Why I'm Not an Angel

If you bootstrap your business it's your prerogative to make any stupid decisions you want--so long as you don't run out of money. But if you decide you want your bootstrapped business to be as successful as possible, you probably make pretty much the same decisions a businessperson backed by outside capital does. The process you use to grow a successful business does not materially change because of how you are funded.

So why do angel investors invest so differently than institutionally funded venture capitalists? Angel has come to be a bit of a pejorative, connoting a certain hobbyist nature, an unseriousness, amateurism. When entrepreneurs tell me they don't want venture firms in their seed rounds, just angels, my antennae go up: what are they afraid of, competence? I stopped calling myself an angel investor some time ago; I try to think about myself as a bootstrapped venture fund, doing the same job with the same professionalism on a smaller scale.

Every would-be angel I've met takes pride in their day job, they would never settle for stupid or unprofessional in their work. Even in their hobbies they would not be satisfied with sloppy or half-done. They are serious, successful people who have made their way by putting in the work to do their jobs right. So why, when they think about angel investing, do they impatiently jump right in with only half-assed attempts at learning how to do it right? Why do people who would never sit at a high-stakes poker table with hard-eyed strangers unless they had spent countless hours at lesser tables put tens of thousands of dollars into a startup without bothering to learn the rules, the odds, the other players?

Venture investing looks so easy from the outside. The public faces of VC--Fred Wilson, Mark Suster, Chris Dixon--are encouraging and open, willing to give pithy advice on the dos and don'ts. People like to talk about what they've done right and how more of that needs to be done. They don't tell the stories much about bad times, hard decision and all the work they did to create the few bright spots they write about. They like to make it look easy. If you read the VC blogs, you must wonder how they manage to fill their days when all they do is wander Union Square bumping into top-notch entrepreneurs, writing them checks on the spot, and then flipping the companies to Google or eBay for hundreds of millions of dollars. Union Square Ventures only invests in a handful of new companies each year--with five investing partners. Each partner only does a deal or two per year? It must be like a tropical vacation. Right?

In the New Yorker's recent portrait of Bruce Springsteen the author makes this distinction: "Keith Richards works at seeming not to give a shit. He makes you wonder if it is harder to play the riffs for 'Street Fighting Man' or to dangle a cigarette from his lips by a single thread of spit. Springsteen is the opposite. He is all about flagrant exertion." Many VCs are trying hard to be cool as Keith Richards. And hey, why not? If you can convince people that you invested in a billion dollar outcome by ignoring the dismissal of all of your peers and the common wisdom and instead just trusting your gut, or that you found the next big thing just walking the floor of a tech company occasionally glancing over engineers' shoulders at their screens, well that's probably about as cool as you can pretend to be if you're a financial intermediary.

But playing the guitar like Richards actually takes a ton of work and an enormous amount of repetitive practice, whether he acknowledges it or not. I'm here to tell you that Springsteen is being more honest than Richards: VC swagger is pure BS. Writing a check is easy; creating a decent chance of getting a bigger one back down the road is hard, damn hard.

Prospective angels ask my advice all the time, as one of the few people on the east coast who has made a living as an independent venture investor lo these many years. I'm happy to answer their questions, but I don't think any of them has ever taken any of my advice. Ben Franklin said "wise men don't need advice, fools won't take it." But I'm an optimist, so advice will follow.

This will be several posts, broken up into bite-size chunks. I will do my best to suppress my usual rambling ranting. Nothing I write in any of these posts is new. If you did your homework, all this would be old hat. That's part of the point: I'm going to lay out a score of pages to convince you that to be a successful venture investor you don't have to be a super-genius, you just have to actually do the work. The main take-away should be that there are no shortcuts.

Some caveats. I'm talking about a specific type of venture investing here, the kind I engage in. Investing in people that can use some modicum of cash to attempt to build a world-class company in a fairly brief period of time. I'm not talking about funding your cousin's restaurant or your buddy's bar. Those worthy endeavors have a different logic.

I'm also talking about aiming for a positive return on your investment. If your primary goal is to help out friends, give back to the community, or support a worthy idea then you don't necessarily care about how much money you make. I'm not going to give advice on how to manage for a non-monetary outcome. I believe in positive returns, not least because if you run out of money you no longer have the wherewithal to fund worthy ideas.

How would professional venture capitalists invest in super-early companies with small amounts of money if they didn't have the huge amounts of cash potentially needed to single-handedly fund the company through to exit and didn't have gigantic well-known brands? Because that's what angel investing is.

Next: The Life of an Angel. The Work-Work Balance (Angel Investing 2)

How to kiss your elbow

Even before Paul Graham's Growth post the recent VC meme was that entrepreneurs just aren't as ambitious as they used to be. They are too careful, husbanding their cash rather than boldly investing it in growth. I've heard this kvetch four or five times since Labor Day, each time from a smart and well-respected VC. They blamed the ease of raising seed money compared to the relative difficulty of Series A and B money, the incubators and angels corrupt the entrepreneurs.

I've had this conversation with many of my entrepreneurs over the years: the market's going to pass you by, carpe diem, etc. But I never really thought of it as a trend, it was just the usual learning opportunity for first-time entrepreneurs--there's no starting gun, no one is going to tell you when to start seizing the day, just do it. This has always been a conversation in the fifteen years I've been investing in early-stage. Is it really now a wider phenomenon?

I don't know, but I heard it enough that I ran the idea by a couple of my entrepreneurs. The entrepreneurs sighed and rolled their eyes. You advised me to raise just the money I needed to get to the A, they said, Paul Graham says I should "not need money." Which is it, they ask? Do you want me to not need money or do you want me to get aggressive and raise my next round sooner, maybe without the metrics I need to get a good valuation?

