Watch a VC use my name to sell a con. | jwz
Normally I just ignore navel-gazing tech-industry articles like this, but people keep sending it to me, so I guess this guy is famous or something. Michael Arrington posted this article, “Startups Are Hard. So Work More, Cry Less, And Quit All The Whining” which quotes extensively from my 1994 diary.
He’s trying to make the point that the only path to success in the software industry is to work insane hours, sleep under your desk, and give up your one and only youth, and if you don’t do that, you’re a pussy. He’s using my words to try and back up that thesis.
I hate this, because it’s not true, and it’s disingenuous.
What is true is that for a VC’s business model to work, it’s necessary for you to give up your life in order for him to become richer.
Follow the fucking money. When a VC tells you what’s good for you, check your wallet, then count your fingers.
He’s telling you the story of, “If you bust your ass and don’t sleep, you’ll get rich” because the only way that people in his line of work get richer is if young, poorly-socialized, naive geniuses believe that story! Without those coat-tails to ride, VCs might have to work for a living. Once that kid burns out, they’ll just slot a new one in.
I did make a bunch of money by winning the Netscape Startup Lottery, it’s true. So did most of the early engineers. But the people who made 100x as much as the engineers did? I can tell you for a fact that none of them slept under their desk. If you look at a list of financially successful people from the software industry, I’ll bet you get a very different view of what kind of sleep habits and office hours are successful than the one presented here.
So if your goal is to enrich the Arringtons of the world while maybe, if you win the lottery, scooping some of the groundscore that they overlooked, then by all means, bust your ass while the bankers and speculators cheer you on.
Instead of that, I recommend that you do what you love because you love doing it. If that means long hours, fantastic. If that means leaving the office by 6pm every day for your underwater basket-weaving class, also fantastic.
Bill Nguyen: The Boy In The Bubble | Fast Company
Bill Nguyen launches startups with haste, never researches the competition, and makes the same mistakes “again and again.” So why do people keep giving him so much money?“I make the same mistakes with every single startup,” says Nguyen, pictured here at Color headquarters. “But I keep trying. Maybe I’m the Don Quixote of startups.” | Photo by Mark Mann”
The debut of Nguyen’s Facebook killer was scheduled for 5 p.m. PST that evening. But by late afternoon, Apple had yet to approve the app. Back at Color’s offices, anxiety ran high. “We thought, This is awful. All this press is going to come out and people won’t be able to get the app,” says Nguyen. If only he knew what was to come. With minutes to spare, the app got approved. People started downloading Color so quickly that it rocketed, briefly, to the No. 2 most-downloaded social-networking app—just behind Facebook. The developers were ecstatic that their brainchild was finally out in the world, even if most were ridden with a nasty stomach flu that had been circulating the office. “I don’t get the sense people were exhausted,” recalls Kuch. “I was tired because I was doing press for weeks and weeks.”
Flips And Flops
VCs love Bill Nguyen’s track record. They usually make money, even if the startups don’t last long.
And then, that very night, everything came crashing down. Color execs started noticing that users were quick to rate the app a measly one or two stars out of five—nails in the coffin, given an oversaturated app market that was spawning more than 1,000 new apps a day. The problem was simple: In order for Color to work, many users had to be in a similar location, but since Color hadn’t widely seeded the app prelaunch, users arrived to a social network that resembled a ghost town. “I wanna see that pitch deck,” ranted influential tech blogger Robert Scoble. “It must have had some magic unicorn dust sprinkled on it.” A mock satirical pitch deck began circulating around tech circles, spoofing Color’s attempt to capitalize on every web 2.0 cliché: “People. Colors. Apps. Cats. Bacon. Organic. Bieber. Mobile. Social. Local. Pivot.”
“Within 30 minutes I realized, Oh my God, it’s broken. Holy shit, we totally fucked up,” says Nguyen. “I thought we were going to build a better Facebook. My reaction was like putting your finger into a light socket. You know something went very wrong.”
Six months after Color became synonymous with “bubble 2.0,” Nguyen is readying Color’s relaunch. Over the spring and summer, Nguyen fired president Pham; Patil, his head of product, resigned. The rumor mill geared up, most notably with the shocking (and unconfirmed) report that, before the launch, Google offered Nguyen $200 million for Color, only to get turned down. “It’s become an ongoing joke,” says Paul Kedrosky, a Silicon Valley investor and commentator, who says the startup is now the Valley’s cautionary tale for a certain naive fervor for mobile and social networks. “It’s become a punch line. You can stand up at VC events and say, ‘Color,’ and people literally laugh without anything else being said.” Nguyen should be a wreck. Hardly. Over lunch at a diner in downtown Palo Alto, in August, he makes it apparent he’s got other things gnawing at his mental space. “I’m going to crush them like a stepchild,” he gloats. He’s not talking about Color naysayers. He’s talking about his own staff. They have downed one too many greasy meals of pizza and burritos, he explains, so they’re now competing in their own version of The Biggest Loser. Nguyen, a surfer and snowboarder, doesn’t have an ounce of extra body fat on his compact 5-foot-7 frame; still, he has hatched a plan to bury his employees. “I have a strategy to lose weight really, really fast, at a pace they can’t keep up with. Then they’ll be demoralized,” he smizes, over his lunch of fruit salad and iced tea. “I don’t care if I have to go to the hospital, I’m going to beat all of them. I’m not going to let them win. I refuse to let them win.” The week before his final weigh-in, he tells me, all he’ll consume is rice cakes and beef jerky. “I’m in every game. I play every game. Weight-loss game. Scrabble.”
His right-hand man, Kuch, chimes in. “But you’re in the startup game.” Nguyen clarifies. “I’m saying it doesn’t matter. If you want to play me in video poker, I’m going to still want to win.”
Nguyen grew up in Houston, but Silicon Valley, his geographical home since he was 23, is his spiritual center. After all, the Valley is to entrepreneurs what Las Vegas is to slot-machine junkies. True, the tech industry can take credit for the past 20 years of GDP growth in America, more than manufacturing or the services industry. It has attracted the world’s brightest young minds, has spawned society-changing innovations, and has inspired a new kind of American dream. Now every industry from advertising to entertainment tries to channel the risk-taking, failure-loving, innovation-seeking virtues of the Valley. But like Vegas, it has far more losers than winners. Some 90% of its venture-funded companies fail. Billions of dollars are invested in companies that never come close to becoming the next Facebook or Google.
In the weeks after Color’s belly flop last spring, friends and colleagues were concerned that Nguyen might be humiliated, or devastated, or at least very stressed out by the $41 million of venture money invested in his failed product. But Nguyen understands the arithmetic of Silicon Valley, and anyway he isn’t one to reflect. “I never get emotional,” says Nguyen, who hasn’t spoken to his parents in six years. “I can have the biggest argument with someone, and five minutes later, I won’t even remember that it happened.” He’s not even particularly attached to his name. In third grade, he had a crush on a classmate whose mother asked him his name. “I go, ‘Vu.’ She goes, ‘Bill,’ and I go, ‘Aha!’ And all my friends have called me Bill since then,” recalls Nguyen. “My whole point was, I don’t care what people call me. It’s like, whatever’s easier for people, I’m totally cool with it.” He adds, “There is no Vietnamese person in the history of the world born with the name Bill. It’s a total facade.”
The Color Of Blood
What’s black and blue and beat up all over? Bill Nguyen’s troubled startup after it failed to live up to the hype.
Bill Nguyen, No Longer at Apple, Working on Next Project
—February 24, The Business Insider
Color Will Have Advertisers Seeing Green
—March 23, PCMagazine.com
Color Reinvents Community; Raises $41 Million to Deliver Sharing in a Post-PC World
—March 24, Color press release
How The #*&% Did Color Raise A Crazy $41 Million For Its First Round?
—March 24, The Business Insider
Color vulnerable to simple GPS hack
—March 29, Download Squad
How Many Mulligans Does Color Get?
—April 29, TechCrunch
Troubled Startup Color Loses Cofounder Peter Pham
—June 14, TechCrunch
The Ishtar Of iPhone Apps
—June 25, TechCrunch
Google Tried To Buy Color For $200 Million. Color Said No.
—July 21, TechCrunch
Nguyen was so astounded by the condolence letters he received after Color’s March fiasco that he did what any 14-year-old would do: turned it into a prank. In June, he bought an Eddie Murphy-style fat suit, took a photo of himself gorging a bag of Cheetos, and had one of his developers Photoshop a cascade of double chins around his face. He posted the photo, a mockery of the idea that the Color debacle had sent him into a downward spiral, on Facebook. Yes, Facebook. “My job is a game, it is a hobby,” chuckles Nguyen. “It’s a pretty good hobby—highly fun and highly entertaining.”
Late in the afternoon on one of the three days I spent at Color Labs in August, Nguyen makes a pit stop at his desk on the way to a huddle with his developers. He fires up a carnival-size cotton-candy machine, a recent gift to himself that sits next to his computer. Curling his arm around the metal bowl, he spins the sugary blue fluff onto a paper cone. Armed with this late-afternoon sugar rush, he walks over to the developer war room and perches himself at the edge of a desk, folding up his compact frame like origami. Developers sporting 5 o’clock shadows and day-old T-shirts gather around their boss like a campfire, the room thick with the delirious exhaustion of gearing up for the relaunch. They’re anxious to hear about the meeting Nguyen just returned from—with Facebook.
Two weeks after Color’s botched launch, Nguyen had an epiphany. “It dawned on me that Facebook is the platform. This is the new operating system. I mean, you can’t survive without it. It’s the everything.” Instead of trying, as he did with the original version of Color, to build a new operating system from scratch, why not just glom onto the most ubiquitous one? “I think that this evolution that’s happened over the past six months is, ‘Oh my God, there already is this great invention, and it’s called Facebook,’” says Nguyen. “So we’re about to make it more functional, more valuable for people than ever.”
In some ways, Nguyen is most comfortable in this space, something those in the Valley like to refer to as “the pivot.” This is the moment when a startup decides to change course. While outsiders may see this as evidence of a failed strategy, Nguyen and his coterie like to point out that Nguyen’s biggest successes involved pivots, most notably with Lala. “The original idea was not what it became,” explains Mike Krupka, a managing investor at Bain Capital Ventures who was an early Lala investor. “The original idea was CD sharing, which is how we ran the business for a year and a half. Ultimately, that model changed dramatically from CD sharing to digital cloud music.”
