twisting in my seat, though nowhere near as much as the other young founder on the panel, Matt Lauzon.  He seemed a little sick. 

When Matt took him up on it and said he would never advise founders to do this, there was a perfect Green Goblin versus Spiderman moment between Mr Orange who's clearly going for a $1BN or bust, where the management team is made up of a Chief Ninja, a bunch of Rockstars, a Pixel Czar and so on (did I mention the King of Bling) whilst Mr Black patiently incubated at Highland and puts his Customer Support Gals front and center of his website.

The point on these two is that you have, on the one hand, a momentum player who wants to own the market yesterday and will throw everything he's got at it, and another who's on a consistent and possibly more mundane path of building team, culture, repeatability (and talks a lot less about it).

Style aside (I do like a bit of camp in my startups), I know where I'd put my money and I'd certainly never advise young founders to raise as much as they can as early as they can, but let's just look at what the data says.

Report Conclusions

You should really get the report, but let's just say that it reads as a homily to

(a) being highly consistent, measured and systematic in progress along all the core axes of execution (customer, product, team, finance, mode)

(b) constraining yourself until you're really hurting for resources, including people and capital

Borrowing from The Master (in Germany: Das Guru) on the excellent RWW: 

• The team size of startups that scale prematurely is 3 times bigger than the consistent startups at the same stage
• 74% of high growth Internet startups fail due to premature scaling
• Startups that scale properly grow about 20 times faster than startups that scale prematurely
• 93% of startups that scale prematurely never break the $100k revenue per month threshold

Before the Lean Startup was codified so beautifully (the elegance of the theoretical model has to make you smile, does it not ?), we at Atlas used to call this Prove / Build / Scale.  It was not a perfect framework, and initiatives like this are key to bringing a rigorous and systematic approach to company building, so it can be taught as a form of management science.

Me ?  I will read, learn, and do as usual: forget all the lessons in the world and go with "data-augmented instinct" in my decision making.

Go crush it.  Let's make these stats better.

Startup Lifecycle - Lean to Fat, Launch to Scale - Video

The video and accompanying presentation gather much of the current thinking around building startups from scratch to scale.

This was my annual contribution to Seedcamp, in the form of a new Prezi and accompanying commentary on Startup Lifecycle, which I presented at Seedcamp Ljubljana.

An awesome editing job was done by Lecture Hub using flowplayer and you can now enjoy the synchronized presentation and slides on their site.

A lot of credit to God (SG Blank), Jesus (Eric Ries) and Mary (Alex Osterwalder, sorry Alex) as well as Tom Eisenmann for references and structure, David Skok for his awesome visuals and sense of economy and DaveMcClure for the Startup Metrics FTW.    We're also trying to get beyond just Lean you can also dig into Scaling (e.g. see my answer on Quora).

And since I'm still having a bit of trouble typing, I borrowed the blog post of a super Seedcamp startup (that I voted for hard but you cannot win them all) called Blossom.io to give you a sense of what's covered.  I trust Thomas won't send me a cease and desist.  If you are looking for Lean Project Management, check them out.

I look forward to any comments -- ping me over mail, this blog will migrate soon and not sure I can (be bothered to) migrate the comments over with me.

Start

• Pick the right co-founder
• Do reverse vesting — It’s founder friendly
• Borrow & steal — minimize cost, more time for product/market fit

Launch

• Be Lean — The Lean Startup, Running Lean, Business Model Canvas
• Focus on providing value to your customer
• Use validated learning, pivots & iterations to achieve product/market-fit ASAP

Build

• You can’t manage what you can’t measure
• Initially focus on activation and retention (funnels, KISSmetrics, …)
• Be data informed, not data driven. Brush up on your statistics skills
• Use your intuition for important decisions (see the big picture), use analytics to optimize

Chasm

• Aggressive investment before product/market-fit can be dangerous
• To grow you need to cross the chasm from early adopters to the early majority
• Read Crossing the Chasm and/or Inside the Tornado by Geoffrey A. Moore

Scale

• Build a repeatable customer process
• Build a solid infrastructure for billing & deployments
• Fight organizational creep and automate stuff
• Grow the team and company culture

Secret Escapes – creating unfair advantages in building local champions

My most recent seed investment is in UK company Secret Escapes.  Whilst there's nothing original about the model (think Voyage-Prive for Brits), there is a definite difference is the method behind building a business that's sustainable over time and aiming for leadership versus simply cloning. 