Fair enough, the world is full of conflicting advice. And I understand how annoying it can be when it's the same person giving you both sides of it.

And let's be clear: the dichotomy is not necessarily between the lean startup and "go big or go home." Suster makes the case that the latter is not always the best route. No argument. This is more along the lines of when to hit the gas, not if. I only invest in entrepreneurs who tell me they can and want to go big and then I try to get them to stick to what they told me. My favorite question when these conversations happen is "what's the bottleneck?" What can we do, who can we hire, who do we need to partner with or talk to or get in front of to make what we both think can happen actually happen, now?

When I ask this, the entrepreneur always knows the answer. In fact, they've usually been thinking about it night and day. But they also usually want to take it more slowly than I do. They want to take less risk. Once you've spent the money, that money is gone, and if you're too early it's gone for good.

So how do you know when it's not too early?

Christensen tells a story in The Innovator's Dilemma about Honda's entry into the US motorcycle market. Honda's entry strategy, after much examination, was to give Americans what they clearly wanted: large bikes to ride long distances at highway speeds. Honda's expertise was in designing small, efficient engines, as in their Supercub delivery bike. But Honda designed a big, fast bike for the American market and in 1959 sent three reps to live in LA to begin marketing it.

The bikes sucked. At highway speed they leaked oil and burned through clutches in record time. The cost of sending replacements for the warrantied bikes almost put Honda out of business.

To burn off steam the Honda reps used to go out and ride their Supercubs--small, zippy, 50cc bikes--in the hills east of LA on the weekends. Over time people started asking where they could buy one of these 'dirt' bikes. The reps special-ordered Supercubs from Japan for people. After a couple of years of this a buyer from Sears tried to place a bigger order. Honda ignored him. Finally the Honda reps convinced Honda to change direction, that the big bike strategy had failed but a small bike strategy would work. Innovative distribution channels were forged, sales took off, market entry was achieved.

But if Honda had been more aggresive with their strategy in 1959, if they had sent reps to Miami and Seattle and Dallas and Atlanta and Denver and Las Vegas at the same time as LA, there's an excellent chance Honda would have not only failed to enter the market but actually gone out of business. By taking it slow until they had found a product that fit the market, they bought the time they needed for success.

Bit of a buzzword that, product market fit. Mark Andreesen says "you can always feel product/market fit when it's happening." Unfortunately, this is simply not true. Honda took a couple of years to feel it and even longer to properly trust it. In B-to-B startups you can have a lot of buzz and a few amazing clients banging your door down and still have a product that doesn't really do much. Or you can have a product that is absolutely amazing that great clients are beta-testing but that no one is paying for. In B-to-C you can have a hundred thousand users and still be serving nothing but tech industry curiosity seekers. Or you can have millions of members and few users. These are not product-market fit.

There is a case for going slow, to a point. Your product has to provide real value to your users. You need to have a viable business model, know the metrics you need to make it work, and be on the path to meeting those metrics. And then you need a way to get to customers and convince them to sign up and/or pay. You need all these things before you can feel comfortable ramping up the spend. But if customers love your product, if those customers are profitable customers, and if those customers start presenting themselves, either directly or by making themselves extremely easy to get in front of, then you should let them become customers. And if there are more of them than you can get in front of personally, then you should hire a salesperson. If there are more of them than your salesperson can get in front of, then you should hire more salespeople. If you have a product and you have a market for that product, you should stop worrying and start scaling.

In the old hockey-stick curve there is a flat part and there is a steep part. That transition, the elbow in the curve, is hard to see, especially when you're spending all your time trying to run your company. Here's a question to ask yourself: if you think you can double revenue next year, what's holding you back from increasing revenue by 10x? If the answer is that there's no market yet, then keep grinding away at it. If the answer is not enough people or hardware for scaling, then start spending the money on hiring them, today.

The best possible Series A story: "we don't really need your money, but if we had it we could grow ten times faster starting tomorrow." Term sheet before you get home, guaranteed.

Response to comments: Training VCs

Many of the comments on yesterday's post were about training future VCs, or not. Both Brad Feld and Fred Wilson said they did not have junior VCs because they did not want to burden entrepreneurs with inexperienced VCs. This makes a ton of sense. But, then, where should experienced VCs come from? Andy Weissman comments that perhaps VCs are best trained by being entrepreneurs.

You either believe that Venture capital is not a profession--i.e. there are no special skills or knowledge needed that can't be picked up as you're doing the job--or it is. If it is then it looks like the best firms are akin to 'boutiques' in other professions. In fact, almost all the firms are akin to boutiques in other professions. Of course, in other professions boutiques are formed by people who were trained at the mainstream firms. If there were no mainstream firms there would be no people to form boutiques.

Law firms train lawyers. Accounting firms train accountants. Banks train bankers. Even advertising agencies train advertising people. VCs by and large do not train VCs. Maybe VC is not something you can learn by just doing VC, although Fred is a prominent counter-example. Professions train professionals partly because they think their professions are important, so they feel the obligation to pass on embedded knowledge to the next generation. And partly because they can skim some of their underlings' earnings (thus the pyramid structure of professional services firms.)

VC does not have the pyramid structure of some professions, like law or accounting, where most tasks can be delegated with oversight to junior people. So it's true that junior people in VC probably would cost more than they generate if they were truly being trained (as opposed to just cold-calling and spreadsheet-jockeying.) But if we care about entrepreneurs, as we all profess to do, we should want not just the best for today's entrepreneurs, but also for tomorrow's.