What makes the Color pivot spectacular is that it is diametrically opposed to every pre-launch proclamation Nguyen made about Facebook. But just as Nguyen doesn’t get particularly attached to emotion, he’s not overly tied to his convictions. “I was totally wrong. I was just wrong. See, I don’t have a problem being wrong,” says Nguyen. He describes this as his mercenary nature. “When you’re binary, you just pick a side; whether it’s right or wrong doesn’t really matter. You’re all in. So you find out all the good and bad things about it instantly. When you find that it’s not right, you just move on,” he says. He claims that this “fail fast” philosophy allowed him to discover Color’s flaws sooner than if he had run the company as a scrappy startup that had been iterating for months. “We learned a lot of things from the first release,” says Nguyen. “But there was no way we could have known without doing it. I don’t think we could have guessed them.”
So now Nguyen is betting the house on Color’s ability to work with Facebook. His inspiration is Zynga, the gaming company that has integrated itself fully into the social network. Zynga happens to be readying an IPO that values the company at $20 billion—and also happens to be founded and run by Mark Pincus, whom Nguyen worked for first in the mid-1990s at a startup called Freeloader, which was acquired for $38 million in 1996 (and shuttered a year later), and then at Support.com. “I’m so jealous of Mark Pincus, it’s not even funny,” says Nguyen of his friend. “Oh my God, unimaginably so. I always thought I was a better product person and should win, right? But he became a better CEO. I’m totally jealous. I totally want to build a bigger company than Mark’s. Of course I do.” He’s hoping that Color on Facebook, as he calls the new version, will be as addictive as FarmVille. The app would allow mobile Facebook users to create, edit, and share group photo albums. And a new feature under the code name “Peek” would let users video each other via mobile phone, with their Facebook friends peering in. “Dude, it’s the closest thing to transporting. Just the magic we need,” he says. But, “if Facebook kicks us out, we’re toast. Done. Dead.”Nguyen says his wife hates his dream home in Maui: “She thinks it’s emblematic of her husband, which is, He’s obsessed with all things beautiful but cares less about whether it’s functional or not.” | Photo by Mark Mann
Nguyen went unaccompanied to the demo meeting with Facebook’s top brass, even though he had promised to bring a crew of Color execs. The twist was hardly atypical. Nguyen likes to add a level of game theory to everything he does. During his time at Apple, he wrangled meetings with every senior executive simply to gain access to every building in Apple’s highly secured campus. When he gets in arguments with his wife, Amanda, whom he started dating when he was 19, he likes to employ a game he calls “the bank of goodwill.” Explains Nguyen: “The cost to me to be right is so high and the reward is so low, I just lie. ‘I’m so sorry, it’s my fault,’ I’ll say. I walk away, and that’s all I have to do. It works really well.” Nguyen figured that going alone to the Facebook meeting would throw execs there off balance. “Since they feel like they’ve outnumbered me, they’ll be really nice,” he says.
While inhaling fluffs of blue cotton candy, Nguyen gives his team a mixed bag of feedback from the meeting. The Facebook team, he tells them, liked their “friend to friend” concept but felt it was too difficult to navigate between Facebook and the Color app. They were impressed by how much thought Color had put into the way people would consume content, but they wanted Color to think harder about how to get people to share content. “And,” grins Nguyen, “they thought Peek was badass.”
It turns out that before launching Color, Nguyen had barely even dipped his toe in Facebook. “I think it was all this stupid arrogance, like I was above it. Like Facebook is stupid,” Nguyen says of his misstep. In the past few months, his Facebook profile has blossomed to more than 500 friends, and he posts photos daily. Says the entrepreneur now: “For me, [Facebook is] revolutionary because I never used Facebook before. Now I do.” How could an entrepreneur who managed to get $41 million in backing have been behind the curve of grandparents all across middle America? “I have this other really bad trait,” boasts Nguyen. “I never use anyone else’s products but my own. I never do a competitive matrix ever. My entire life, I’ve never done it. I could care less what other people make. I have no interest whatsoever.”
Kuch, Nguyen’s handler, is sitting by his side during this exchange, and he rushes to massage his boss’s confession. “I think you get it by osmosis because all of us push it to you,” says Kuch, who resembles a young, tan Michael Douglas. Nguyen steamrolls over the suggestion. “I don’t ever listen to any of it,” he grins. “I mean, I literally don’t think there’s anything to be learned from other people’s stuff.”
That is exactly what happened with Color, which Nguyen never even bothered to test. “I’m not here to practice. I’m here to play,” says Nguyen, citing Apple as a company that puts out breakthrough products that haven’t been beta-tested endlessly. “That’s Bill’s entrepreneurial spirit,” says Satish Dharmaraj, who cofounded OneBox.com with Nguyen and is now a general partner at Redpoint Ventures. “If he’s going to take over a sector, he doesn’t care what others are doing, he’s going to build the best thing his mind can build.” But just because Nguyen sold his company to Steve Jobs doesn’t mean he is Steve Jobs.
Investor Kedrosky says entrepreneurs like Nguyen manage to get away with this hubris because it reinforces their auras as visionary entrepreneurs. “The fallback of the visionary is they say, ‘I don’t need to talk to people because there’s no point in doing focus groups on revolutionary products,’” says Kedrosky. “But that’s such a false dichotomy. No one is suggesting you make all of your decisions based on how people respond to surveys.” Says Eric Ries, author of The Lean Startup: “The thing that requires the most courage in entrepreneurship is being willing to get the actual feedback about your vision and then still do it anyway. But it’s easier to raise money and convince people you’re a genius with an imaginary story and no business plan, versus having few customers and small results. It’s a psychological thing.”
In building that myth, Nguyen was aided and abetted by his investors. Believe it or not, they never insisted that Nguyen test the product beyond their inner circle. “The biggest mistake we made was that we all used the product and loved it,” says Bain’s Krupka, Color’s first investor. Remember, Color was based on proximity; when the investment team tested the app with one another, they never encountered the “loneliness problem” that disappointed those early real-world users. Color board member Geoff Ralston, who was Yahoo’s chief product officer before serving as Lala’s CEO, now concedes, “I never thought it was that easy to use.” And while the press release for Color’s launch quoted Sequoia partner Doug Leone (“Once or twice a decade, a company emerges from Silicon Valley that can change everything. Color is one of those companies”), now no one at Sequoia will comment.
The first time Nguyen ever pitched a venture capitalist it was for a product he had never heard of. It was 1998, Nguyen was 27, and an entrepreneur had overheard him at a tech conference. “Three weeks later, he calls me and says, ‘I have a meeting tomorrow with Kleiner Perkins, do you want to pitch?’ I’m like, Well, what’s the idea? ‘We’re going to send faxes over the Internet.’ I’m like, Okay, I can pitch that,” recalls Nguyen. “I never prepared a business model, nothing, literally just pitched the idea this guy told me in the parking lot.” That night Nguyen went home, changed the name of the company from Ziptel to OneBox, expanded the company’s business to web-based “unified messaging,” went to another VC for backing, and, 18 months later, sold the startup for $850 million—two months before the dotcom crash.
Since then, Nguyen has been more comfortable pitching VCs than he is mingling at a dinner party. “I don’t like cocktail parties,” squirms Nguyen, who oddly likes to refer to himself as a recluse. “At the end of the day, what am I going to get out of it? I’ve known this person for seven years, we don’t really know each other well, they’ve bounced from company to company, and I do the same thing—what do we have to talk about?” Nguyen’s reclusion is of an attention getter’s version. He tells stories about throwing private concerts and of every year going to Bonnaroo music festival, only to hide in some dark corner. While showing me around Color’s space, he takes me to the basement where his new office will be, a cubbyhole that only someone of Bill’s childlike size could crawl into. Despite his relentless charm, he professes not to care much for relationships, except for those with his two adopted sons and his wife, the latter the subject of an almost algorithmic strategy that preceded even their first date, back when he was 19 and she 16. “I had this whole theory,” he says. “It was, I think I should meet someone as early in my life as possible, so that we would just get to know each other really well. That was my master plan.” They married six years later in Maui. When Nguyen told a colleague at Apple that he was going to start a new kind of social network, the man “started laughing,” says Nguyen. “He goes, ‘You have no friends. What are you doing?’”
But pitching a room full of VCs? “Piece of cake. Oh, that’s just like Fight Club, I’m on. Anytime there’s dollars involved, it’s like, game on,” says Nguyen of raising the jaw-dropping $25 million from Sequoia. “It’s funny because a lot of people, they think it’s an achievement. I could care less. I could have gotten it from 10 other places. It didn’t matter.” Cameron Myhrvold, a venture capitalist at Ignition Partners who invested in Seven Networks, the only Nguyen startup besides Color that hasn’t been sold to another company, raves about Nguyen’s ability to raise money: “He’s kind of a magician, a wizard.”
Nguyen has been cultivating his sales skills since age 16, when he decided to strike out on his own. He had a tenuous relationship with his parents, Vietnamese immigrants who raised him in low-income housing. “I grew up not wanting to be poor. I always worried about that,” says Nguyen, who describes his enterprising drive as a stark contrast to his “conservative Asian engineering parents.” During high school, he hustled as a used-car salesman during the week while throwing warehouse raves on the weekends, which he says earned him upward of $5,000 a pop. The money paid for his Houston apartment, tuition at a Jesuit private school, and, eventually a Porsche. “His personality wasn’t for everyone back then, especially authority figures like teachers,” says Nguyen’s close high-school friend, John Cogan, whom Nguyen later hired as general counsel for OneBox and Lala. “He was stellar at debate. He would just crush folks, in an unorthodox manner, but the teacher might not like what came with it. They’d think real hard about whether to bring him to an out-of-town debate, but they’d end up bringing him because he’d win them the trophy.”
While in college at Houston Baptist University, Nguyen became a fund analyst at American Express. He eventually dropped out of school, but his three years in the investment business taught him everything he needed to know for a successful career in Silicon Valley. “A lot of people are good about reading financials on a company, trying to figure out what they did,” recalls Nguyen. “I could care less what the company made. They could make balloons or elephants, it didn’t matter to me—just what was the direction of the [stock] chart? I was really good at picking trends. If a trend changed, dump it. Take your losses, take your gains. Move.” Nguyen’s most lucrative talent may be his gift for storytelling. “He paints pictures with the best in the world,” says Ralston. “And storyteller doesn’t give it the richness it deserves. He’s Jobsian in his ability to get you on his side.” Ross Bott, CEO of Seven and former CEO of OneBox, says Nguyen tells a great story raising money but an even greater tale when he wants to sell a company. “He has what I call ‘the Jedi,’” says Bott. “In order to get into a negotiation, you shouldn’t be talking money first, you have to make the company anxiously wanting you, and ideally you have more than one company doing that so you can get a bidding war. And Bill is extraordinary at that first process. Bill is able to say something and have the person he’s talking to believe it, and believe that they want to buy it. Bill does that better than anyone I know.” Some, like Myhrvold, admire his ability to convey his vision to potential investors. “I used to joke he sold things before he built them, and once he sold it, he’d go build it,” Myhrvold says. “I don’t know if he liked that joke.”
