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16

Dec

2013

In Tech Bubble Talk, Differences Outweigh Similarities with Early 2000s PDF Print E-mail

Bobby Franklin

Written by Bobby Franklin   
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In the wake of last month’s Twitter IPO, and the attention it drew to the valuations of those companies widely perceived as “next in line,” some of our members have reported fielding questions from journalists and other market observers about whether we’re seeing the beginnings of another tech bubble. Based on my conversations with these folks, the short answer is, “No.”

First, any vigorous market that features serial highs like those we’ve seen in recent months is going to attract investor attention. That, in turn, breeds higher valuations.  That said, we believe that these companies are creating and delivering real lasting value to their end users. So, while some froth may be present, it’s not fanned by hot air alone.

Second, the companies presently garnering the most attention are much further along in their development curves than the “cautionary tale” companies of the early 2000s. Far beyond the proof-of-concept stage, many of today’s tech leaders are sustainable, scalable businesses that have already built daily relationships with tens of millions – or even hundreds of millions– of users.

Third, higher valuations are somewhat part and parcel of the longer runways to exit we’ve seen since the tech bubble, and through the Great Recession. The longer a promising venture-backed company remains private and independent, the more guidance and funding it may receive from its investors – and the more it may be apt to grow. Similarly, the longer a VC firm can keep a successful company in its portfolio, the greater the value it can return to its investors – the limited partners – at the exit. This is not to say that VCs are enjoying today’s longer runways, but they are capturing more of the upside where possible.

Finally, many VCs believe that now is still a good time to invest. In each of the last five years, the industry has invested more money than it has raised. Yes, fundraising has been difficult, but the investing climate still looks good to many. Otherwise, so many VCs would not be investing ahead of their fundraising.

Yes, those who ignore the lessons of history are still doomed to repeat them. But insight lives in both the similarities and differences between yesterday and today, and we should take care to consider both in this case.

 

25

Nov

2013

Patent Litigation Reform Advances in Congress PDF Print E-mail

Kelly Sloane

Written by Kelly Slone   
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Patent litigation reform has gained significant momentum in Washington over the past month, with bills being unveiled in both houses of Congress and the White House reiterating its desire to see a measure reach the President’s desk. In more colloquial terms, Congress is once again attempting to tackle the problem of patent trolls.  While we agree with those who want to curb abusive litigation, we also recognize that the potential impacts of some of the reform proposals do not cut neatly across the traditional venture sectors in which our members invest.

For a significant number of NVCA members, abusive patent assertions and litigation have become a serious concern, as indicated in a recent study by UC Hastings law professor Robin Feldman, with participation from NVCA members and portfolio companies. This is likely because the costs of challenging or infringing upon the patents of innovative upstarts are relatively low, while the benefits can be high. Conversely, the costs and burdens of defending against infringement or assertions for those small venture-backed companies are often disproportionately high. These dynamics have made abusive and frivolous assertions and infringements popular strategies, and they must be addressed.

However, the need to address these concerns must be balanced with the needs of those start-ups that depend on strong patent protection and that believe the system is working. In addition, any remedial actions must also guard against unintended consequences that could weaken strong patent protection.

Within this context, NVCA is working with Members of Congress, as well as those in our industry, to find a consensus around appropriate solutions as discussions about patent litigation continue in both chambers. In the House, the Judiciary Committee marked up the Innovation Act of 2013 (H.R. 3309) on Nov. 20 and voted 33-5 to advance the amended bill to the House floor. Introduced by Chairman Bob Goodlatte (R-Va.), the Innovation Act aims to curb the practice of abusive and/or frivolous patent assertions by bringing more transparency to the process and easing the burdens on defenders in such cases. While NVCA supports the bill’s broader goals of limiting abuse of patent protections and ensuring that the U.S. patent system works efficiently to encourage and reward innovation, the Innovation Act of 2013 contains a number of provisions that warrant concern for venture capitalists. NVCA expressed these concerns on record in a letter to the committee prior to the markup session.

In the opposite chamber, Senate Judiciary Chairman Patrick Leahy (D-Vt.) and Sen. Mike Lee (R-Utah) have introduced the Patent Transparency and Improvements Act. This bill focuses more directly on the issue of frivolous demand letters by confirming the Federal Trade Commission’s authority to act against companies that threaten to file infringement lawsuits for which the primary goal is securing settlements from their targets. The bill does not currently contain language regarding fee shifting. An outline of the bill can be found here.