Clones

Clones have been widely derided as pale copies of their original models, and often rightly so.  It's hard not to be amused when Groupon spawns as many as 20 copycats per European country, including (a) from the get rich quick crew and (b) from folks who seem to have woken up to the news that the Interweb was huge only recently.

The Master Cloners are of course the Samwers of Germany, who have built a factory around their Berlin homebase to capture every single trend that comes out of the US.  A perfect case study of the technique was MyVideo, started late, perfect YouTube copy, pumped with a EUR1m of marketing and quickly funded and flipped.  Stable management team not included in the price.

The Samwers have turned cloning into an art form (and since moved past that stage into helping US companies win in Germany -- see here).  You may not like what they do, but they do it with extreme efficiency, the "Cloning Mannschaft" I suppose.  Heck, they even cloned a set of my slides once.  The same cannot be said of most clones, which I would define as average companies hastily set up to mirror the latest runaway innovation.  

Local Champions

Clones are inferior copies, but there is a time honored tradition of taking stuff that works and building it properly, or even better.  After all, that's how Toyota was born (copying the Chevy straight six engine at the time). 

There is in any event a perfectly valid investment strategy in Europe around building local champions, and I have certainly done my share of those.  If you nail a large category in a local market, you can certainly build a company worth $300M or more.  None of them has ever felt like a clone though, because we build them differently and weren't looking to flip but rather to build sustainable businesses.

PriceMinister of France, which was sold to Rakuten last year, is an eBay like marketplace but innovated around some key concepts.  It was item centric rather than listing centric (allowing it to do price comparison and product search as well as listings) and acted as a third-party guarantor to every transaction.

Zoopla of the UK was started on the strong belief of the founders, Alex Chesterman and Simon Kain, that the UK market needed a better listings solution.  It was in part driven by Alex's frustration and amazement with the quality of the existing solutions and in part by the profitability of Rightmove, a company that needs a serious competitor !  Zillow and Trulia may have provided some inspiration, but the UK market lent itself beautifully to leveraging Land Registry data and user provided data (which only Zoopla does) to enhance its property valuation engine.

DailyMotion started at the same time as YouTube (and both later than Metacafe in any event)  and whilst both companies borrowed a few things from each other, neither is a clone of anything.  They just happened at the same time for different reasons.

 

Secret Escapes: creating unfair advantage for local leadership

My latest investment on European soil is in a company that is of the same ilk called Secret Escapes.

Secret Escapes is private sales for travel.  Private sales as everyone knows well was pioneered by Vente-Privee of France as a way to get around sales regulations and struck a nerve with internet shoppers, driven by the "blink and you'll miss it" dynamics and the constant stream of attractive offers (most of which you don't need or never thought about buying, but never mind, at that price, load the credit card).  There are successful companies in this field already, such as Voyage-Prive which has impressive metrics. 

If you're going to launch a new entrant in a market that is clearly on everyone's expansion roadmap (the UK), you better make sure you have some assets that will give you more than a fighting chance.  In this case:

• Insider founders: The founders (Alex Saint, Troy Collins and Andrew Bredon) were behind Dealchecker.co.uk, which they bootstrapped to a successful exit to EasyVoyages.  They know about travel, and they know about scaling startups in a lean way. See Tnooz.
• Insider execs: The team currently running the business is made of up dedicated internet veterans such as Tom Valentine who ran product at Seatwave and was at eBay, Daniel Evans who has extensive experience sourcing hotel deals, notably at Lastminute or Tomas Lin for example who is a senior lead dev and ecomm vet.
• Insider investors: OK, ok we all know investors about as much value as Gordon Brown did to the UK economy, but at least the list of companies we collectively backed looks good on paper.  William Reeve of LoveFilm fame represents the money men on the board.
• Users from the outset: SecretEscapes start with a large database of active users, solving the chicken and egg problem that typically plagues these types of initiatives by giving us a large active user base, which means hotels and other suppliers should see immediate results on the inventory that they provide.
• A real desire to make it happen: maybe most important, these guys are not that interested in getting an early call from say Jetsetter.  They'd rather show they can make it happen and go long.  Because they've built a decent success before, they want to take it to the next stage with this opportunity and really nail it.