Others, like a former senior-level employee at one of Nguyen’s startups, deride his mythmaking. “Many salespeople blur the line between reality and potential to move a deal forward. Bill seems to delight in willfully disregarding the line altogether,” this source says. Nguyen admits to being an unreliable narrator, even of his own life. He’s fine with that. “People who know me are like, ‘You have the most selective memory I’ve ever seen,’” he says. “Like it’s nothing but roses and flowers and peace and harmony. I don’t remember any of the other stuff. I literally have no clue.” Nguyen put me in touch with Rob Ryan, a tech entrepreneur who turned Ascend Communications into a multibillion-dollar company. Nguyen described Ryan as an early mentor of his. He told me he had gone to visit Ryan at his ranch in Montana to get some startup advice. “He was giving me all these rules of what to do, and I don’t think I listened to any of them,” Nguyen says. “But he gave me one that totally stuck. It was: Raise as much money as you possibly can.” When I call Ryan to hear about the formative advice that has guided Nguyen all these years, Ryan tells me he has no recollection of Nguyen. Furthermore, he says that those words of advice are the opposite of what he preaches. “I won’t get involved in companies if they’re taking on a bunch of money. I call it OPM—other people’s money,” Ryan tells me, adding that in his view venture capitalists are toxic for startups. “An entrepreneur gets a whole host of money, so he actually starts to believe that he is a company because he has $20, $30 million in cash. In fact he has nothing. He’s earned none of that money. None of it has come in through revenue, and none of it is profit.”
I ask Nguyen to explain the confusion. “I guess his thinking has evolved,” he responds, in a rare moment of sheepishness.
In August 2010, when Bain decided to become the first investor in what would eventually become Color, its partners didn’t mind that there was no business plan or product. “[Nguyen] came and pitched all the partners. He basically just stood up in the room and described the vision of where the world was going and what could happen and what we were going to do,” says managing investor Krupka. “We basically said, ‘We don’t know exactly what it’s going to be, but we have confidence that we’ll figure it out.’” Ralston, another early Color investor, describes Nguyen’s elevator pitch: “His start was: ‘I’m doing it, I’m ready, I’m going.’” I ask Ralston what the “it” was. “For me, with Bill, it is secondary because he’s made me a true believer,” Ralston says. Krupka reiterates the importance of Nguyen’s track record in Bain’s decision. “If someone who had never started a company before came in and said, ‘Let me tell you where the world is going, I’m going to build this company, I don’t really know what it is, so can you give me some money?’, we’d say no thanks.”
A faith in track records is what keeps the Valley spinning. “VCs tend to invest in people who’ve had good exits, who have successfully had their company acquired,” says Bott. “If you’ve had two good exits, you know the person isn’t a fluke. What’s going on in the case of Bill is he has the reputation of somehow creating good exits out of things he touches, and that is magic for VCs. You’ll invest in it even if you don’t totally understand the idea.”
“Silicon Valley just cannot get itself out of this trap of overfunding serial entrepreneurs,” says Kedrosky, who likens the Valley’s obsession with serial entrepreneurs to Hollywood’s obsession with A-listers. “William Goldman famously responded to the question, How do you predict box-office success? with the answer ‘No one knows anything. That’s why Hollywood overpays for top-drawer stars.’ The exact same thing happens in the world of startups. If you’re a serial entrepreneur with at least one success behind you, you can almost always find a host of investors who will overpay for your next startup because nobody knows anything.” In the case of Color, blind faith paired with a pack mentality and a fear of missing out. Color, says Kedrosky, “was just this magnificent confluence of everything the Valley likes to fund: It had pieces of what had made money for people before, which is to say mobile and photos; it had an experienced team; it had a multiple-success CEO; and it brought together some investors who were really eager to redemonstrate their bona fides.”
And, says The Lean Startup’s Ries, it had something known in the Valley as “social proof.” “It’s a euphemism,” he says, “for a way of demonstrating to other investors that your company is doing well by saying who else is investing. Entrepreneurs know this matters, so they spend an inordinate amount of time strategizing how to get which investors on board and in what order, to give their company the appearance of success.” Then factor in what Adeo Ressi of TheFunded, a VC blog popular in Silicon Valley, calls the phenomenon of the “pig pile,” where competitive A-list VC firms are all fighting for the same investment. “It’s not good enough to just get in the deal,” says Ressi. “They view it as their victory is someone else’s defeat. So you end up seeing these deals skyrocket.” (Nguyen disagrees entirely with this. “There was no bidding war,” he says.) Nguyen’s pitch for Color also tapped into VCs’ deep yearning for disrupters with the potential Google had in the late ’90s. “There are lots of famous stories about people passing on Google because there was this perception that search was over,” explains Kedrosky. “Now there’s a whole bunch of people who feel that we’re giving up too soon on social networks by saying that Facebook gets the whole playing field.” In other words, if Google overturned Yahoo’s search in the early 2000s, why couldn’t Color usurp Facebook’s social network in the 2010s?
“Is Facebook forever?” says Ralston. “No fucking way. Of course it’s not. Is Google scared of Facebook now? Yes. Are venture capitalists willing to say, ‘Is this that thing?’ Sure. Of course. We ought to be. We have to be. That’s the way the world works now. It’s all connected, interrelated, and people will change fast. Does that mean there will be a post-Facebook world? I don’t know. Will it be soon? Does it have to do with mobile? Maybe. Would I invest in a company that said, ‘Hey, we have something that’s different?’ Yeah,” he concludes. “I did.”
Some 45 miles north of Lake Tahoe is a volcanic peak. It is there, in the Sierra Buttes, that Nguyen will seed his next vision. “I’m going to try to build a mountain,” he whispers, flexing his eyebrows skyward. His plan is to turn this tract of wilderness into an Olympic Ski Center and donate it to the U.S. Olympic Ski Team. “I just want my 6-year-old to ski with Olympians to see if he’s into it or not,” says Nguyen. “I’ll risk everything to see if that’s what he wants to do with his life.”
Nguyen’s intense drive for money—and a lot of it—started early on. “My best friend had the ritziest house in Texas. I was like, Dude, I want this, I need this,” recalls Nguyen. “I think some of my friends knew they would be a CEO. I never knew I would be a CEO. I thought I’d just be rich.” Although Nguyen doesn’t disclose his net worth—“It’s more than what it should be,” he smirks—money is no longer an obstacle, so he finds new quests in other things, like his son’s ski mountain or the Hawaiian dream house he built over the course of a decade. The house is on an 18-acre property in Maui’s Mokuleia Bay that sits next to a marine-life-conservation district. “We got state laws changed to actually build on the spot,” Nguyen likes to point out. After selling Lala, he moved his family out to Hawaii, but they returned to Silicon Valley less than six months later because his wife hated it. “There’s nothing about this house she likes. Nothing,” says Nguyen. “She thinks it is emblematic of her husband, which is, He’s obsessed with all things beautiful but cares less about whether it’s functional or not.” While Nguyen says his son, Jacob, is a great skier, he wasn’t so glowing about the child’s work in reading class. “The teacher was like, ‘There are other things he’s good at,’ and I’m like, No, no, no, he needs to be the best reader in the class and he needs to be the best skier in the class and he needs to do everything the best,” says Nguyen. After all, Nguyen’s father, a military guy, taught him the value of winning when he was Jacob’s age. Nguyen had finished second in a tennis tournament. “My dad takes the trophy and goes, ‘Huh, first loser,’” he says. “So I got the message really young: You win. But my father took it much more seriously than I do.” Now Nguyen is teaching Jacob “this concept that when your friends are goofing off, that’s when you catch them. So every time you watch your friends goof off, pick up a book. Because they’re resting, hunt them down.”
As he himself tries to win at the CEO game, he’s tracking his old friend and competitor. “I wish I could be as good a CEO as him,” Nguyen says of Zynga’s Pincus. “He’s focused, he’s disciplined, he’s grown a lot. I haven’t grown at all. I haven’t matured five seconds’ worth since the first time we met. I’m building skate ramps and cotton-candy machines, and Mark’s implementing whole management structures. I’m obviously not as mature.” When I ask him how he can improve his CEO chops, Nguyen’s response is that for the first time he will “not abdicate the role” as he has done at his other startups.
“Bill’s like an airplane,” says Redpoint’s Dharmaraj. “He really knows how to take off a company and he knows how to land a company, and in the middle he needs a pilot.” Dharmaraj says Nguyen’s typical pattern, as was true with Lala, is that once his startups are off the ground, he starts working less and spending more time with his family until he realizes “it’s not going anywhere, so he comes back and fixes things, positions them, and tries to return the investor capital.” Nguyen wants to believe that Color is unlike his other startups, that this time he’s out to create something iconic rather than something to flip for some new cash. But he realizes he may not have the patience this plan demands. At Lala, he recalls, he and his executive team were sitting around one day discussing the miserable economics of the music space. “I said: We should just sell the company. They’re like, ‘That makes no sense, no one’s going to buy it, Apple never buys anything,’” he says. “It took me two weeks, start to finish.” Says one former colleague: “Bill is motivated by the adrenaline rush of the deal, about demonstrating his power to influence other people. In general, people motivated by a hunger for influence and control are not ideal leaders for building long-term value.” Nguyen says he admires companies, like Netflix and Pandora, that have persevered longer than he ever could. “I make the same mistakes with every single startup,” he says. “Sell too early, not patient enough, make some bad hiring choices; I make them again and again. Every time I do it, I think I’m not going to do it, but I keep trying. Maybe I’m the Don Quixote of startups.” Now comes Color’s reckoning, the moment when Nguyen’s pivot will either soar or stumble. In late September, around the time of Facebook’s f8 developers conference, Nguyen revealed the all-new Color, an app integrated 100% into the Facebook platform, which also features Peek (now officially called Visit). Days before we go to press, Nguyen is careful to clarify that the unveiling is not, in fact, a relaunch of Color, but a “preview demo.” “I’m actually a little more cautious,” says Nguyen of his plan B. “I don’t want to turn our customers into guinea pigs again.” He’s taking a very un-Nguyen iterative approach, giving the app to 100 users—journalists and influential bloggers—who will test it while his developers continue to fine-tune it. Of course, this may also prove a handy way to co-opt his potential critics.