If you do, and still don't think training VCs is worthwhile, then it must be that you simply do not believe that VCs can be trained, that VC is not in fact a profession at all.

I do not think this is true. The best--in fact almost all--VCs have historically come from one of five places: VC, banking, law, technology firm management, or journalism. Check the VC genealogy to confirm this. (I don't think any journalists are represented there, but Mike Moritz is a prime example.)

Each of these paths teaches people some of the necessary skills to be a venture capitalist, but not all of them. Witness Kleiner's and Perkins' struggles as they started out, making ridiculously wrong bets on markets they did not understand. Or the revealing comment Fred Adler made* about two of his partners that left to start their own fund: "These fellows came out of Citicorp where they were quite senior and they didn't go through [my] intense interrogation" justifying the investments they were making. The implication being that the two partners did not know enough to make good investments and Adler did not feel they would accept his instruction since they were so senior. In other words, being senior at Citicorp had not taught them all they needed to know to make good venture investments. Those two partners must have learned something on Adler's dime though, because the fund they started was Accel**.

Many venture capitalists made similar mistakes early on. The ones that didn't seemed to either have extensive angel investing experience (and so their early mistakes are not part of the record) or they "played the follower strategy" (as Wilson has it) and managed to get into more experienced VC's deals in order to learn the business.

So if specialized knowledge is needed, how to generate it? Kauffman has their Fellows program to train VCs. Andy thinks being an entrepreneur is the best training. I disagree with both. I think only doing the job teaches the job. And since no one wants anyone doing the job who doesn't know the job, this means a long apprenticeship. But the best VCs seem to not be interested in having apprentices. So, then what?

In my opinion, if we want better trained VCs, then either the culture has to change so VCs feel an obligation to train the next generation***, even though it costs them money, or the LPs need to start looking out for their future returns in addition to their present ones and compel VCs to have a bench. It would be interesting to hear from experienced venturers how they learned the business.

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* Quoted in John Wilson's The New Venturers.
** Wilson's book was published in 1985, Accel was founded in 1983, so Wilson had no way of knowing that Accel would go on to be one of the premier venture funds. This just makes the quote that much better.
*** I would be happy if VCs would even just blog more with other investors as the audience, instead of writing the same frickin how-to posts for entrepreneurs over and over. The world does not need another "How to Read a Term Sheet" post, it really doesn't. It could, however, use a few more "How You Will Get Screwed if You Write a Bad Term Sheet" posts.

On fixing VC ourselves

What good is it for me to sing helplessness blues
Why should I wait for anyone else?

- Fleet Foxes, Helplessness Blues

That's for Fred Wilson.

In his post last month "Can the Crowd Be More Patient", Fred says

We need new medical approaches to preventing and/or curing disease. We need new scientific approaches to generating, storing, and being more efficient with energy. Maybe we need more space exploration. Maybe we need more undersea exploration.

He says this in the context of not being able to fund these things because that is not what venture capital is. But you know what? At this exact point in time Venture Capital can be whatever Fred says it is. If he wants a 20 year fund instead of 10, he could raise it. He wants an evergreen fund? He can do that. I think he could probably raise a fund to do whatever he wants.

So I'm not sure what he's saying. But if what he's saying is that these things are not fundable, no matter the time frame, that they are simply bad early-stage investments, then I strenuously disagree. Investing in the things that make our collective lives better--the very things we think of as progress--should be the only good investments. Venture capital is a means to an end, that end being the commercialization of innovation that makes our lives better.

Here's a thought:

Entrepreneurship is a self-actualizing and a self-transcending activity that—through responsiveness to the market—integrates the self, the entrepreneur, with society. Unavoidably, therefore, entrepreneurship is an exercise in social responsibility. To suppress or constrain innovation and improvement—and their implementation—ignores a society’s needs and wants, holds it back, and diminishes its future. Entrepreneurship is the unique process that, by fusing innovation and implementation, allows individuals to bring new ideas into being for the benefit of themselves and others. It is sui generis, an irreducible form of freedom.

That's from the Kauffman Foundation's 2008 report on Entrepreneurship in American Higher Education [pdf]. Meanwhile, this week Kauffman had a new report [pdf] that--as Ed Zimmerman had it--blames investors in VC funds for being co-dependent enablers of bad VC behavior (for the tl;dr, see Fred Destin's excellent post on the report.) I've heard a lot of opinions on this report: some agreeing, some denying Kauffman's conclusions (for instance, Brad Svrluga's rebuttal.) But while the degree to which venture investors are doing a bad job is arguable, the fact that, as a whole, we are is not.

Nice as it would be to agree with Kauffman and say "I'm doing a bad job because I'm being managed poorly," that's no excuse. Every VC I know complains about bad practices in the industry, because bad venture capital practices affect us all. And while the bad behavior might make short-term economic sense, as outlined in Kauffman's report, I am not in this for the money and neither is anyone else I know.

Yes, I want to make money; in fact, I need to make money if I'm going to keep investing, I'm also competitive by nature and making money is how we keep score. And then, if it's true that the market ends up choosing companies as winners because they are the ones that contribute most to societal growth, then making money is not a bad metric in the long-term. But the real reason I'm in the business is that I want to contribute, I want to be useful. "Entrepreneurship is an exercise in social responsibility." That's what I want to enable. Every good VC I know feels the same way, but almost all of them feel helpless to change the current broken incentive model.

How would we do that, as venture investors? I'm sure there are smarter people than me thinking about this, but here are a few ideas.