Don't get me wrong, we'll need all of this goodness to become #1 in the UK and put some clearwater between us and the rest of the pack.  This segment's busier than Paul Carr's favourite pub on a Friday. Just looking at the obvious contenders: 

• Voyage Prive, focussing on mid-market travel. Successful on the continent but haven't caught the consumer imagination in the UK
• Travesse, small operation launched out of a travel blog, not getting too much traction as far as we can see 
• Groupon, Living Social, doing occasional, successful, travel deals, generally with broad appeal (Mediterranean packages and UK spa)
• Big US players planning  to launch, including Jetsetter & Living Social Escapes

I've been there before; when we financed DailyMotion there were over 100 video sharing websites.  Normally I like to have a distinct product advantage and with this one it's really all about great supply, but we think we've got the best domestic team to make this happen.  So bring it on boys, we're ready :-) 

Six reasons to attend AngelBootCamp in Boston on June 14

It’s probably the best time in history to become an Angel, yet the market is moving with a velocity that is sometimes mind boggling even for the most maverick among us.  There is no better time to all get together, learn from the best and think about the future. Jon Pierce and team are putting together the year’s must attend event for angel investors, do join. 

No, Dan Gould, Angel investing is not Fantasy Football for rich people.  There is a method to the madness and a long and profitable road ahead for those who can do it well.

 

Here are four reasons why you should be an angel, but an informed angel that attend BootCamp:

1. It’s a Golden Age for angel investing.  Low capital requirements, hyper scalability, global access should all be driving awesome angel returns.
2. Yet Angel Investing is being disrupted.  You’ve all noticed, we live in a new age of velocity and transparency.  Entrepreneurs now choose who they want to work with from a global roster of strongly branded Angels that they can access through tools like Angellist.  Are you ready, can you cope ?
3. Companies are being built differently.  Lean startups, fast iteration, data driven decision making.  Do you know all you need to know about how entrepreneurs are leveraging the cloud and technology standards to do more faster ?
4. Investment themes are different.  Opportunity sets are evolving faster than ever, and this time it’s global.  Come learn about trends that will shape the Eastern Seaboard ecosystem in years to come.
5. There’s Angel, Boot and Camp in the name.  How cool is that ?  Ok, maybe a bit 2008, but you know this is not going to be boring.   Mind you, probably not that camp either.
6. I’m going.  This is going to be huge.

 

So come join us at Angel Bootcamp in Cambridge, MA on June 14th: http://seedboston.com/angelbootcamp/#agenda

Superb participants include Bijan “Twitter” Sabet, noted angel investor Bill Warner, repeat entrepreneur Dave Cancel or David “Midas List” Skok and many others.

Follow @angelbootcamp and request an invite on the site.

 

Nuggets from our recent Angel Investment panel in Boston

I recently organized a little event around Angellist with our friends Nate and Boaz at HTML5 stalwarts Bocoup.  We had invited Nivi (angellist founder) to town for our annual meeting and this event but he underwent a root canal surgery instead and could not make it over.  

So we got together a “last minute yet great” group of people:

• Steve Kane, repeat entrepreneur and founder of LuckyLabs
• Jeff Fagnan, angel and venture capitalist, first money behind VentureHacks
• Mark Jung, repeat entrepreneur, chairman of Songbird, ex COO Fox Interative, founder of IGN etc etc
• Judy Obermayer, Golden Seeds and Launchpad member
• Scott Kirsner with his usual flair and style did a great moderation job.

 

The highlights are well worth a listen, in particular if you want to listen to:

• why Angellist is the reference marketplace for early-stage funding, moving from a simple VC hack blog to a true lean product company
• the blurring of angel and venture
• how the fundamental shift in velocity means traditional angel club methods are probably dead or in need of drastic evolution
• why Jeff Fagnan would have funded Dan and Brian at Norgard at Namesake even if they were selling steakknives
• how Bubs at colourLOVERS raised 90% of his funding through Angellist (even though he was a YC grad)
• how Steve Kane is not really Jeff Fagnan’s older brother, they just do yoga together
• why Friends and Family money is not always the best idea
• why VC’s sometimes destroy you and why raising money is a zero sum game
• why you better know what you’re going to do with that first $100K
• why convertible debt is really equity

I want to tip my hat to Steve Kane here for some really heartfelt and important observations, including thinking about success with a long-term perspective (and not confusing fundraising with success), what matters, why your tradeoffs as a founder are fundamentally different from anyone else’s.

You may want to check out this nice writeup from Andy at Rentabilities.

Panel Highlights (16 mins)

 

Angel Investing Panel - Highlights - 201105 by fdestin

 

And if you really cannot get enough below is the full length video

Angel Investing - BoCoupAtlas Panel - 201105 by fdestin

On personal brand, transparency and social contract in venture capital. Oh yeah, and blogging.

Recently I was interviewed by Andrew Perlmutter at BostInnovation.  The very candid interview does a good job of capturing my views on personal brand and the use of media in venture capital, and which I republish below.