His investors seem encouraged. “Don’t bet against Bill Nguyen,” says Ralston. Still, the odds are against him. “I can’t think of any example with this much money and that much attention invested where anyone’s done a successful pivot,” says Kedrosky.
Oddly enough, failure wouldn’t be such a terrible outcome for Nguyen. “One of the things [LinkedIn founder] Reid Hoffman always says is that if your first product is not a complete failure, you’re probably doing something wrong,” says Ganesh Ramanarayanan, a Color cofounder. This is a prevailing philosophy in Silicon Valley; what’s more, this forgiveness is one of the fundamental beliefs behind the idea that the American innovation process is flexible and great. Failure could actually bolster Nguyen’s reputation. “People in the Valley find every reason to believe that a large failure just means you’re more likely to succeed next time,” says Kedrosky. “I often make the joke that if the financial industry ran like Silicon Valley, you’d have the guys who crashed the mortgage-backed-securities industry being handed billions of dollars the next day on the argument that, well, they must have learned a lot from crashing capitalism last time.”
“The unfortunate thing about Silicon Valley,” concedes Nguyen, “is that it isn’t the best ideas that get funded, it’s the people who do. I’ve been a beneficiary of that.” The more money Nguyen gets, the more risk he’s willing to take. “I never worry about the risk that much. The downside doesn’t bother me,” he says. “It’s why I’m a terrible gambler. I don’t do it very often, but a lot of my friends like to gamble. I just go to roulette and throw everything on one color. That’s my bet. Whether I win or lose, that’s it.” His investors’ bet on Color, he says, is all or nothing. “The goal of it is not to get a 1x or 2x return,” says Nguyen. “It’s not an in-between bet. You’re either going to lose all your money or make up your entire fund.”
Regardless of the outcome, Nguyen will continue to play the best game he knows. “The concept of a bubble helps us. It makes it sound more magical than it actually is,” says Nguyen about the criticism that behavior such as his helps drive the Valley’s forays into frothiness. “People leave really great jobs at places like Intel and Microsoft to go to startups. If the bubble didn’t exist, no one would leave their real job to go work at one of these things. Why would they? It’s totally the lottery. But it’s better than the lottery because you get to do something about it. It’s cool! You’re the one rigging the machine and telling people what the numbers are.” And while he has no need to make more money—“Every day is already Christmas anyway,” he says—there is still one thing that bugs him: He’s not a billionaire. Yet. “That’s the thing,” says Nguyen, the American dream sparkling in his eye. “I will outlast everyone else. There is no one in the world who I won’t outlast. There’s no way. There’s no way. There’s no way. I can take so much more punishment than anyone. I totally can. I can last forever. I’m like a roach.”
A version of this article appears in the November 2011 issue of Fast Company.
Understanding How Dilution Affects You At A Startup | TechCrunch
Everybody knows that when you raise money at a startup your ownership percentage of the company goes down. The goal is to have the value of the startup go up by enough that you own a smaller percentage of a much larger business and therefore your total personal value goes up.
The simplest way to think about this is: If you own 20% of a $2 million company your stake is worth $400,000. If you raise a new round of venture capital (say $2.5 million at a $7.5 million pre-money valuation, which is a $10 million post-money) you get diluted by 25% (2.5m / 10m). So you own 15% of the new company but that 15% is now worth $1.5 million or a gain of $1.1 million.
But understanding how you’re likely to get diluted over time is a more difficult concept. And figuring out how much your equity may be worth over the course of a 5-year stint at a startup is even more complicated.
I’ve had to simplify a bit, but to make it easier to understand I’ve teamed up with Jess Bachman at Visual.ly. If you want to see a view of the power of their work check out this Steve Jobs infographic. I’m a huge believer in Infographics and the ability to create deeper understanding of complicated topics through visual means. As “Big Data” becomes more pervasive the power to visualize will become increasingly important.
And Jess is awesome at his trade. His personal blog with some great example is here.
So here is our crack at explaining the world of dilution to you. Let us know what you think. And if you want more goodness like this don’t forget to sign up to my newsletter and to follow Jess on Twitter. We’ll bring you some more goodness again. Let us know what topics you want us to break down for ya.
Everyone should know and understand this.
Confirmed: Pinterest Raises $27 Million Round Led By Andreessen Horowitz | TechCrunch
Hot online pinboard site Pinterest has closed a $27 million round of funding led by Andreessen Horowitz, we’ve confirmed. As part of the financing, general partner Jeff Jordan will be joining Pinterest’s Board of Directors.
AllThingsD first reported that Andreessen Horowitz was leading a round of over $25 million that values the young startup at up to $200 million (the firm declined to confirm the valuation).
This new funding round comes just a few months after a $10 million round the company closed this past spring, led by Bessemer.
Pinterest is still invite-only, but it has garnered plenty of attention around Silicon Valley. And, notably, the site is getting a lot of traction outside of the tech bubble. The site’s popularity stems in part from its simplicity – at its core, it’s all about ‘pinning’ things you find interesting across the web, and saving them in whatever ‘Board’ you’d like (so, for example, you could make a ‘board’ of things you’d like to learn how to cook, showcasing tantalizing photos of steaks and ribs).
The site is very visually oriented, with photos everywhere — which is what makes it fun to browse through the pinboards of other users. When you spot something you like on someone else’s board, you can re-pin it onto yours (sort of like a Tumblr reblog). And it’s open-ended, so people wind up using their pinboards to showcase a variety of different things.
In an interview, Jordan said that Andreessen Horowitz is excited about Pinterest for three main reasons: first, the site is showing very strong growth metrics, despite the fact that it’s still in a semi-private beta. Second, the service has very strong user engagement — Jordan says the users who are registered often wind up using it “fairly voraciously”.
And finally, the site has a clear path to revenue — a lot of the use-cases Pinterest users are coming up with have potential commercial intent (say, a list of things they want for their wedding). And there will certainly be business models that can be built around them.
Pinterest cofounder Ben Silbermann says that the company is setting out to “connect people all over the world through common interest”, and notes that people often use their pinboards to show off things that interest them offline (in other words, it’s sort of like an online bridge between the web and the real world).
Pinterest currently has a team of eight people, including Silbermann and fellow cofounders Evan Sharp and Paul Sciarra. They intend to use the funding to grow the team (by a lot, presumably).
Palantir Technologies Raises $70 Million At $2.5 Billion Valuation | TechCrunch
Palantir Technologies has raised $70 million in Series F funding, we’ve confirmed with the company. This brings Palantir’s total funding to nearly $200 million. While the company declined to reveal the valuation in the round, we’ve learned from sources that it is around $2.5 billion. Two unnamed New York-based hedge funds anchored the round, and multiple early investors and university endowments participated in the round.
Founded in 2004 by former PayPal employees and Stanford computer scientists, Palantir offers a high-powered data analysis platform. Palantir Government and Palantir Finance both integrate, visualize, and analyze information in these sectors. The company analyzes a variety of data including structured, unstructured, relational, temporal, and geospatial content. The virtue of Palantir is that it accepts huge databases and allows users to slice and dice this information.
Palantir says its platform works at any scale while also promising security and civil liberties protections. Clearly this makes it ideal for governments and financial institutions, who need to analyze large amounts of classified, secure data.
While the company’s technologies has been popular amongst government agencies (including the FBI), Palantir has revealed that 60 percent of its business actually comes from the commercial sector. In fact, the company closed a number of recent deals in the commercial space, including a deal with financial giant JP Morgan Chase.
Palantir told us last year that revenues have at least doubled every year for the last three years. And in the company’s last round last year (in which it raised $90 million), its valuation was pegged at $735 million; so clearly the company has taken a big jump in value in the past year.
Early investors include former PayPal CEO Peter Thiel (who is the Chairman of Palantir’s board as well), and the CIA’s venture arm In-Q-Tel.
We had originally reported on an SEC filing revealing some of this most recent round in May, and AllThingsD reported a few weeks ago of another SEC filing that showed additional fundraising. As the company confirmed to us today, this round has closed and Palantir now has another $75 million in its coffers.
Oh wow, Palantir.
4 Tips for Using Your Company Blog to Attract Investors
How to Blog to Attract Investors
Venture capitalists and angel investors weigh in on what they’re looking for in your company blog.
“For a business like ours, in which there are no comparable companies, it truly is an entrepreneurial idea, and you have to explain it and build credibility,” he says.
His company works directly with high-speed rail providers to build what amounts to an Expedia for trains. He does most of his business in Europe, where high-speed rail is a burgeoning market. He doesn’t have to worry about mass consumer appeal. Yet, founded in 2009, the company is still young, and providing an online presence that may entice investors is important. “We’re thinking about doing a series B,” Gowell says.
“We try to make our posts fairly statistic-based, and it is deliberately written so potential investors and partners look at this stuff,” he adds.
And Gowell’s on the right track. Fundraising has never been easy, and the emphasis put on a company’s online presence has only added a new wrinkle for many entrepreneurs.
While stories of a small company’s bold Twitter and Facebook pages attracting investors make headlines once in while, experts say investors often look to blogs for a level of depth that can’t be found on Twitter or Facebook.
An entrepreneur’s regular contribution to their company’s blog—even their own personal blog—gives investors a look behind the brand. And aside from personality, investors are looking to see that entrepreneurs use the power of their blog wisely.
Here, experts discuss how a company blog can help attract an investor.
If a company has a blog, he says, he’ll look at that to get a fuller picture of what the company and the founder are like, and, though blogging is often thought of as an informal medium, Williams’ standards are no less exacting.
“I want to know this company. I want to see disparate posts that are not affiliated with the company,” he says. “I want third-party content that evaluates a product or service.”
Michael Greeley, a general partner at Flybridge Capital Partners, says that founders should follow one dictum that applies to all aspects of a company’s self-presentation, no matter what the medium: “Be very judicious about what you put out.”
Be transparent. A thoughtful company blog may be one way to get attention, but Greeley says he likes to see blogs of companies that champion transparency— his own included.
“We are one of the few firms where every partner blogs,” he says.
Greeley recalls one company that was courting, and being courted by, several venture capital firms. After the start-up received an offer from a firm, it posted the offer, stripped of identifying details, online.
The start-up founder had, it seems, conceived of his postings as a way to help other company founders understand what a funding round looks like from the inside, and the effect was that the investment firms began bidding against one another.
“It ended up becoming a competition, it ended up becoming this remarkable phenomenon,” Greeley says.