1. Change LP Behavior.

I agree with Kauffman about misaligned incentives, not that my agreeing is going to change anyone's behavior except my own. But if Fred Wilson and his ilk agree with Kauffman, then it does make a difference, if they want it to. Fred talks his talk in public and he walks his walk in private, so maybe he's already in the process of convincing LPs to accept a different model so he can make the investments he thinks make a difference. I hope he is. And I hope he's not just volunteering USV, but the whole industry. When you're really good at something, explicitly raising the bar for the entire industry is a killer strategy, so convincing LPs to hold VCs to a higher standard would just be good business for him.


2. Professionalize VC.

One of the odd things about venture is the lack of seriousness about what we do. Venture is the only professional services business which does not think training its employees is a good idea. Witness Brad Feld's comment--ironically, in the textbook that Kauffman asks its Fellows to read--"We don't intend to hire associates and train them; [when we retire] we are just going to shut shop and go home. Done!" This après moi le déluge attitude means that our industry continues to be half-staffed by people who half know the job. I am constantly amazed at the crazy things other angels do, usually sins of omission, and VCs I know express the same sentiment about other VCs. In no other profession do they expect people to just show up and do the job well. In our profession many show up and do the job poorly. We all suffer. If we care about innovation--not just making money--we should be training people how to invest in and manage investments in startups.


3. Think bigger.

Wired publishes "When Will this Low Innovation Internet Era End?" at the same time as the Guardian has an article called "Has the Internet Run Out of Ideas Already?" Rick Webb calls a bubble in the very part of the startup world that has the least to do with societally useful progress (progress defined as improving GDP per capita and thus living standards.) Fred's complaint: it's true.

As an industry, we are funding too many ideas which do not make a difference. We can take pride in helping build companies that create jobs. But creating jobs is not as good a goal as we make it out to be if those companies and those jobs disappear three years later. Jobs come and go, but technological progress is forever. Funding progress makes a difference. This is not a "they promised us jetpacks" rant. Jetpacks are stupid. I don't want a jetpack. I don't want you to have a jetpack. I think all of us having jetpacks would not make the world a better place in the least**. That's not progress. Google was progress. Twitter is progress. These are tools that enable us to think better, to communicate better, to find the things we need to know more efficiently.

Paul Graham had a post on "Frighteningly Ambitious Startup Ideas." I think that his ideas as a whole were not ambitious enough. A new search engine, replacing email? OK, those are big ideas, and they're ideas a small team can make progress on over the course of a YC session. But the big ideas are more akin to his latter ones: a wholesale reconfiguration of existing industries that suck, efficiency-wise or societally: Hollywood, medical care. I like companies that are trying to destroy and replace our most hated industries***. But there's big and there's bigger. How do you create a company that doesn't solve a specific problem but rather makes us better at solving problems in general?

Google and Twitter both make us better at solving problems. They don't just make us more efficient, they make us more efficient at finding efficiencies. They are tools to make our brains better. But they are primitive tools. We should be building companies that make us--as a species--more creative, better problem solvers. Our bottleneck in making more progress is ourselves as people: we can not on our own think any harder or better. Where are the startups that change that? I don't want a company that cures a disease, I want a company that helps researchers figure out how to cure diseases. The best, and best returning, industries that venture capital has funded have done just this: the computer industry, the biotech industry. These were meta-tools.

What's the next meta-tool? If I knew I'd be building it. I don't know. So instead I spend my days looking for the type of people who think they do know. That is the job of the venture investor. We need to do more of this, and less of what we are doing now.

Kauffman's report implicitly suggested that there should be only 20 funds, each of $400 million or less. If this advice were taken, the venture industry would be a fifth the size it is today. Almost all VCs would be out of jobs. Entrepreneurs would be back in the bad old days when ARD funded DEC with $85,000 and received 70% of the company in return. No one wants that, except maybe the LPs, but that's what is in the cards if that's what it takes to make the investment class work. To avoid that, we--the venture investors--need to do better and we need to do it preemptively.

We are not helpless, we should not wait for anyone else.

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* Many small companies do make a difference in people's lives, and certainly do so in the aggregate. But in some sense it's just as much work to build a small company as a big one. My philosophy is to aim for the moon and land on the roof: a big idea can produce a moderate size outcome or a big outcome; a small idea can produce a small outcome and that's it. Many entrepreneurs I've worked with have showed up with a modest idea. I've pushed them all to be wildly immodest--there's always a big idea surrounding a small idea, go for the big idea.
** Just go buy yourself a Ducati.

*** My current bets are in banking, mobile telecomm, and, of course, advertising.

Venture Capital Family Tree

About six months ago my friend Chris Fralic (@ChrisFRC) invited me to a screening of Something Ventured, a film about the origins of the US venture capital industry. Definitely worth checking out. One of the things it got me to thinking about was how intertwined the early VC firms were. So, in the spirit of one of those genealogies of rock music posters, I gathered some data and made a visualization. It's not pretty like the rock and roll one. And it's woefully incomplete, which I need your help on. We'll get to that.

The whole thing

Zoomed in on some interesting '90s reshuffles

I used jquery and d3, although I had to customize d3 a bit. Because it's d3 and there are a lot of svg objects, it could be slow on slower computers. Also, screen size makes a big difference here, not recommended for mobile viewing.

I was trying to put in firms from the early days and firms that were critical links between the early days and today, so there are a very few firms founded in the last ten years in there. It's a historical study, not a contemporary view. The founders of the firms are noted, but not seminal later partners (i.e. Kleiner and Perkins but not Doerr or even Caulfield.) Although new partners can have a huge impact on a firm's direction*, I just didn't have time. Maybe in the next iteration.