While the House appears ready to bring H.R. 3309 up for a full vote sometime next week, we believe that progress may come more slowly in the Senate, and thus temper some of the momentum we’re seeing now. In any event, NVCA is confident that we will have additional opportunities to deliver our messages on these issues – and in the process, assist lawmakers in passing legislation that strikes the right balance for all stakeholders.

Last Updated on Monday, 25 November 2013 14:27
 

22

Nov

2013

Entrepreneur’s Corner: Turn Your Investors into Rubber Ducks PDF Print E-mail
Written by Global Entrepreneurship Week   
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Guest blog post by

Phin Barnes

First Round Capital

In programming there is a concept called rubber duck debugging. As an investor, my goal is to be the best rubber duck on the planet. For software it works like this (original from lists.ethernal copied below):

1) Beg, borrow, steal, buy, fabricate or otherwise obtain a rubber duck(bathtub variety)

2) Place rubber duck on desk and inform it you are just going to go over some code with it, if that's all right.

3) Explain to the duck what you code is supposed to do, and then go into detail and explain things line by line

4) At some point you will tell the duck what you are doing next and then realize that that is not in fact what you are actually doing.  The duck will sit there serenely, happy in the knowledge that it has helped you on your way.

Works every time.  Actually, if you don't have a rubber duck you could at a pinch ask a fellow programmer or engineer to sit in.

 I don’t think investors should engage in creating the application or try to come up with the bug fixes, but good ones can add a ton of value by seeing bugs and flagging them first– sometimes I can identify them based on my start-up experience (although the half-life on this is very short for most things that matter). Generally, early signs of bugs come up through experience with other founders and their companies and new ones become clear all the time through conversations with other investors, business development partners and service providers. This is the value in “pattern matching” and it helps flag the first sign of a bug in the system so the management team can properly prioritize it, put it in the cue and fix it (or teach me why it is a feature not a bug).

I choose to be a rubber duck rather than engage in a more prescriptive debugging method because I believe that for any challenge your business faces, the the best answer is in you, the founder. My job is to help draw your best answer out and then leverage all the resources available to me, to First Round and within the First Round Community to eliminate friction so you can execute against your best answer as fast as possible.

5 steps to turn your investors into rubber ducks:

  1. Frame the problem you are facing — describe the challenge in enough detail that I can understand it without being an expert (because I am probably not an expert)
  2. Create context for an answer — Explain why this problem is a priority for you and the business and why you need to solve it now (because I am not involved in the day to day operation of your company)
  3. Propose a few solutions — Describe a few paths you might take and talk through how you would choose between them (this helps me understand the outcome you want to achieve)
  4. Be patient — Be open and engage deeply in the questions that I have and explain your answers with specific detail (even if it seems obvious)
  5. Be active – The goal is to debug the system and the builder is most likely to find the bugs we seek (and to see others along the way)

An example:

Last night I called a founder to see how it was going. At the end of the call, he said, “Thanks for the call. Talking this through really helped me figure it out.”

It was a small thing, and I know that the conversation served to confirm his thinking — but even in the 30-40 minutes we were on the phone, I heard his thinking evolve and believe it got better. The company moved a little closer to behaving as expected and doing the thing it is being built to do. This is success for me. To be helpful in this way. To help a founder adjust by one or two degrees at the start and to know that it could change the outcome by a lot.

If you can get your investors to embrace their inner rubber duck, the good ones will find ways to ask the questions that no one else has asked, to come at the problem sideways — not with the answer –but with questions that push at the edges and help you find the best answer for you and your company. An investor that embraces the rubber duck approach combined with the common things (responsiveness, access to resources, dedication of time) and the stuff that really matters (be part of the ecosystem, give more than you take, be empathetic) sounds like a great VC to me.

(Thanks to Micah Baldwin for his post What Makes a Good VC as the three common things and the three things that really matter come from him)

This column was originally published here.

In recognition of Global Entrepreneurship Week, NVCAccess is featuring guest blog posts from NVCA members about isssues that entrepreneurs commonly face in building innovative startup companies. This information is intended to provide mentoring and guidance to entrepreneurs, and is not meant as investment or fundraising advice.

Last Updated on Friday, 22 November 2013 12:11
 

21

Nov

2013

Entrepreneur’s Corner: The Power of Context and Story PDF Print E-mail
Written by Global Entrepreneurship Week   
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Guest blog post by

Adam D'Augelli

True Ventures

This past May, the True team spent the afternoon at the World’s Largest Office Hours, part of the National Venture Capital Association’s VentureScape 2013. The goal of these office hours was to bring hundreds of venture capitalists and entrepreneurs together in one room for an afternoon of networking, mentoring and idea exchange. As a member of the NVCA and supporters of innovation and entrepreneurship in general, we were extremely happy to participate.