Use press to get press. Let’s face it: Investors will always be more interested what reputable publication says about a company than what that company says about itself. But there are certainly ways to use your blog as a vehicle for such press.
Once your blog is established and it has generated a following, think of your bloggers as expert voices.
“My CTO just did an article for the BBC that got a fair amount of coverage,” Gowell says. “When you go to a new investor and they do a Google search, you sure like to see the first page be on the BBC.”
A company blog should also be a place where investors can see any other press about the company.
Williams says highlight the big guys: The weight an investor will give to a piece of press he or she finds online will depend on the publication that ran it as well as the credibility of the writer or reporter. “It depends on what kind of press it is,” he says.
“Who is the creator of the content, if it is local XYZ versus local ABC, that will have a certain weight.”
Read what investors write. Before you start blogging, read what investors write on their own blogs and use it as a guide.
Williams doesn’t blog, but Greeley does, and he has certain rules for his own posts that small business owners may do well to emulate.
“My advice is to have the post be short, and to follow the truism that if I had more time I would have written a shorter letter,” Greeley says. “It has to be really thoughtful and on point.”
Seeing Both Sides: Why Venture Capitalists Invest In Pigs, Not Chickens
There is an old parable about the concept of commitment when it comes to breakfast. The story goes that when looking at a plate of the traditional fare of ham and eggs, it’s obvious that the chicken is an interested party, but the pig is truly committed.
When I tell this story to entrepreneurs, my point is usually to contrast the approach VCs have to start-ups as compared to entrepreneurs. The VC is an interested party, but at the end of the day, if their start-ups live or die, they typically still have their job, their office and their portfolio of other investments. The entrepreneur, on the other hand, is the pig - truly committed to the outcome, with no fallback.
But lately I’ve been thinking about the parable of the pig and the chicken in the context of the characteristics that make a great entrepreneur - and the kind of entrepreneur that we VCs in general, and my firm Flybridge Capital in particular, like to back. In short, we like to back pigs - entrepreneurs who are truly and completely committed to the outcome of their venture, have a lot of stake, and no fallback.
How do we discern the difference between the two entrepreneurial archetypes? It’s usually relatively easy, but sometimes subtle. Here are a few of the top characteristics we see in entrepreneurs who appear to be exhibiting behavior that suggests they’re more like “chickens” when it comes to their start-up:
1) Prefer to wait to start their venture only after they receive funding (“We are ready to go, as soon as you give us your money.” …um, does that mean you won’t start the company if I don’t give you my money?).
2) Don’t quit their day jobs before receiving funding. (“This has been a side project for a year, and I can’t wait to focus on it full-time” … um, if you can’t wait - why are you waiting?)
3) Don’t physically move themselves or their teammates to be in the same geography when starting their venture (think Eduardo Severin in the Social Network spending his summer in NYC).
4) Prefer to play a hands-off chairman role or look to quickly hire a COO/president in the early days rather than operate as the hands-on CEO/president. (I’ll leave out the numerous examples to protect the innocent, but as a rule of thumb, companies with fewer than 40 employees don’t typically need a COO).
5) Are unwilling to fully leverage their own personal and professional networks to drive recruiting, fundraising and business development.
On the other hand, the top five characteristics we see in “pig” entrepreneurs include:
1) Commit to the new company everything they have - even if that means moving their families, quitting their jobs, or even dropping our of their schools (as much as I don’t want to condone or encourage this!).
2) Put themselves “out there” publicly and visibly with the industry, their relationships, family and friends. If the company is a failure, it will not be a quiet one.
3) Have not yet achieved a mega-success already and/or yet achieved wealth beyond the point of needing to work again. (I remember my mentor and boss at Open Market, CEO Gary Eichhorn, congratulating me when I became a first-time homeowner in the mid-1990s and observed: “I hope you got a large mortgage so that you are locked in and highly motivated to create wealth!”).
4) Participate in a minimal set of outside interests and hobbies that aren’t directly related to their business. Starting a company is a consuming, obsessive, 7x24 endeavor. Raising a family and remaining healthy is enough of a battle. When we see entrepreneurs with long lists of hobbies and outside interests, it’s a red flag. One of my partners went so far as to look up the number of times an entrepreneur played golf one summer (which apparently is public information somehow, although I’m not a golfer so still don’t know how he figured this out) as a barometer for how hard they were applying themselves to their new venture.
5) There exists a rare breed of entrepreneurs that have already had mega-success are so special and driven that they remain obviously hungry and scrappy. For these entrepreneurs, the key is to watch and see if they’re still as hands on as they ever were (e.g., obsessed with the product, knee-deep in the financial model, out in front of the organization in selling). Again, these entrepreneurs are very special.
So what are you - the chicken or the pig? Investors clearly prefer one model over the other, not just in the founder, but in the entire team. As a result, as you are assembling your start-up team, be careful not to hire chickens. In the eyes of prospective investors, you may find it’s even less kosher than hiring pigs.
Misadventures in VC Funding: The $24 Million Moz Almost Raised « Rand’s Blog
Over the course of this year, I’ve written a couple times about raising a potential round of venture financing for my company, SEOmoz. At last, the saga’s over, I’ve been released from terms of confidentiality and I can share the long, strange story of how I first rejected, was eventually persuaded, but ultimately failed to raise a second round of investment capital.
My hope is that by sharing, others can learn from our experience and possibly avoid some of the mistakes, pitfalls and pain we faced.
Raising money for a startup is an inherently risky proposition. You step up to the plate knowing that the odds are slim and that, for every story of success on TechCrunch, there’s two hundred companies pounding the street, getting nowhere. We went the opposite route – letting investors come to us (a strategy I wrote about last year). This is the story of that experience – being “pitched” by investors, the decision-making and negotiation processes and the end results.
Do We Really Want to Raise a Round?
In November of last year, 14 months after my previous failed attempt to raise capital, we started receiving inquiries from a variety of firms – venture capitalists and private/growth equity investors, asking if SEOmoz was interested in pursuing funding. My answer was always the same, and looked fairly similar to the email below:
Over the following months (Nov 2010 – April 2011) we hunkered down, focused on product, technology and marketing and grew the business, largely ignoring the possibility of outside funding.
In March of 2011, one particular investor (whom I’ll refer to through the rest of this post as “Neil”) reached out to us and was especially excited about the SEO/inbound marketing sector and SEOmoz in particular. He sent this email after our call:
It was flattering and exciting to feel this great level of interest in our business from an investor, and Neil wasn’t the only one, either. Here’s a list of the folks we talked to seriously (meaning more than just a single phone call or email) over the first 7 months of 2011:
• Bessemer Venture Partners
• GRP Partners
• Stripes Group
• Insight Ventures
• JMI Equity
• Level Equity
• Mayfield Capital
• Accel Partners
• Summit Partners
• General Catalyst
• Industry Ventures
For the firms noted above, I’ll keep specifics of who we spoke to and how far we progressed private (as I did in my post on the 2009 experience) using pseudonyms.
The week of May 8th, I met with 3 investors in New York City and one in Boston. In preparation for these meetings, I tried to remind myself that money might not be the best thing for the company with a public blog post on the topic. I was focused on the goals of building relationships, sharing our trajectory and learning as much as possible about how others viewed our business and market.
Despite this bevvy of interest, my previous fundraising experience had left me gun-shy and reticent about committing. A week after the meetings in NYC, the Moz team had a serious chat about whether raising a round could have a serious, positive impact on the company. That discussion included a lot of back-and-forth, but the reasons we ultimately decided to test the waters more seriously included:
• Grow Engineering – For the first quarter of 2010, we had a mandate to grow the engineering team so we could improve our product faster. This proved incredibly difficult, as the much-reported tech talent wars in Seattle created a vacuum of big-data savvy SDEs. However, in Q2, our position shifted as we were able to significantly grow the engineering team – to a point where we had to slow hiring in order to keep payroll in line with our bootstrapped growth. While certainly a positive, this change meant that we were limited by cash in the bank for the first time in a while.
• Scale Data – Linkscape, Blogscape and our APIs cost ~$100K/month at the beginning of the year. In Q2, this cost had risen 30%+ and we foresaw a nearby time when it would double or more. In July of this year, those costs were, indeed, nearly $200K. We’ve gone from 40 virtual machines hosted on Amazon to 200+, and while we’re thrilled to see our metrics (mozRank, Domain Authority, et al) achieve widespread adoption, many of the heavy users employ our free API, leaving our revenue from other channels to support these costs. Long-term, we believe in free, open data as a way to grow the brand, the company and our revenue-producing channels (and it’s part of our core values to be as open and generous as possible with our data), but the cash limitations had finally become a point of frustration, and another reason to seek growth capital.
• Expand Facilities/Benefits/Team Happiness - The Moz offices can comfortably hold 45-50 people, but we realized that by Q3, we’d already be at that range. We also recognized that the aforementioned talent wars were pushing us to grow the range of benefits and space we provide to the team. Moz was named #6 on Seattle’s Best Places to Work, but we’re striving for #1, and we strongly believe that the better we can treat our team, the more amazing our output and results will be.
• Release New Products – Our big data projects have been challenging, but also incredibly rewarding, and we felt a strong drive to do more, faster. We want to produce marketing analytics beyond pure SEO, moving to field like social, content marketing, local and verticals (mobile, video, blogs, etc. – anything that sends traffic on the web organically). Some of those require heavy upfront investments in data sources, engineering and market research. One of the weird things I’ve found (which probably deserves a post of its own at some point) is that the larger your scale, the longer it takes to build product. You’d think that having 15 full-time engineers and a significant support team around them would mean faster development, but it doesn’t – the scale we need to support (nearly 14K paying customers and 250K+ users of our free products) for anything we release means far greater attention to architecture, reliability and quality then when we had two devs and 500 users.
• Invest in Marketing – Today, most of SEOmoz’s acquisition of new customers is through inbound/organic channels (~80%). We recognize there’s a lot of room for growth in both organic (content marketing, more community investment, SEO, social, etc) and in paid marketing. An investment here would allow us to take a longer view on customer payback period (the time until we recoup an investment in acquisition) and experiment in new channels, too.
• Provide Liquidity to Founders – Gillian founded the company that would become SEOmoz in 1981 and I’ve been working with her since 2001. As Gillian’s stepped aside from day-to-day responsibilities (post 2008) and taken on more of an external evangelism role, we all felt that giving her a more formal exit and liquidation path would be an ideal option. I also personally felt it was wise to take some money off the table.