BostInno: Why did you start blogging?

FD: I started blogging for two main reasons. First, I wanted to help entrepreneurs get inside the game and understand what happens inside VC partnerships. And secondly, because I invest in consumer facing innovation, I thought investing in it without eating the dog food is a little difficult. 

BostInno: How has your motivation for blogging evolved?

FD: Today, I blog primarily because I like to write. I derive a genuine pleasure from putting together my articles, it is like my personal creative space. Personal branding is also important. Though I did not start blogging with personal brand in mind, when you are 18 months into it, you begin to realize that blogging can bring very high personal branding benefits. I have walked into rooms at events for startups where 80% of the people already have a personal connection to me when they meet me. This not only helps with meeting people, but it also saves me time because people already know what I think about a wide range of issues. Bizarrely, blogging has also helped me build relationships with the press. Whether it is the Financial Times or the whole crew at TechCrunch, these are people you get to know in a different way because you are co-contributors in the eco-system. So I do think there is a lot of value in blogging that extends far beyond my initial reasons for doing it.

BostInno: What is your general view on the value of VC blogging?

FD: I do think a lot of the content is undifferentiated, unexciting, and is created because VCs feel forced to use it to push their personal brands. But the best bloggers are very genuine about it and try to be personal and differentiated.  Overall, it is wonderful to build mindshare and push your personal brand outside of its normal boundaries through the blog. Nevertheless, I am still only Little Fred from Boston. There is, of course, Big Fred [Wilson] from New York, so it is still tough for me to compete on my first name only.

BostInno: What have been the biggest advantages and disadvantages to developing a personal brand through your blog?

FD: If you are a Boston-area venture capitalist, and you used to be known for how well you covered Cambridge, downtown, and a bit of Newton, your world just exploded because globalization has finally hit the venture market. There is almost perfect transparency on the venture side, so you can’t just sit back and wait for people to come through your office. You have to be out there and people have to know what you stand for. With VC being a fairly undifferentiated offering, the primary personal-brand benefit is that it helps you bring across who you are as a person, so people can understand why they may want to work with you. So I think it has become a job requirement to have a personal brand, and blogging is the cheapest and fastest path for developing it. I would also add that a VC’s overall social footprint includes Quora, Twitter, and other services, but blogging is the most substantive part.

The downside is that sometimes you are a publisher. I have landed myself in trouble sometimes because my relatively personal thoughts end up being public opinions about the industry, the economy, or startups. Blogging is a tool that requires me to be controversial sometimes, but I also have to think about the fact that I am carrying across the Atlas brand, so I have to be thoughtful. For example, there was what I considered to be a stupid article on Reuters saying that VCs are shifting from biotech to social investing, so I tweeted that I thought the article was idiotic and non-sensical. Of course it got picked up by Om Malik within a few hours, so it is very important to be careful. But overall, I don’t think there are many downsides. I mean, take a look at major influences like Brad Feld and Mark Suster. One is in Boulder and the other in LA, both of which are secondary VC markets. They have used blogging to extend their boundaries.

BostInno: How do you respond to people who argue that, at its worst, VC blogging creates a false impression of which VCs are the most active investors and best at their craft?

FD: There is no doubt that if you spend a third of your professional life essentially as a tech journalist, then you build a huge personal brand, and that personal brand will be leaps and bounds ahead of your “substance” as a moneymaker. And if you look at the Midas List, its all the Benchmark guys you never hear about and the Accel guys tweeting once a month who are all there and making the real money. Now take Mark Suster as an example. He’s at GRP, which is a phenomenally moneymaking fund, with partners that you don’t hear about who are making all the money. But what’s the negative against Mark for building a personal brand, helping entrepreneurs better understand the VC community, and generally making the ecosystem more efficient? So if in the process, he gets 135,000 “Likes” on Facebook, I say good for him. And he is also probably working like a dog. Fred Wilson famously blogs from 4:45AM through 6:45AM. Geez, you really need a lot of discipline to do that. When Fred Wilson started blogging in 2005 and said he would commit 20 hours per week to blogging, people laughed. Nobody’s laughing today after he’s done Twitter, Zynga, Foursquare, Etsy, etc.

BostInno: But what does it mean for a venture capitalist to have 135,000 Facebook fans?