Firms founded in New York are blue, in Boston are red, and in Silicon Valley are green. Others--including those that do not yet have an entry for place--are orange. Type a firm name or founder into the box (there's autocomplete) and click to zoom in on that firm. Also, pan and zoom using the mouse.

Venture firms never really die, they just fade away. And some firms stop being VCs (in the '80s many firms abandoned venture for PE) or were financial orgs and became VCs. This is denoted by a 'tear' at the beginning or end of the firm's bar--the firm had a life before or after, but was not an active venture investor.

I've also started adding noteworthy investments, but there are only a few. As far as I can tell, there is no extensive list of who backed who when. Which brings me to my ask.

I've put in info as I came across it for the last six months, but I have other commitments, so it's been slow. And the easy info sources are running dry. So I slapped on a form, hoping you all would help. All contributions are welcome, but in the spirit of the thing, I'd like to prioritize adding firms that were either critical links between the past and present, that trained a bunch of people who went on to found their own firms, have been influential for a long time, or were influential in the past and have disappeared (i.e. TVI, MPA&E.)

When contributing investments made by firms, I would rather not add every investment. I've tried to add investments that were important or household names. This is a public historical document, I think it's more interesting (and puts the better foot forward) to show that Starbucks and McDonnell Aircraft were venture backed (or Pizza Time, for that matter, even though it failed) than, say, Kozmo.com**.

To contribute either click on the '+' button on the upper right to add a new firm, or click on the name of a firm to edit/augment their info. When you hit 'submit', it should reflect locally, but it doesn't add it to the database (I'm not a back-end guy) it emails me. I will edit and add data, I don't expect to get a ton of submissions. The data is open source (cc by-sa), and any contributions will be considered open as well. I will add your name to the contributor list on the help page if you put it in the 'Comments' box on the form (there's no other way for me to know who you are.) Also, put your email address there if you want so I can contact you re your submissions.

But please, do submit! It struck me as odd when doing the research here how little the venture community values its roots. Law firms have web pages and sometimes whole self-published books celebrating their founders and history. Your typical VC firm comes across as if it's in the witness protection program. It's crazy that I can't figure out who all four founders of Menlo Ventures are and where they came from, or who backed Federal Express and when. I've got decent google-fu, and I looked, trust me. Someone out there knows, and you should enter this stuff. The mainstream industry is now some 50 years old. We are in danger of losing our past.

If someone knows of a source of data for this (that is either free or you can get me access to), I will port stuff.

Primary sources were firm web sites, Wikipedia, and The New Venturers by John Wilson, a great book now out of print. Some data was taken from Venture Capital at the Crossroads, Creative Capital, Valley Boy, The Startup Game, and Elfer's Greylock. I'm planning on skimming Done Deals and Venture Capitalists at Work for more. Other sources are in with the rest of the data as 'cites'.

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*  In a couple of case, Paul Bancroft joining Bessemer from DG&A, for example, I think it was significant enough to consider that the start of Bessemer's venture activity, even though that is not strictly true.
** Well, hard to say. I can only think of interesting companies because I only remember the interesting ones. Kozmo might actually be an interesting investment from a dot-com bubble point of view. Maybe just send me whatever you want and I'll figure out some way to highlight some and not others. I don't know.

Selecting, not filtering: Give me a reason to say yes

Raising money for my last startup was humbling, frustrating, time-consuming. But that part was okay: any highly selective process will be humbling, frustrating, and time-consuming. The part that really bothered me wasn't that it took so much time, but that so much of that time was a complete and total waste. In almost all of the VC meetings, we did not leave with a check. But in some 80% of the meetings we also did not leave with any insight as to why not*.

The best VCs listened to us and then gave us some insight into their thinking. Fred Wilson and Brad Burnham actually said no to us and then worked through their thinking about what we were doing in great and helpful detail. Josh Kopelman and Howard Morgan told us it wouldn't work, told us exactly why, then invested, and--after that--introduced us to people who helped us fix the flaws in the plan. But many others gave us either no response at all ("we'll get back to you") or generic non-responses ("we'd like to see more traction.")

We had a pretty firm idea of the problem we wanted to solve, but we were somewhat flexible about how we would solve it. We used the feedback from the money-raising process to hone our ideas. When we got no feedback, we felt we had given the VCs critical market intelligence and gotten nothing in return.

One of my ideals when I started investing was to always provide feedback when I said no. But here I am four years in, going through the pitches that piled up last week while I was on vacation. I'm finding it hard to live up to that ideal. I'm saying no to companies that I don't have a concrete reason to say no to. After a bit of introspection, I think that finding a reason to say no is not really how I make the hard decisions.

I have a tangible reason to say no to some 85% of the pitches I see, and I say yes to less than 2% (some of these I don't end up doing because we can't agree on a deal.) Here's a swag at how my dealflow works out:

• 40%: No; I do not know your market well enough to help you succeed (also known as I do not know your market well enough to make a good decision about investing);
• 20%: No; I do not think your idea will work and I can't see where else you will be able to put the technology you're building to work/you are completely inflexible about entertaining other potential markets for your technology/you are too flexible about where you will put your technology to work (the "we're a platform!" syndrome);
• 10%: No; You are creating something merely better, not different;
• 5%: No; You have the wrong team/your team does not seem to gel/you do not seem to think you need a team at all/you are coding in .NET;
• 5%: No; Other explainable reasons;
• 5%: No; Bad**;
• 13%: Meh;
• 2%: Like.