Our team had a series of six meetings with Founders of companies who were seeking our feedback and advice on their business and pitch. As we worked through each session, we began to see a pattern emerging. Specifically, within the first minute of sitting down, the Founder would launch directly into describing the product or show a demo of the product.

In each case, we would slow the Founder down and ask a series of questions designed to provide background and context to the broader story.

In general, those questions were:

- Who are you?

- Why did you decide to work on this project?

- How and why is this team working together?

- How much money have you raised?

- How much are you raising now?

- How has the business evolved since the initial inception?

In music, they say that you have been writing your first album your entire life. In startups, it’s the same. As a Founder, you have been with your business from day one. Your product is an extension of you, based on a problem that you identified through your set of unique experiences. Therefore, any time you want to show people your product or talk about your business, they really need the broader context of your background and how you ended up starting this company to truly appreciate what it means.  (And long-term, the final product will look very different from where it is today.)

Especially at the seed stage, investors are investing in the people and how they see the world—not the product or business you’ve built today. Knowing that, Founders should spend 80 percent or more of their time talking about their background, their values and how they see the world, because this information is what gets an investor excited about potentially joining their journey.

This column was originally published here.

In recognition of Global Entrepreneurship Week, NVCAccess is featuring guest blog posts from NVCA members about isssues that entrepreneurs commonly face in building innovative startup companies. This information is intended to provide mentoring and guidance to entrepreneurs, and is not meant as investment or fundraising advice.

Last Updated on Thursday, 21 November 2013 11:33
 

20

Nov

2013

Entrepreneur’s Corner: Three Magic Numbers PDF Print E-mail
Written by Global Entrepreneurship Week   
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Guest blog post by

Brad Feld

Foundry Group

Every company I’m involved in keeps track of numbers. Daily numbers, weekly numbers, monthly numbers. Ultimately, all the numbers translate into three financial statements – the P&L, Balance Sheet, and Cash Flow Statement. While these numbers are sacrosanct in the accounting and finance professions, they are lagging indicators for most startup companies. Important, but they tell the story of the past, not what is going on right now.

I’ve formed a view that every young company should be obsessed about three magic numbers. Not two, not five, but three. Before I explain what those numbers are, I need to tell a story of how I got to this point.

My brain works better with numbers than graphs, so over the years I’ve conditioned most people I work with to send me numbers on a regular basis. Words are good also, but I love numbers. Early in the life of the company I request numbers daily. Some of this is for me; most of it is to try to help the entrepreneurs build some muscles around understanding the data and how to use it.

Recently, I’ve noticed a cambrian explosion of data among several of the companies I work with. The number of different numbers being tracked daily is massive. When you walk into their office there are screens full of graphs on the wall. Everyone in the company has access to the trends over time across a number of dimensions. These graphs are pretty, the numbers are dynamic, and there are often blinking lights to go along as a bonus.

A few months ago I stood in the middle of the office of a 30 person company and stared at the flat screen TVs hanging from the ceiling showing an array of graphs. I’m sure my mouth was open as I tried to process the data and make sense of it. I knew this particular company well and could reduce the number of different data points to a small set, but I was completely overwhelmed by the visual display. As I systematically looked at each of the graphs, I realized very few of them mattered much, nor where they particularly helpful in understanding what was going on in the business.

At the moment I realized these were no longer magic numbers. Instead, I was looking at wallpaper. The entrepreneurial aeron chair equivalent of 2012. Pretty, but a bad allocation of resources. The 30 people in the room might be looking at the graphs. They might be looking at one of the graphs. But they probably weren’t seeing anything.

This particular company runs off of three numbers. Daily active users (DAU). Live publishers. Trial publishers. That’s it for now. In the future, there will be a daily transaction metric (Daily transaction revenue) that replaces trial clients. But that’s probably a quarter or two away.

I then started thinking about each company I’m on the board of. This rule of three applies. For many of the companies, DAU is one of the numbers. In others it’s daily orders. Or daily revenue. Or daily activations. Or total publishers. Or new publishers. But in every case I could reduce it to three numbers that I felt were the most important to pay attention to.

The absolute number is what matters. The trend is driven by day over day changes. If during the week (assume the week starts on Sunday) the numbers are 47, 67, 69, 72, 174, 80, 53 this prompts the question “what happened on Thursday to drive the number to  174?” If the next week the numbers are 53, 75, 214, 83, 80, 73, 45 this prompts two questions: “what caused the spike on Tuesday” and “why is the week over week trend downward?” Clearly there is seasonality within the week and there is a new high, but the overall trend going into the weekend is negative.