FD: We have entered the age of the celebrity everywhere. There are people who are far more famous for what they say than the substance of what they have done. And there is a bit of show business in the VC industry. Entrepreneurs sometimes put people on a pedestal. So I can tell you about some entrepreneur champions involved in the early-stage ecosystem who have astonishing personal brands but are complete assholes. There is nothing you can do about them. People removed from them think they are god-like in their ability to support entrepreneurs while people who have worked with them have vowed never to work with them again. But so what? Some people play the show business game well. So if you have substance and can play the media game well, which is Fred Wilson-like, that positioning is highly sustainable. Fred Wilson not only likes entrepreneurs, but he is on the Midas List too. So this guy has bridged both worlds and created a very difficult position to assail as the go-to VC in New York. Suster has done a wonderful job of building awareness, so if he supports that by building a great portfolio, then again he will have proven people wrong and bridged the two worlds. If he doesn’t, then he will be like many of us in the venture community, a so-so VC who has done a great service to the entrepreneurship community by helping people understand how it functions.

BostInno: Has VC blogging truly made the VC industry more transparent to entrepreneurs? And if so, have it helped them in a material way?

FD: The transparency in general is factor of the past 10 years and not just VC blogging. This transparency really helped entrepreneurs get more sophisticated. At the same time VCs fell off their pedestals because, to a certain extent, they were not adapted to the changing times and were removed from young tech founders. So the VC as a mythological beast has been slain and replaced by super-angels, who are themselves no different from VCs, making everyone confused about definitions. But seriously, transparency has been a massive factor. Entrepreneurs now get better deals, they negotiate hard on the terms that really matter, and the social contract is a lot stronger.

I love these results because they make negotiations very speedy. It is really easy now just to tell entrepreneurs, “hey, we don’t do any of the nasty stuff you read about online, yes we will have a preference, but it will be non-participating, and no we will not have a convertible cap.” Check. Check. Check. It almost takes negotiation out of the equation because best practices pervade the industry. This is great for me but it is also great for entrepreneurs. I often hear them say, “if I had only known this 10 years ago.” In general, we are finally moving away from bespoke deals towards a liquid marketplace. This is a wonderful development because it helps people focus on what matters, which is entrepreneur-investor fit and not whether your terms make sense.

BostInno: It seems like some VC firms designate one Partner as THE firm blogger. Does that strategy work?

FD: My answer is that I would rather shoot myself in the head than be the designated Atlas Venture blogger. I think such a designation defeats the purpose. I am not blogging for Atlas, I’m blogging for me. I work for Atlas and love my partnership, so it comes into play sometimes. But the partnership-centric blog is a waste of time, a waste of space, and it is not what people want. They want to hear personal opinions. I sometimes disagree with my partners. I sometimes even send them messages through the blog. So we have never done that.

BostInno: Have any firms had success with a firm blog rather than a designated blogger?

FD: It usually fails. These company blogs always feel contrived. A few firms like Union Square Ventures and First Round Capital have done a good job using social media. That being said, if you view blogging as a dynamic publishing paradigm and think that venture should not be static, then a blog-based platform might not be a bad thing for venture firm websites. There is nothing worse than the “we update our website every five years” VC model.

BostInno: How powerful a tool is a VC’s social media presence for promoting his portfolio companies?

 

FD: There is no silver bullet in marketing. Is it helpful that Fred Wilson has 120,000 Twitter followers? I bet you it has a lot of SEO value that gets back to the companies website. I bet you it’s probably the biggest awareness impact thing the company will do that week. I think it definitely does help. I have been able to pass fairly structured messages to the press through the blog about my companies. So if a VC wants to add context to the story on one of his companies, he gets quoted on TechCrunch, which links back to the blog post. This adds a lot more depth to the story. VCs can absolutely influence the message and how its shaped.

Another thing is that if I write a blog post on one of my companies, it is hard to contradict the details I provide. If a journalist is writing a piece on the company and I have already explained the story in a candid way, people cannot go and write bullshit about the company because I am the inside baseball guy on those companies. So if you want to disagree with me, you better have good data, because my brand is based on the notion that I never lie and I don’t try to paint a pretty picture of my companies. In that way, a VC can be the author of record on his companies and cut off bullshit allegations as long as he does not sell shit himself. The VC has to be absolutely authentic. You might ruffle a few feathers, but if I have learned anything from blogging, it’s that you have to be honest.

My new standard turn down auto-response

"Your project is in a queue, if we don't respond it's not because we don't like it, in fact we think you team rocks.  We usually don't respond, but rest assured we read your material, tried your app and tweeted it our to our 17 followers. [Michael Robertson] loved it, Dan and Brian talked about it on namesake, but unfortunately our bar is insanely high and we only do halo deals right now or companies that can go IPO in under 2 years. Best of luck"

What do you think ?  I am still tweaking the parsing of the original email so I can fit the right founder in on the fly.  I think this could cure my RSI and make me really popular.