I always explain, in as much detail as the entrepreneur wants, my thinking behind the 85% where I can say no. And I am always happy to explain why I like the 2% I like.

The rub is in the penultimate 13%. These are companies that I don't have a real reason to say no to, companies where I analytically think they have a venture-capital-winner expected value but where I just can't get excited about them. The reality is that with these companies--and, in fact, with all companies--I am not looking for a reason to say no; I am looking for a reason to say yes. With the 85%, there is a glaring reason why I can't say yes. With the 13%, I just can't get the word to come out of my mouth.

For the companies I can easily say no to, some dimension of their plan (team, market, vision, product, customer, etc.) does not rise above my threshold of yes. For the 15%, all aspects do. Analytically the fitness function then necessarily also rises above my threshold.

The difference between the 'meh' and the 'like' is that the 'meh' companies are good enough in all aspects but not great in any of them. The 'like' companies are the ones where they really excel in at least a couple of ways: a great team, a big market, a compelling vision. I try to select not just for how good a company is, but how good it will be. It's easy to improve along one dimension, it's possible to improve along a couple of dimensions, but it's almost impossible to improve along all dimensions. The companies that are just good enough in all dimensions need to improve in all dimensions. The companies that are great in a few just need to improve in a few others, not all, to be great overall.

In fact, some of my favorite companies are the ones that may not even rise above the threshold in one or two dimensions but make up for it by having a superstar team or a gigantic market or a world-beating vision. These are the companies that have a shot at being legendary.

I don't know what to say to 'meh' companies after they pitch me. It's hard for you to recover from a "we're not so bad" pitch. But if you're dreaming up your startup right now my recommendation is to be good at everything, but to be insanely great at something. That's what gets me excited.

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* And, I should note, the founding team knew the venture market inside and out. We had done our research on which firms to approach based on what they were interested in, which partners to approach, had pre-sold the idea before the physical meeting, had customized the deck to highlight the aspects that particular firm/partner could grab onto most quickly, etc. Highly suggested in any case.

** My dealflow right now is pretty highly curated so I don't get a lot of pitches that are just, well, bad. Not to be judgemental. Bad, to me, is a founder who simply does not know what they're doing: a non-coder trying to enter a market either (i) that they just don't know anything about--generally where they've had a bad customer experience but have not done the research to understand the institutional framework behind the root cause, (ii) where there are great companies already doing exactly what they want to do and they've never heard of them, or (iii) that is so small that even revolutionizing it will create almost no societal value. Or, they could give a damn about creating societal value, they just want to make some money quick.

VC/Company Investment Visualizer

A friend asked me last week if I knew a tool to help him visualize which VCs were investing in a sector. I did not. But I realized I could pretty quickly repurpose the VC Bar Chart code and some unpublished code that pulls in data from a Google spreadsheet to show a force-directed graph. So, weekend project.

Data from Crunchbase, visualizaton using the d3.js library.

Here's my portfolio.

The site is here. Just start typing company names in the upper-left hand corner box and hit plus to add. Real name to Crunchbase permalink translation uses the list of companies as of Friday* or so, so if the company was added to CB later, autocomplete finds nothing;  just type in the permalink and the company will still be added. In the screenshot above a few of my companies had no CB investor entries, so they're just floating out there. Many of my other companies are not linked to me because CB does not mention me as an investor.

One way to explore is to enter a bunch of companies in your area of interest and see how the graph falls out.  Here's one of the AdTech industry.

The save functionality is experimental (to me, that is.) It uses HTML5 localStorage. The caveat is that you can't email visualizations around that way, and there may be times when your browser clears localStorage (sometimes when clearing cookies, for example.) If it does, you lose all saved visualizations.

The code is all client-side, so it's right there in your browser if you want to look at it. I found myself late last night using a non-analytical debugging process** when I was trying to get the 'load visualization' piece to work. I'll put it up on GitHub some time after I clean it up.

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* And I redacted the list to only include companies that CB showed having investors. The full list was too big to load efficiently.
** Mainly making random code deletions.

You can't manage what you can't measure. Not at scale, anyway.

A year ago I wrote, re investing in social marketing, "The social loop will share superficial characteristics with the display loop, but it's really completely different... the area with the most near-term leverage will be tools that help communicators understand the impact of how they are communicating and then help them make better decisions." This has turned out to be completely true.

I've been thinking about social marketing for five years. It has seemed obvious that major advances in marketing technique will occur through the social channel, but it was never clear to me exactly what those would be. I looked at and worked with a couple dozen social media marketing companies before throwing up my hands and declaring non-prescience.

My rule of thumb is that when the evolution of the landscape seems unknowable it is usually because the technology that will underpin the advance is still in flux. The obvious solution is dropping a level deeper in the stack and looking for investments there. In mobile, that meant Flurry four years ago and Media Armor a year ago. In social, it meant Awe.sm.

The smartest guy I ever knew in the ad business (like being the tallest dwarf, I know...) said, of managing people, "Whatever chart you put on the wall goes up."

-- Clay Shirky

That was me, the tallest dwarf, from back when I knew Clay, when he was just another guy.

I worked at IBM during the heyday of the Six Sigma movement. I was a design engineer, trying to optimize a very small piece of the central processor of what became the System 390 series of mainframes. As a design engineer there were several layers of abstraction between me and the silicon: the design language was a visual one--I wrote a flowchart which was compiled into a set of logic gates which were then mapped onto silicon. Aside from tweaking the logic gate-level design to try to get better performance, I spent my time at the flowchart level, as did most of the engineers.