I’d be remiss if I didn’t also mention another meeting in Boston – with Hubspot’s Dharmesh Shah. For the past few years, Dharmesh has been an amazing mentor to me, and someone whom I always turn to when big decisions like this appear. On the topic of funding, he gave clear, well-reasoned advice (and later, made that advice public). We met in May, just after my in-person meetings in New York, and noted that the combination of a great market for investment plus strong growth at the company made for excellent fundraising conditions.
Testing the Waters for a Large Financing Round…
Thus, in mid-May, when Neil asked to follow up with an in-person visit to our offices in Seattle, I sent the following email reply:
After that meeting in Seattle, things got hot and heavy. Neil wanted to do a deal and we began talking terms. It was at this point that our executive team and board of directors decided to take some steps to insure that we were making the right moves. These included:
• Meeting with and, hopefully, receiving offers from 2-3 of the other firms who had reached out to Moz to help test the waters on valuation and deal terms, and to make sure we had a partner and investor we loved.
• Deep-diving on Neil and his firm. We ended up speaking directly to folks at 2 of their portfolio companies, several people who worked with Neil in his previous roles and back-channeling to nearly half a dozen others who’d worked with him in one way or another through our network of contacts (both at Moz, and through Ignition Partners, our investors from 2007).
• Working hard on long-term, strategic planning for 2012 and beyond – what did we want to do, how much would it take, and where would the money be spent?
• Preparing a semi-formal slide deck to pitch the partnership at Ignition, as we wanted them to participate in the round as well. We also made a light version of this deck to send around to several folks in the field and help drum up any potential interest without being too forward or pushy.
• Investigating the fundraising market for self-service SaaS companies like ours by talking to as many recently funded entrepreneurs in the space as possible. Through this research, we hoped to get a good idea of what sorts of terms and valuation we should expect, and what was “market” (VC-speak for “normal”).
In mid-June, I made a trip to San Francisco, ostensibly to participate in SimplyHired’s SEO Meetup, but also for several Bay-Area meetings with VCs. Three of these turned into more serious discussions.
June was also when we started to feel a bit cocky. We were in active negotiations with Neil. We had multiple talks going with investors in the Bay Area, and almost every week, we had a ping from a new source reaching out to see if we were ready to start a conversation. I spoke to dozens of folks by phone and email and learned a lot more about the market – and those conversations gave me a lot of reasons to get excited. As in 2007, a lot of startups were reporting a very hot market for raising money. Valuations of several SaaS businesses I talked with were in the 6-10X revenue range (and those who raised in Q1/Q2 got valued on their 2011 estimated revenues)!
Narrowing Down the Field
Throughout the process, we’d been extra careful on the investors we engaged. We turned away one firm due to a bad experience we had with them in 2009 (email below).
This example wasn’t alone – we turned away another after talking to some of their portfolio companies and a company they’d look at but didn’t invest in and hearing about some questionable behavior.
Our biggest filter wasn’t deal terms or price, but cultural fit. We’d been warned many times against adding an investor who didn’t share our core values or who displayed any dishonest/manipulative tactics in our conversations. That ruled out a few folks, but also made us more excited about Neil, “Reggie” (an investor in California) and “Todd” (at another California-based firm).
One of my favorite emails in our process came from Reggie, who sent this just before their in-person visit to the Mozplex:
Adorable, right?! Sometimes, it’s the little stuff. Neil always asked about my grandmother in New Jersey (she had a rough fall, a concussion and spent a few weeks in hospitals, but is now nearly 100% and doing well). Todd wolfed down multiple helpings of phenomenal braised pork shoulder made by our systems engineer, David. Sarah and I dragged both Neil and Reggie to meals with both of our significant others.
But, the fundraising process certainly wasn’t all fun, and it did require a tremendous amount of work, particularly from Sarah, Moz’s COO, and from Jamie + Joanna on our marketing team, who held numerous calls with investors on a ton of membership acquisition/retention-related topics. Here’s a brief snippet of a weekend email thread that Sarah sent to Todd:
In June and July, the funding process probably entailed hundreds of combined hours of work on the part of our team – much of that was me, but plenty spread to other departments and functions. We knew this was a very big decision – one that would massively impact the future of the company – and thus, we wanted to be as diligent, thoughtful and cautious as possible.
By early July, we were down to four potentially serious investors. One decided against making an offer around the middle of the month. The others were Neil (from NY), Reggie (from CA) and Todd (also CA).
Closing the Deal
At the beginning of July, one of the investors made an offer at a $50mm pre-money valuation for a $25mm investment. Here’s my email reply:
That offer was subsequently raised to $65mm pre-money, which was matched by another firm (both Neil + Reggie). I was feeling pretty good about my negotiation skills, until a couple weeks later.
Todd was an early favorite of several Mozzers. At the end of his visit to our offices, I gave him a ride back to the airport (I borrowed Geraldine‘s only-slightly-dented 2003 Kia Spectra, since I don’t actually own a car). Near the end of the conversation, Todd noted that his firm “would have a tough time getting to $100mm” on our deal. I probably should have corrected him at that point (it would have been the TAGFEE thing to do), but I instead said something like “this isn’t entirely about the highest pre-money valuation; it’s about the right fit for us.” This would serve as a good example of why I shouldn’t try to “play the game.” A week later, after lots of back-and-forth, Todd noted that his firm simply couldn’t match our valuation expectations, and although interested, would be backing out.
I’m not sure if our strategy with Todd was a big misstep or a small one, nor whether they would have made an offer in the $60-$70mm range if they’d thought that was our target. I also don’t know why he thought we were offered those much higher numbers, nor what we should have done from there. We could have gone back and pushed on what they thought we wanted, but it seemed the time had passed (hard to describe why/how exactly).
We made our decision, sent a polite note to Reggie thanking him and another to Neil saying we were ready to move.
Pitching Ignition Partners
In addition to raising funds from an outside partner, we also wanted Ignition, who had put $1mm into the company in 2007 to participate in this next round. Their support would be helpful in making outside investors feel great about the deal, and would help us have more shared ownership among our board members.
Below is the pitch deck I used for Ignition (parts of this made it into the “light” version we sent to some other folks earlier in the process):SEOmoz Pitch Deck July 2011 View more presentations from Rand Fishkin
We’ve had a terrific relationship with Ignition over the years, and I continue to recommend them to startups of all kinds. As part of the “thank-you” for their support, Geraldine baked some cookie bars the night before our pitch meeting, which I brought to their offices and handed out prior to the presentation. I took a photo hoping that I’d be able to share it on the blog once the deal was done:
Ignition confirmed, just after this meeting, that they’d love to participate in our next round, in whatever quantity made sense to the outside, lead investor. We were excited, and spent some serious time in July planning a comprehensive strategy around how to grow with the funding. We even started some conversations with other companies we were considering acquiring.
Neil brought several folks from his firm to our annual Mozcon in Seattle. On the last afternoon, we met to negotiate some final terms of the deal. It ended up looking like this:
• $24mm invested; $19mm from Neil and $5mm from Ignition
• $65mm pre-money valuation, $89mm post
• $18mm to SEOmoz’s balance sheet; $4.75mm to Gillian, $1.25mm to Rand
• No liquidation preference for Series B (Ignition has a 1X on the Series A)
• Straight preferred (meaning that the investor either gets their money out in a sale OR the percent of the company they own, but not both)
• New board would include myself and Sarah (our COO), Michelle (from Ignition, who’s been on our board since 2007) & Neil plus a new, outside member to be approved by all parties
• The CEO could only be replaced if ALL board members unanimously approved the new person
• A sale of the company for less than a 3X return to Neil’s firm could be vetoed by them
• All other terms very similar to our Series A deal
We felt really good around these terms, and although we recognized we likely could have gotten a higher pre-money valuation through a more intensive process, we decided not to take that path, reasoning that delay could cause a dip in the markets, and that we needed to concentrate on the business, not spend more time on fundraising.
On August 5th, we executed and entered a 30-day due diligence phase.
Then Things Got a Little Weird
Michelle was the first to note that something was “odd.” In a phone call with Neil, she heard him comment that they “needed to do more digging into the market.” In her opinion, this was very peculiar, as investors typically have a thesis and great quantities of diligence long before talking to companies, nevermind prior to a signed agreement. In fact, when Neil approached us, it had been under the auspices of excitement about the SEO/inbound marketing field. One of the things we liked best about them had been their strong belief, passion and knowledge about the SEO landscape. Questions about “market size” and “opportunity” at this stage seemed peculiar.
I shot Neil an email noting that we were a bit concerned. Here’s his reply:
We didn’t actually chat that night, but a few days later. On the call, he strongly disabused me of the idea that they’d pull out, noting that they had invested massive time and energy, multiple trips to Seattle, multiple people from their firm, considerable research and expense. One of the most memorable quotes from that conversation that stands out in my mind was “We never pull out after signing an LOI unless we find fraud or some other serious misrepresentation of what we already know.”
We set up a lunch date for the next week on a Friday, just prior to their planned, in-person diligence with our team the following Monday/Tuesday (when their legal, accounting and tech folks would be meeting with teams and execs to make sure all was in order).
One other item Neil mentioned in the call was our July numbers – we’d just closed out the month and sent them details a couple days prior. Neil noted that they were curious about why July’s revenue was off budget by ~$70K. I promised to follow up and provide details.
For reference, here’s our revenue numbers from January to July of 2011:
In December, our draft budget had us doing approximately $15K more in revenue in June and $70K more in revenue (both product – our only services revenue is events like Mozcon). However, we’d beaten revenue estimates from January – May and thus, were still ahead of our total revenue target by ~$35K for the year.
Nonetheless, given that June and July were slightly slower in growth of new PRO members (we grew approx. 7% in July vs. our projected 10%), Sarah revised our rolling forecast for the year, projecting that rather than hit $12.4mm (our previous rolling forecast given our higher-than-expected growth Jan-May), we’d instead be around $11.2mm unless growth in future months picked up again. Our model for the rolling forecast is fairly standard and fluctuations like this are fairly common. At one point earlier this year, the rolling forecast had us projecting nearly $14mm, and as low as $11mm.
We didn’t worry much about these numbers – for the past 4 years running SEOmoz, we’ve often see months that beat our targets and some that don’t. Certainly, a month where we expected 10% growth but only hit 7% was nothing shocking, particularly in a year where, even with the revised estimate, we’d be doubling revenue from 2010 (in which we did $5.7mm).
Unfortunately, our new would-be-investors didn’t see things that way. Well… Maybe.