[originally published on @namesake, home of Conversations That Rock]

 

How I really turn people down

• I mostly email b/c I do it late at night and getting calls together is a hassle.  Anyone I have met I provide some context. Anyone I have spent serious time with I call and am typically uber-direct and detailed.

• If I liked the project I will often tweet and intro to others though this is random and time dependent.

• I am often very direct.  I try not to give boilerplate answers but sometimes I do because explaining would take too long and I would rather be conversing on namesake.  I have given up trying to be super considerate to everyone b/c voila, c'est la vie.

• I still consider responding with feedback to be an important SLA.  It is the one item that pisses entrepreneurs off no end and still I suck at saying no and would rank myself 6 or 7 /10.   Yet I care so I cannot imagine what your average VC would rank at.

 

Having said that ....

It's amazing though how little upside there is to being direct. The guys who say "yay I am a huge fan you guys rock but we're uber busy with [color] right now" get away with murder. I'll still be direct though b/c Ialways seek feedback and never get any.  Some come on, be honest :-)

 

Handling the No

How you handle rejection is a big part of what happens next. Most startups I meet I have to say no to but when an entrepreneur comes back and says "great feedbak thank you we'll think hard about some of these points; in the meantime look out for us in the market because we're going to make an impact. Is there anyone who you think might like this who you could intro and do try our new demo at xxxx and let others know about it if you like it."

It might seem odd but providing context when turning someone down is a "give" (it takes time and attention to write it) and hence a "positive" signal of engagement (I cared enough to spend 5 minutes structuring my thoughts rather than simply turn down).  The question is how you leverage the no and get something else from the relationship you're building.  As a CEO I know likes to say: "I don't consider that anyone is not a potential customer; they're just future customers".

 

Brad Feld on building local communities, Boulder-style

When away from the Valley Vortex ™, building sustainable and efficient communities is hard.  I am in violent agreement with Paul Kedrosky when he recently argued that the first failure of smaller innovation markets is a misguided attempt to ape the Valley.  His quote: The insider/conveyor game is why venture is such a profound disappointment in almost every other market around the world. Everyone slavishly imitates the U.S. model, and then wonders why it doesn't work. (from a Namesake conversation; more on this later).

 

In that context, Brad Feld’s speech at the recent (and excellent) C100’s accelerate Montreal are worth spending some time on.

Brad’s talk starts with a little look back at the history of Boulder.  Boulder, when Brad moved there in the early 90’s, already had a high concentration of smart people that were independently minded and enabled by the advent of the internet in the 1990’s.   The incredibly fast spread of information about entrepreneurship, bi-directionally, helped make that happen.  Everyone at the time was trying to emulate Silicon Valley: Silicon Prairie, Silicon Mountain, Silicon Alley etc…  But by 2001 most of these communities got wiped:  the effort was not sustained.

Boulder started recovering a few years later.  Brad considers the seminal moment in his change of thinking about what community in Boulder really meant through a “random meeting” with David Cohen: “I love living in Boulder, I am tired of being isolated and I can’t find the thread linking us all together”.  The rest of that story is well known. David started a movement that was later to become TechStars, the original mentor centric program and an initiative that is today known around the world.

 

Building sustainable local ecosystems

Brad observes: “there’s activity and momentum in the community [in Montreal].  But a handful of things are needed to build long-term sustainable communities, so we avoid the “running out of steam” phenomenon that happened after the 2000 bust”.  Some thoughts for environments like Montreal:

• Take the (very) long term view: commit to 20 years of proactive support of the company creation process and the community nurturing.  This is not a zero sum game; making the environment stronger makes everyone a winner.
• Refresh the Community: Keep taking in new talent.  Brad calls it “fresh meat”.  The more energy you put into getting new people involved, the better the quality of the community … and of your own thinking. Members of the community need to continuously engage the new.
• Build Density: Engage the whole ecosystem from top to bottom, from the newbie to the experienced hand.  

Boulder is only a 100,000 people, but with an incredible density of entrepreneurship and creation, and not all of it has to do with marijuana being legal.

 

Rome was not built in a day

The comment that most resonated with me in this is “taking the long-term view”.  As an investor and board member of Seedcamp from the outset, I keep being asked “what success stories can you point to ?”.  It turns out we have a couple of exits we can point at, but that’s not the point.  Seedcamp is a mere 4 years old and Rome was not built in a day; quality and engagement get built over time and need to be sustained over time. There is no shortcut to creating great ecosystems: it takes time, consistency and commitment from all of us.