Six Sigma methodology has you measure processes, find causes of errors and remedy them. The idea is to improve processes until there are fewer than 3.4 defects per million. IBM had a company-wide mandate to implement Six Sigma. I was subject to this mandate.

I asked my manager how I was supposed to measure my 'defects' and why would I even want to if I had to define them in such a way that I essentially never, ever made that type of mistake. He said "How are you going to improve if you aren't noticing your mistakes and figuring out how to stop making them?" "I already do that," I said, "I'm just not marking them down on some stupid piece of graph paper thats been pre-printed with a normal curve." He said "But then how can we manage it?"

Ah, Bach.

You can't manage what you can't measure. Stupid as managing designers on the binary idea of defect/not-defect and on such a stringent scale, constantly knowing how well you are doing so that you can constantly improve is extremely powerful. This idea, probably more than any other, drives my investment strategy: things that are not being measured are being managed poorly; creating new ways to measure creates ways of doing things immensely better, it creates entirely new businesses.

The fact is, you do get what you measure, whatever graph you put on the wall will go up. But the moral of that pithy aphorism was meant to be: be careful what you wish for.

If what you are measuring in social marketing is Likes or Follows, that is what you will get. But how closely aligned are these measures with what a business really wants: happy and loyal customers, higher sales? You don't know. No one knows. This particular loop hasn't been closed. Because the social gesture cause and business result can't be tied together in a measurable way, it can't be managed and it can't be improved.

I invested in Awe.sm's seed round because they provide core social measurement functionality, the ability to tie social actions into their actual results, to close the loop. I re-upped into their Series A because they're now doing something even more interesting: they're providing this functionality to other developers via API. Instead of being just an analytics player, they're now enabling the creation of an entire social marketing infrastructure that can use measurement to provide a ever-improving feedback loop.

I may have gravitated to marketing in part because dealing directly with people is too messy to ever even approach Six Sigma, but the engineer in me still believes that by measuring you can improve, and by linking measurement and algorithms you can create a feedback loop that allows you to improve adaptively and in real-time. This idea has revolutionized online advertising over the past few years. It's going to revolutionize social marketing over the next few.

Disruptive innovation, buy vs. build, the most pernicious lie in business, and how to know if you're fooling yourself

If a man has good corn or wood, or boards, or pigs, to sell, or can make better chairs or knives, crucibles or church organs, than anybody else, you will find a broad hard-beaten road to his house, though it be in the woods. 

—Ralph Waldo Emerson, big fat liar

No matter what the dictionary says, you can't describe a company as disruptive without giving weight to Christensen's description of innovation. It's perhaps overly simplistic to divide innovation into two categories--disruptive and sustaining--but the strikingly different characteristics of companies pursuing these strategies makes the partition a natural one.

Sustaining innovation means finding ways to do things better. Lowering the cost of manufacturing a widget by 10%, making a widget 20% more durable while only spending 10% more, reorganizing a department so ten people can do the work of twelve, creating an integrated supply chain to deliver goods to your stores in smaller quantities and less time. That sort of thing. Sustaining innovation often results in products that exceed customer needs at a given price point. The proliferating options in Microsoft Office show a sustaining innovation cycle that has exceeded most of the market's need.

Disruptive innovation means creating a product or service that is radically cheaper but much less functional (and this needs to appeal to a customer set that was previously underserved, so disruptive innovation often creates entirely new markets) and then using sustaining innovation to improve it until it meets mainstream customer needs (but is still radically cheaper.)

Before Google, there was targeted advertising. Very targeted. Hog Farmers Digest (now National Hog Farmer) was aimed at hog farmers. If you were a hog farmer, you read it; if you weren't, you didn't. It was a pretty effective buy: not a lot of wasted impressions. But creating an entire magazine for a very specific market is a difficult business proposition. The fixed cost of putting a book together limits how small its audience can be and so how targeted its ads can be.

Google's disruptive innovation was being able to create content for next to nothing. They can create a page that addresses a market segment as small as a single person for nominal marginal cost. Even though the content was lower quality than that it was competing with--the lack of human writers and editors means that any specific page is much less useful than a well-written and thought-out page would be--it turned out it was good enough. And because advertisers could be so specific in their buy, they could spend much less money. This opened up an entirely new market: advertisers that don't have multi-million dollar budgets.

Existing publishers could not compete: they could not lower their cost per page to anywhere near Google's. If they tried, they would lose quality and the loss of quality would mean losing their existing customers. This is the beauty of disruptive innovation: it is almost impossible for incumbents to respond. Disruptive innovations are disruptive because business logic precludes old-line companies from shrinking their business to address the disruptors.

It's incredibly difficult and expensive to challenge incumbents with nothing but a better product. Sustaining innovations are easy to copy and well-managed incumbents are always on the lookout for challengers and willing to learn from them. But when a disruptor comes along, they are trapped.

*****

What kind of innovation are we peddling in adtech? Article after article calls our companies disruptive, but do we really fit the Christensen mold? A disruption scenario would look like this:

• the existing industry would supply a product of higher quality/functionality than the majority of potential customers actually needs and at a very high price;
• the disruptive companies would find a way to bring in a product of lower quality/functionality at a much lower price;
• customers that did not need and could not afford the old product would emerge as customers of the disruptive product, allowing the new companies the wherewithal to quickly mature their technology until it was competitive in the old product's market.

Does this sound like ad tech to you? It doesn't to me. The current ad-world is not supplying services at a higher quality than its customers need and there seems to be advertising inventory at every price point. If you can't supply advertising at a radically lower price point to customers who were previously underserved at a quality level that the incumbents are not interested in touching, you aren't really in a position to be disruptive. Almost all of adtech now is sustaining innovation: building a better mousetrap.