The following week (Tuesday, August 16th), VentureBeat wrote a story that SEOmoz had closed a $25mm funding. I quickly commented on the story and called the reporter. They fixed the piece a few hours later:
I also got on the phone with Neil, but he didn’t seem overly concerned about the misinformation or the story. As far as I know, no one at Moz was responsible, and the misinformation made this seem incredibly unlikely. Given the numerous inaccuracies (our employee count, customer numbers, the description of what we do and more), I really have no idea who their source was, or why they published this piece without waiting for our confirmation or statement.
We went back to work on the diligence documents and preparation, a bit shaken and more than a little skeptical.
Two days later, the day before Neil and I were to meet for lunch, he sent an email indicating they were cancelling their in-person diligence in Seattle (planned for the following Monday/Tuesday) pending our meeting. I immediately assumed they were killing the deal, and emailed the Moz team to stop the work for the process on our end.
We met in New York and had lunch. I took notes:
I thought they were going to focus primarily on the growth we missed in July – despite knowing that it wasn’t a big deal from the long-term perspective of the business, it was nerve-wracking and hard-to-shake in those few days. But instead, we talked for nearly 2.5 hours about our market strategy, how we planned to expand our product, deliver more value, etc. Neil shared a lot of what they’d learned talking to CMOs, VPs of Marketing and SEO specialists at companies they knew. It was all pretty flattering, actually – I was shocked at how positive the feedback had been.
The only big concern he brought up from that research was that higher-up marketing executives still lack belief in SEO. One quote that I noted above was a VP who said “I know it’s irrational, but nobody can prove to me that we should spend more.” This lack of investment in SEO and inbound marketing compared to paid channels, despite the higher ROI and lower acquisition cost, is something every inbound professional fights against.
At the tail end of the conversation, Neil brought up their concerns around our July numbers. They asked whether we felt the month was “a blip or a softening of the market.” I explained that when we looked into it, we saw a few major drivers:
• June/July lacked major new product releases/improvements as we geared up for MozCon at the end of the month (where we had three big releases, including the new OpenSiteExplorer, one of our flagship products)
• We had turned off re-targeting ads for SEOmoz and OSE in late June as we switched providers and didn’t have it on again until early August. Re-targeting’s great for us, because we have such high organic traffic, and it brings those visitors back. Based on the May/June numbers, we likely lost between 5-10% of new memberships from this alone.
• May, June and July also didn’t feature as many upgrades and improvements to our performance marketing channels, primarily because we focused the team’s time on other projects, including, notably, calls, metrics requests and data dives related to fund raising.
• The team was distracted by fundraising. I actually didn’t use this explanation when talking to Neil (I think I felt ashamed of bringing it up – that it would make us look worse than the others), but it certainly played a part.
I also told Neil that, if it was very important to them, we could certainly hit the $12.4mm revenue target for the end of the year by focusing on short-term acquisition, but that it would come at the expense of longer-term projects, and we felt that was unwise and unwarranted.
The meeting wrapped up, and Neil promised me an update by Monday. Tuesday morning we got the call; no deal. They released us from the term sheet conditions including, generously, the associated NDA. I promised that in the blog post I’d write (the one you’re reading now), we’d keep their identity anonymous, “Dragnet-style.”
Why Did The Deal Fall Apart?
We have a few working theories, but don’t know for sure.
• What Neil Told Us – according to Neil, the sole reason for their exit was the softness in the June/July numbers. However, this is very hard for me to swallow. We literally missed growth in two months where we had a combined $1.8mm in revenue by $85K, and we were still technically ahead on the revenue projections for the year (by $35K).
• The VentureBeat Theory – one guess is that someone important and trusted by Neil contacted him following the VentureBeat story and advised them not to put money into us for one reason or another. This fits the timeline reasonably well, but they did seem nervous about the deal even prior to the story coming out.
• Market Timing – as anyone who follows the stock market knows, the beginning of August was a rocky period. It appears to have stabilized more recently, but it could certainly be that, as in 2008 when funding suddenly dried up, the market’s crashes took their toll on Neil’s confidence or that of their firm’s LPs (who said something like “don’t make a capital call right now.”)
• Something in the Research – it’s also possible that something they found during their diligence into the market spooked them, but they couldn’t or wouldn’t share it with us. It’s hard to imagine what it could be, or why they wouldn’t tell us, but I suppose anything’s possible.
I doubt we’ll ever know for sure, and that’s pretty frustrating. Last week, I sent the team this email:
The replies back were awesome. I won’t share them here, but they killed whatever doubts I might have harbored from Neil’s withdrawal. Working at SEOmoz just flat out rocks, and it’s because I’m surrounded by some of the best people ever to be assembled. Re-reading those emails now still brings an unmitigated smile to my face.
What Did We Learn? What Lessons Can Others Take Away?
The lessons from this process are challenging to compile, not only because it was such an inbound process, but because so much of the reasons for the final result are unknown. Nonetheless, I’ll try:
• Don’t Let Fundraising Distract You from What Really Matters – If I had this to do over again, a big part of me would still want to have the slower-than-expected growth in July to make sure we didn’t get a fairweather friend who didn’t really believe in the company onto the board, but I also know we could have been much more disciplined. Spending the team’s time not just on phone calls and webinars to walk investors through our numbers, but time researching, pulling metrics, re-inforcing market questions, etc. was a waste. We should have let the investors do more of the work and kept the team more focused on the mission at hand. If an investor really wants to be part of Moz, a few missing, non-standard business metrics aren’t going to change that.
• Inbound Interest is No Guarantee of Getting Funded – For some reason, I had this idea stuck in my head that if the company is being pitched to take funding by investors, the deal will be dramatically easier to do. This might be true, but “easier” doesn’t mean “in the bag.” Our first round did work largely this way – Michelle and Kelly pitched us, we said yes, money arrived. This time, Neil, Reggie, Todd and plenty of other reached out to us, pitched and at the end of the process, nada.
• Be Careful About How & Where Funding is Communicated – We tried to be cautious this time around, not wanting to get our team or ourselves too excited before money was in the bank. Nevertheless, we definitely started planning ahead a bit prematurely. The nights and weekends (and a few days, too) spent brainstorming and roadmapping an SEOmoz with another $18mm in cash was time we certainly could have spent on more productive, realistic goals.
• Be Excellent to Everyone, All the Time - I can definitely confirm that the world of venture capital and private/growth equity is a very tiny one, and that entrepreneurs, partners and service providers talk incessantly and vociferously about nearly every experience with an investor or company. If you’re in the startup world on any side of that equation, it pays to be a great human being and to treat everyone with respect (this is probably another full post worth writing at some point). We heard some not-so-great things about several potential investors, and it made us pull back pretty quickly. Folks in the Valley often talk about how “reputation is everything,” and this experience re-inforced that for me.
• Never, Ever Get Cocky – I have to admit that sometime around the end of June/beginning of July, I was starting to feel pretty good. A bunch of investors wanted to put a LOT of money into our company. We were beating revenue month after month. We turned away investors instead of the other way around. I tried to stay humble, stay hungry and not get overly excited about things, but the idea of having liquidity for my family, the ability to grow Moz in a new and exciting way and, yeah, the idea of finally having some personal savings were all dancing in my head.
• Remember What Really Matters – No matter how this VC story went, I’m an incredibly lucky member of the human race. The big stuff is going amazingly well. My grandmother, who had a fall back in May, has almost entirely recovered. I’m surrounded by people I love to work with, all of whom are excited to come into the office every day, investment or no. And I’m married to her:
Our Plans Going Forward
The best part about this otherwise frustrating result is that we didn’t end up signing a deal with a firm who didn’t truly believe in us, our market or our future. Despite our positive experiences with Neil from March – July, the last couple weeks clearly showed that he would have been a poor choice for our board of directors. Whatever caused the cold feet, it’s better now than after the investment, when a wrong choice could have made life unpleasant for everyone for many years to come.
On the investment front – we’ve decided that attempting to raise a round of funding anytime in the next 6 months would be a mistake. We continue to receive calls from potential investors, but my message has shifted to “let’s maybe talk again next year.”
Personally, I feel burned. This is the second time in 3 years that I’ve gotten excited about raising a potential round of capital, and it turned out terribly both times. I’m not sure what I did wrong or what I should do differently next time. I also don’t know how we could have done more diligence on Neil or his firm – literally everyone we talked to raved about him; even the skeptical third-parties who went digging into their mutual contacts for us had great things to say.
Phone calls and meetings are one thing, but this wasted a massive chunk of our time, energy and emotion. Putting faith in the process in the future would be hard – if a deal can fall through this late, when we weren’t even pitching but got pitched… Well, I just don’t know. Everything about this feels wrong.
What I can say is that this experience makes me and the rest of the Moz team even more inspired and motivated to build an amazing company. We can’t help but feel passion for proving doubters and naysayers wrong. The greatest revenge is to execute like hell, bootstrap all the way, and do what we said we’d do – become Seattle’s next billion-dollar startup, and make the world of marketing a better place.
I know we can do it.
p.s. A huge thank you to so many amazing people who helped us out with their advice, networks and reviews during this period – Mark Suster, Hugh Crean, Brian Halligan, Michelle Goldberg, Dharmesh Shah, Gautam Godhwani, Jason Cohen, Nirav Tolia, Kelly Smith, Dan Shapiro, Ben Huh – and many, many more. You were the best parts of this experience, and I hope I can repay the favor somehow in the future.
Stock Market Drops. VCs Hold Partner Meetings. What Happens Next? | TechCrunch
This is a guest post by Mark Suster, a 2x entrepreneur turned VC with GRP Partners where he focuses on early-stage technology companies. Read more about Suster on his startup blog and on Twitter at @msuster.
Venture Capitalists typically have partners’ meetings on Mondays. Why is that? Who knows. But probably because as a group we travel a lot. So the industry formed around a day of the week when all partners could avoid having company board meetings or traveling.
Yesterday was a Monday. And not a pleasant one.
Rewind. When I first got into the industry it was 2007. Valuations were enormous relative to progress in companies. Web 2.0 was still a term being bandied about. Companies with less than $2 million in revenue were asking for $50-60 million valuations and getting them. My partnership was pretty bearish and scratched our heads a bit at price tags.
It was a great learning time for me. I spent my days meeting companies, figuring out what areas of the market interested me and trying to get a sense for how VCs thought about fair valuations. I thought about things I never had to as an entrepreneur: check size, ownership percentage, deal stage, portfolio construction and risk.
By 2008 I had gotten more serious about championing companies through our investment process. I started showing my partners more deals that I found interesting and doing loads of analysis on the future of markets I thought were ripe for disruption.