It also takes a recognition that collaboration around building an ecosystem is to the benefit of all.  One issue I have been running into at Seedcamp is desire by many VC firms to have “branded” initiatives and, to be blunt, a concern that Seedcamp was too close to Index.  You can hardly blame people for contributing though, can you ?  With more of the community actively engaged, this becomes irrelevant over time.  Just look at the exciting Seedcamp companies that Eden Ventures has backed.  Seedcamp is like most community efforts: you get more out of it the more you put in.  I live in Boston and am unlikely to do too many deals in Europe, and yet I agreed to stay on the board to provide exactly that: consistency.

 

Bottom Line: until we build a highly liquid and connected local fabric, we should not be surprised if we keep losing our best people to the Valley.

Atlas Venture and Wellington Partners merge, change name to Watlington Venture Partners, go Huge

Today Atlas Venture and Wellington Partners announced that they were combining to create a new powerhouse in the global venturing world.  “This is going to be huge” commented Frank Boehnke.  “ I always wanted to be huge”, added Fred Destin.

“The market really went with their headfake about leaving Europe” said Dan Primack, reporter.  “I like the gutsy move; in retrospect, staying under target on the last fund was nifty”.  Mr Jeff Fagnan, a partner at Watlington originally from Oregon, agreed: “You gotta keep people guessing.  It’s all about the Valley these days.  Having a bunch of Europeans in the firms and an office is Cambridge will really help us differentiate over there. We’re taking this market.”

One of the firms LP’s, who preferred to remain nameless, was gushing in his praise: “these guys are smart, they understand we are trying to concentrate our LP relationships and so they’re delivering exactly what the market wants ahead of the curve”.  He dismissed concerns that this was really about Atlas wanting to get into Spotify and Spotify wanting to get into the US.  Daniel Ek was having drinks with Bono again and could not be reached.  “Nonsense, these guys are bi-winning here: more companies, more partners, more venture partners, more everything.  Biwinning” said a helpful market participant.

“We think the name’s really nifty” said Fred Destin, a social media consultant and former investor.  “It worked for Balderton, so it should work for us, and SEO on Watlington is dead easy.  I stopped investing since I heard that it’s all about mindshare and look forward to starting my own TV Channel: Winning With Watlington”.  Milo Yannopolous, the Quentin Letts of tech reporting, added: “I love the Edwardian undertones.  Can’t wait for Fred and Daniel to guest post on the topic”.  Stephen Fry could not be reached for comment.  Daniel was reportedly delighted with his new email address: waterhouse@watlington.ly

In its press conference Watlington, also unveiled its groundbreaking investment strategy and announced that it will exclusively focus on “backing exceptional entrepreneurs with disruptive ideas and global ambitions who want to build the next 100 billion dollar company”.  Dave McClure offered free unwarranted commentary from the back row: “these guys are friggin’ DINOSAURS. Can’t wait to work with them”. 

The ridiculous Vivek Wadhwa furore and the new Boston Tea Party

Vivek Wadhwa shows up at MIT and tells a bunch of smart people that Boston is being left behind in the sand by Silicon Valley.  Sand, silicon, haha; the Valley won.  Ensues a stream of cheap shots and angry denials that makes the National Enquirer look pro and some fun headlines, including a scorcher of a headline from the New York Observer: “Vivek flames Beantown has-beens”.  Milo at the Telegraph never misses a chance to get in on a mudfight whilst Scott attacks Vivek on the absence of data.  That’s a dangerous line if you ask me, for when the data does come out I bet you it won’t look pretty.  PEHub is trying to outdo SAI and collects all the nasty tweets, whilst Chase wonders why anyone really gives a shit about this old argument.  Oh, and Vivek Wadhwa is not “Mister Wadhwa” or “Professor Wadhwa” or Vivek but “some dude”.  Nice.

Overall, the old Boston gentleman doth protests too much, methinks. 