We clearly have a better solution than what existed, no argument. But the big lie of business, the pernicious fallacy that has deluded countless entrepreneurs, is that if you build a better mousetrap the world will beat a path to your door. It doesn't work that way.

*****

What is going on in adtech right now is clearly innovative. But because it's not disruptive in the Christensen sense, it means we're going to have to earn our money. We need to move fast to build scale.

There have been scores of M&A discussions in adtech this Summer and only a few have resulted in deals. One of the things I heard as an excuse over and over (from buyers, from sellers, from bankers, from founders, after a few drinks) is that the buyer said "we don't need to pay up for this, we could build it internally."

Build versus buy is an interesting discussion to have before you buy anything, especially something with the revenue multiple adtech VCs are looking for. Cold hard fact is, there's almost nothing out there in adtech that someone else couldn't build from scratch. The CTO would certainly tell the CEO that building would be cheaper than buying a company, and be right.

And yet, and yet. And yet the companies that are prowling for bargains still can't get advertising right. They clearly have a ton of tech talent in their core businesses, and the ability to hire more. They have the money to hire and manage and build adtech solutions. But they don't. Why not?

When I was at Omnicom, back in the 90s, investing in the early interactive agencies--clearly not disruptive businesses--the old-guard ad agencies that then made up the bulk of Omnicom's business talked big about building their own interactive units. But they never could. They also refused to pay the valuations the i-agencies commanded. They were on the sidelines while their clients hired hotshot young startups to build their websites, and some of the startups got pretty big in the process.

There were several reasons for this. Primarily, the old guard couldn't hire good people: no one who understood the web back then would go work for an agency whose primary business was making 30 second films for TV. Why would anyone who was any good go be a second-class citizen at a firm that was paying nothing but a salary and had no career path in interactive? Why wouldn't they go instead to Razorfish and get stock options and be a hero to their management everyday? They would, of course, and they did. And almost all the true stars of that era spent time in one of the independent agencies.

As then as now. Why would any competent adtech engineer go work for AOL or Yahoo or Twitter or any of the other big old companies where stock options issued today will in all probability never be worth anything? There are plenty of good jobs at exciting startups where there's the possibility of making actual money*. More importantly, why go to one of those big companies and be a second-class citizen, the "ad guy," when at a startup you're essential to their product?**

Companies can do very well at their core mission. But when their core mission is media or software or infrastructure or professional services, it's going to be really hard for them to get a foothold in the quickly changing adtech world. This never seems to be taken into account in build versus buy analyses: they can't build, and even if they could, they won't. And if they do, it will suck. Trust me, I've been there. And if you don't trust me, just take a look around.

But remember that the era of the independent i-agencies only lasted some six or seven years. At some point the number of people that could do the work more than competently was enough that even old-line agencies could hire them. At that point the i-agencies were like every other agency: they competed head-to-head with the old guard. Many of the biggest remained independent until acquired for great prices. But these were the ones who earned it. Unlike a disruptive business where nothing but guts, an innovative spirit and a huge dose of luck are necessary, competing head-to-head means competing: blood, sweat and tears.

We need to keep building, ignore the distractions and focus on winning clients, not just raising money, so that when it comes time to compete head-to-head, we will win. That's as it should be, of course, and I think many of our industry leaders have what it takes. But if you're starting an adtech company and you want to win, you have to know that you're in it for the long-term. It's a marathon, not a sprint, the cliche goes, and it's true.

*****

Meh, you say. I'm disruptive, I am going to go viral, achieve imminent world domination and sell to Google for $5 billion in two years. Neumann's an idiot.

Maybe. But disruptive businesses have certain characteristics. Ask yourself these questions.

1. Am I creating a new market, bringing in a set of customers for whom there was previously no value proposition?

Disruptive businesses bring out a product or service that is so far off the industry price/quality line that customers who would never have used the industry's products start to. This gives the disruptor the foothold it needs to start improving quality until it threatens the incumbents. Google AdWords is an excellent example of this.

Who are the unserved markets in advertising? Are there any? I think there are, and I think that if you don't see any, you need to think about what advertising is more broadly.

2. What is price in my market?

If you're in ad-tech, what does price even mean to your end-customers (the advertisers***)? Is it just lower CPMs? There have always been low CPMs out there. Is it higher ROI? That's probably closer to the mark. The best answer I have heard is that it is lower risk: the ability to more accurately predict ROI.

You have to credibly answer this question and then be radically better along this dimension if you are disruptive. I think there are many answers here, and your answer will depend on your answer to question one, above.

3. What is quality in my market?

In disk drives (Christensen's first case study), this is an easy question: quality is how much data can be stored. The disruptors built lower-quality disk drives at lower prices, then used the march of progress to threaten the old-line disk makers. The old-line disk makers' customers wanted more storage, not less, so they did not see this market and could not address it with the existing customer bases. But key to the disruptors long-term value was the ability to improve quality quickly. If they could not, they would not have been able to displace the old guard.

What is quality in adtech? Conversion? Click-through? Pinpoint targeting? And if you know what quality is to your market, can you then improve quickly along that metric so you serve not only the new market you've created, but the giant market that already exists?

Quality. I've been thinking about this question for ten years and don't have a definitive answer. Do you?

If you do, if you think you really have a disruptive business model, call me, I'm looking to back people like you.

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* If this is you, email me.
** Soldiers don't get promoted if they haven't seen battle. If you want a career path, always take the job in the middle of the action, even if it pays worse.
*** And are the advertisers really your customers? Why aren't the 'consumers'?