I have always believed that TV was ripe for disruption. The parallels to the music industry are too obvious even though the industry players, the medium and the cost structures are different. US TV advertising is $60 billion in its own right. I had found my industry and a deal I really liked in it.
I introduced my partners, we spent weeks with the team and felt good rapport. And just when I thought I had the deal that was worthy of bringing to the investment committee the world changed. It was September 2008. The market had tanked. Lehman Brothers had filed for bankruptcy. It was many events that led to the crash but perhaps this was the pin that pricked the market.
The following is a 2-week graph of the end-of-week price of the Dow Jones Industrial Average (DJIA) in Autumn 2008.
And while the market was off 24% in two weeks, it’s worth remembering 2 other things
- The market was actually off 40% from its Oct ’07 peak
- The market wouldn’t bottom until Mar ’09. On Mar-6 it hit 6,626 or 53% off its peak
We thought the following:
- No new deals close until we figure out WTF is going on with the market. We need some visibility.
- Let’s review all of our existing investments. Let’s make sure each has enough cash. Cut where needed. Finance where needed. Anyone not going to make it?
- Who has deals in process? Let’s help get their funding get finalized or the company sold if it’s already in play.
- Fawk, man. This is really bad. Depressing. Harrumph.
It felt awful. Kind of like you felt as personal investors, no doubt.
My deal got dragged out and eventually never happened. Mostly we got to see the team operate in stressful times and that changed my perspective on the deal. I need leaders who manage in good times and bad. To build a large company you need to manage through economic cycles.
Come 2009 we felt really bullish about the future for startups because the froth was gone and so, too, were wantrapreneurs. The people left standing had a compelling vision to build companies and we backed many in 2009.
When this period was fresh in September 2009, I wrote a very detailed assessment of what I thought had just happened.
- Companies raised too much money in 2005-08 and had high burn rates
- VCs were very active in this period
- When the market tanked they had the “triage problem” – which portfolio companies to save, which to kill
- So no new deals got done. Everybody focused inwardly
- And VCs scrambled to raise their own funds. Making even less time for new deals
- VCs hate downrounds to even good companies struggled to raise money
But by late 2009 life had started to return to normal
- Eventually you have to invest. It’s your job. You don’t get paid to sit on the sidelines. So when the market started showing good signs (iPhone, Facebook, Zynga, Twitter, stock market growth) it was happy days again
- M&A returned. For the same reasons. You would think it would be better for M&A to be more active when the markets are down – better prices. But I guess you could say the same about VC.
So I encouraged entrepreneurs to think about raising their funds as quickly as they could because
- Consumer spending 70% of the economy and vulnerable (wealth effect, build up debts)
- Unemployment likely to rise
- Risks of these two factors to the stock market
- Stock market declines would bring back dog days of VC
The full articles are linked below. If you want a comprehensive summary of the industry in this era it’s worth a read:
In particular part three talked about what happened if we saw a double dip in 2010-11 or a “lost decade.”
We did not see a double dip or the drying up of VC funding. In fact, fundings boomed as you know. 2010 was the year of the “super angel” and 2011 has to date been the year of unbelievably highly priced B,C & D rounds of venture capital. The so-called “billion dollar club.”
Fast forward a year to September 2010 and I wrote my treatise on the 2010 economy. It has some detailed charts you may appreciate if you’re wanting to understand the current economic situation. I show charts on housing, structural unemployment, home equity re-financings that we spent meaning less spending power post crash, new housing sales, debt-to-income ratios, public-sector job problems that will cause crises in cities and states across the US.
Summary version? No chart was good.
At least you can’t accuse me of being inconsistent. My year-over-year summary sounds very similar upon re-reading them.
I have a young entrepreneur friend who IMs me a lot. He was working on a VC round in the early Summer. He pinged me for advice. I told him (verbatim), “close your round by August 2nd. After that, all bets are off.” He’s literally on IM right now in my other browser tab saying, “you called it.” I can’t say his name yet because he hasn’t announced funding. But he got it done. Maybe he’ll reveal our conversation when he announced.
I told another friend the same. He’s still optimizing on price and hasn’t accepted his term sheet. It expires this Friday. I wonder what will happen. I guess in part we’ll see how the stock market plays out this week.
August 2011. What’s happening?
The fundamentals in our economy are mostly not on more solid footing than when I wrote the posts in 2009 and 2010. On the positive side, corporate profits are up, their balance sheets have been repaired and they have recapitalized themselves to have lower amounts of debt relative to equity. Not just tech companies but industrials, too.
But you’d have to be a pretty heads-down coder to not have noticed the past 2+ weeks in the DJIA.
Most of the informed people I know are telling me that the sharp sell-off has more to do with European national debt (PIGS as it is called: Portugal, Italy, Greece & Spain) than the current US dilemma of a S&P downgrade of the US government debt. But it must also be on the minds of investors that perhaps the flu will end up on our shores, too.
I know that investors must also be aware of the civil unrest in the UK. Yes, it seems to largely be thugs. But social unrest is created in harsh economic times and we’ve seen this in Greece before. Expect it to spread. It does weigh on the mind.
And while I cannot tell you for sure what was going on in VC partner meetings across the world today – I’m a data point of exactly one – I think I have a pretty informed guess. And depending on which way that economy heads I can tell you what the story in entrepreneur land *might* be in 60 days, “funding is getting harder, valuations are slipping, companies are running out of cash, M&A is slowing down.”
So let me give you the news 2 months early. If the economy and the stock market continue to languish that’s exactly what’s going to happen.
I’ll bet most partners’ meetings this week consisted of looking just a little bit closer at the cash needs of their portfolio companies – making sure they’re “fully funded.” I’ll bet many of them did a review of their “investment pace” as in – how quickly should we be investing. I’ll bet many did a slow roll on deals that might have gotten approved today. Not a “no” but not yet a “yes.”
It’s impossible to sit in a partners’ meeting on a day like today without having an iPhone on watching the stock market free fall and no matter how much of a public tech cheerleader you are – privately I guarantee there was much concern.
If we do head South it will take a few weeks or months until the memos to portfolio companies get published and the Powerpoint presentations get sent out. But the internal conversation started today – trust me. VCs will take a “wait and see” approach right now. Don’t want to call it either way. It’s too early.
Me? I feel confident telling you to, “Watch your pennies. Raise your money. Don’t spend like it’s 1999. If we’re not heading for a double dip recession at least you’re still being prudent.”
Maybe we’ll bounce right back? Anybody who says they know for sure one way or the other is a bit of a shaman. But I have to imagine the speed and severity of the stock market decline and political instability will likely weigh on investors for some time to come – even if we rebound.
And I’ll tell you what worries me: Jobs, growth & political malaise. And don’t think tech will remain immune.
I guess that’s why I encouraged people to raise money while the getting’s good (PPT slides & video).
I’ve been parroting this for 2 years. We have a two-track economy. We have the inability to hire engineering in Silicon Valley or brand sales people in NYC but the country still has very high structural long-term unemployment. Check out the graph below from the Economist magazine. It plots employment changes from the peak GDP quarter of the previous boom. What you’ll see is that it takes about 2 years to recover jobs from the normal recessions of the past 50 years (as if there was a “normal.”)
This recession? We’re 2.5 years in and still down 5% from the peak.
What gives? I’m guessing many of these jobs ain’t coming back any time soon. The last big recession was in the early 90′s where IT and globalization were in their infancy in terms of impact. We need a plan to replace these jobs long term. That can only come through education, training and investment in regions of the country that are not IT centers. There’s no band-aid solution and no quick fix.
Whatever you think about tax policy, I’m certain that it’s not driver one way or the other to fixing this problem. Anyone who says it is a driver is selling you political malarky.
We gotta fix jobs.
The story here is no different.
My message to entrepreneurs has been, “It’s coming soon to a theater near you.” You know – the “butterfly effect” on a local and tangible basis. Consumers hurting in Detroit or Biloxi will not continue to spend money they don’t have and income they’re not earning. It will impact retail. It will impact brands. These companies advertise. On your tech platforms. These consumers buy iPads, iPhones, Androids. You’re counting on them for up-sells to your app. For buying virtual goods. You need consumers – they’re 70% of the economy.
Trouble is – they don’t have jobs. Those that do still have too much debt. Their 401k ain’t what it once was and it just got whacked again. They still have too much personal debt. And the equity in their house isn’t rising. They’re doing what economists call “de-leveraging,” which means spending less, saving more.
And you don’t see it. You don’t see it because the world you likely live in if you’re reading this has been booming. And even if you’re not physically in a booming tech market you’re likely in the market spiritually, metaphorically. You’re reading TechCrunch, aren’t you?
3. Political Malaise
I think here I’ll just quote myself from my analysis a year ago to avoid sounding like I’m jumping on the bandwagon of this week’s quarterback analysis:
“While there was a momentary unity in the US government for bailouts & stimulus spending that were initiated in the Bush administration (many people conveniently forget this now) and continued under Obama, it is clear that this era of consensus is over. Keynesians will argue that this is a bad thing and fiscal conservatives will argue that it is a necessary discipline.
Either way, the gridlock that is now the US congress will prevent any real economic responses and it seems likely that this political malaise will last beyond the 2012 election as the Republicans look to make big gains in the 2010 mid-term elections.”
Maybe the stock market drop will bring some clarity to congress. Maybe it will bring some bi-partisan spirit to solving the nations problems. Maybe. But evidence seems to the contrary. Right now people seem to be angling more around November 2012. And that sure sounds a long way away to me.
What does this mean for the tech and VC markets?
I’m characteristically still bullish on our long-term trends for companies who get through the toughest times. Here’s what I know:
- Television will be consumed dramatically differently in 10 years from now than it is today. Creative destruction will continue to create opportunities for people who understand the deflationary economics of the Internet. I’m long.
- Cash will continue to become less relevant in 10 years as electronic & mobile commerce continue to proliferate and new technologies like NFC drive change. I’m long on payment technologies.
- Computing will be an order of magnitude more mobile 10 years from now, changing the way applications are delivered and the way we interact with our real social networks. I’m long Mobile. And Social.
- Businesses will continue to realize that the Internet is one big information utility and will continue to move operations to the cloud. This will create whole new segments of the tech market for databases, data-as-a-service, real-time information processing, cloud mapping & visualization technology, etc. I’m long the cloud.
Venture capital is an industry best served up from 7-year aged casks. As many people have said, “We over-estimate the impact of technology in 3 years and under-estimate the impact in 10 years.”
Make sure you’re still here in 10 years. Get yours. Then go build your companies.
Top image courtesy of Fotolia.