I am a newcomer to Boston; I have worked in Europe, the Bay Area, New York and now Boston.  I find the whole uprising quite suprising, because frankly it does not exactly feel controversial:

• Boston is a qualitative, deep, highly professional local market that knows a thing or two about building value and building companies
• Yet Boston has a bunch of serious challenges:
  • It cannot hold on to its youth or its talent; most graduates get out as soon as they finish their studies.  The likes of Mark Zuckerberg or Drew Houston take a hike as soon as their business get serious.
  • It’s overly comfortable in the halo of its awesome universities, which is dangerous.  EPFL in Switzerland is the world’s second powerhouse when it comes to academic IP creation, but as an entrepreneurship halo it’s not exactly top of your list, is it ?
  • It’s getting much better at being open and exciting, but it’s still slow and sleepy in some respects.  Just ask the entrepreneurs about the pain of getting angel money, the endless diligence meetings, the generally conservative mentality, the gorgeous views of foliage from the windows.
• So whilst the Boston vs Silicon Valley debate is maybe not that relevant, the need for more change and a sense of urgency about change is far from an irrelevant consideration. I am from Europe, and let me tell you, Boston feels more like a stodgy European market than the uber-eager West Coast market. 

In many ways though, Boston is oversold, New York is comparatively over-hyped, Silicon Valley is in love with itself and many underestimate the depth of talent and the attractions of the area.  The David Cancels, Dharmesh Shahs, Bill Warners and many other entrepreneurs and angels make the area proud; the Founder Collective, Next View Ventures or Project 11 team are driving seed investing forward; and the area of course has some awesome funds.   But to shy away from our problems is foolish and immature, and paints us in a bad light.  Embrace your weakness, build on it, says your sensei.

I have just applied for my green card and I am here to make it work.  Let’s just not take ourselves too seriously now, shall we ?

VCs and Mega Late Stage Investments, or how to corner a market

The crossover fund has finally arrived.  Liz Gannes has done a great roundup of the latest trend, with Zynga, Facebook and Groupon taking money from the likes of KPCB, Battery, Greylock or Andreessen Horowitz.  There are few too many smart guys doing this to dismiss it as hype, so let’s think about what’s really going on.  [I was engaged in a great conversation about this on namesake and am recycling some of the content]

 

VC’s are offering Access

VC’s have paymasters too: LP’s. LP's can struggle to get into the best VC funds, even today, and now the best VC funds are offering them access into the winners of tomorrow.   Which LP is going to give you trouble for getting into facebook, really ?  How about google pre-IPO ?

 

VC’s are offering Brand

Assume EVERYONE wants a piece of facebook and think, for a second, from the company's standpoint: with the valuation being huge and hence irrelevant, who will be best for them as incoming investor ?  Having a cool VC brand (if there is such a thing) says to the market:

• We’re still a startup and we have savvy insiders backing us, not some faceless mutual funds or hedge fund
• The VC’s are giving us their money rather than funding new early stage competitors, we’re officially declaring game over on our segment !
• We get Mary Meeker to do our IPO roadshow slides for us

Compare and contrast with the negativity hitting the Wellcome Trust for its investment in Wonga.  Umair Haque is giving them a beating on twitter right now: “You couldn't find a more perfect example of the ponziconomy if you tried. Future health benefits? Traded for ultra high interest rate debt”.  No one would have batted an eyelid if it was KP coming in…  Although arguably a real coup from Wonga in buying cred !

In any event, the halo effect is mutual; call it “branding congruence”.  As @cdixon nicely put it, the VC’s are coining a new VC phrase: "buying posters" = VCs buying late stage shares of hot companies to put the company's logo in their lobby”.

 

The risk / return profile is not bad

Deals are surely often structured, though probably not facebook. At face value the price looks huge but a guaranteed return is baked in. Hence the financial logic is easy to defend. zynga at $7bn with 1.5X preference or similar. The company gets a great headline number, the VC gets a reasonable return on a big wad of cash and everyone is happy

 

Ecosystem in resonance

LP’s are concentrating their investments in the best name.  Now these franchises are all doing each other’s deals.  They’re owning the sector; it’s every money manager’s wet dream of a crossover fund coming true, but in collaborative mode.  Fund me, fund you.   Oh, and think about the relationship with the acquirors and the future startups created by talented leavers. Remember the Sequoia / Intel conveyor belt of startup / acquisition / startup.  The ecosystem is entering a form of perfect resonance.  Even Union Square Ventures’ Opportunity Fund is a perfect example of this.

Remember, resonance is a powerful thing, it’s also been known to destroy bridges

Questions

• Are these deals best for the GP’s because they put fund in the black at the expense of great IRR’s ?
• Are VC’s really qualified to do momentum late stage investment ?  Is access all there is to it ?
• Do I really need to get billion dollar companies built to feel good about myself ?  Back to work then, PriceMinister and Dailymotion are both in a different class )

 

I could go on but my arm is hurting.   This continues to be a fun market…