My brain can focus intensely on three variables like this in a business. Once I add a fourth, I have trouble figuring out the relationship between them. This doesn’t mean that the leadership and functional managers shouldn’t track and analyze the detailed data. They should. But they should realize that when they show this to everyone in the company, no one knows what to care about.

Instead, my new approach is to focus on three numbers. These three numbers should reflect “what’s going on right now in the business” and the trend of the numbers should be a predictor of what’s going on. As I think about the companies I’m involved in, I can define these three numbers in 60 seconds – they are almost always painfully obvious. Sometimes I do end up with four and have to make a choice, but I rarely end up with five.

The technology for displaying these three numbers is remarkably simple. They make this thing called a whiteboard that you can write them on. An email can go out to everyone in the company with the three numbers. That’s it.

What are your three magic numbers?

This column was originally published here.

In recognition of Global Entrepreneurship Week, NVCAccess is featuring guest blog posts from NVCA members about isssues that entrepreneurs commonly face in building innovative startup companies. This information is intended to provide mentoring and guidance to entrepreneurs, and is not meant as investment or fundraising advice.

Last Updated on Wednesday, 20 November 2013 16:15
 

19

Nov

2013

Entrepreneur's Corner: Your Board Can Suck or It Can Be Great — It’s Up to You PDF Print E-mail
Written by Global Entrepreneurship Week   
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Guest blog post by

Adam Marcus

Open View Venture Partners

It’s no secret that many CEOs aren’t big fans of their BODs, which they see more as distractions than sources of value.

Even seasoned CEOs who have managed to assemble a valuable team of advisors and mentors sometimes struggle with board management. They’re not sure how often to communicate with them, how involved they should allow board members to be, or in which areas the board could provide the most value.

So are boards as useless as some CEOs think they are, or does the CEO-BOD disconnect have more to do with the fact that some entrepreneurs simply don’t understand how to interact with and gain leverage from their board?

I tend to think it’s the latter. Ultimately, the value you glean from your board is largely dependent on the goals you set for it, and how you choose to engage with each member. For example, independent board members tend to bring a different bag of tricks than a VC. Conversely, an early stage investor will be additive in a totally different light than a late stage investor.

The most common BOD challenges are often functions of these three issues:

  • You don’t communicate with your BOD: If the only time you talk with your board is during quarterly meetings, an information gap will inevitably exist. That can cause a huge operational disconnect that results in ineffective and inefficient meetings. Too much of the BOD meetings are spent getting caught up, versus having a meaningful dialogue about the key issues. 
  • You don’t want to show your weaknesses: CEOs are very often hesitant to open up and reveal their weaknesses. This may be born out of a bad experience in the past or just pure ego. They worry that if they’re candid about the challenges the business is facing, they’ll be viewed as incompetent. 
  • You don’t want to bother them: Entrepreneurs too often assume that their board members are too busy to be bothered with seemingly menial issues, and they feel like a nuisance if they ask for help.

 

While all of these issues are completely fair it’s your job to engage your board, communicate openly and frequently, and identify and tap into their individual strengths.

If you do that, you should be able to expect three key benefits from your board of directors:

  • Strategic insight and market knowledge: Most board members are either active investors in your marketplace or former industry executives. Needless to say, both types of people can often provide key insights and connections. You should probe them on what they’re seeing in the market and ask them to highlight issues they’re seeing in the competitive landscape. Don’t hesitate to go so far as to ask them to do some additional competitive research for you. 
  • Executive recruiting: When you gear up to build out your management team, you can engage your board members in three key ways. First, by asking for guidance on how to find, approach, and hire top executives. Ask them to help define and maybe even guide the process. In most instances, you should have board members participate in all senior level hires. Second, by utilizing them as a selling mechanism for top talent that you hope to recruit. Get them involved in the process if you need to close a candidate. Many times a prospect will significantly benefit from hearing about a potential opportunity from a board member. Lastly, by serving as a sounding board when you whittle your executive candidate pool down to a small group of finalists. Don’t be afraid to ask for advice on whom to hire. 
  • Operational support: This benefit most pertains to an independent board member. If you don’t have one, get one. Ideally, that person will be someone with relevant industry and scale experience. If you already have that type of person on your board, you should ask them to evaluate one functional area of your business at least once a year. It will only lead to good things if you can get fresh eyes on the people and the processes that make you tick. You should also invite a subset of your board to your annual strategy/planning session. Again, the more experienced eyes the better. 

 

A lot of boards — and board meetings — are ineffective for a variety of reasons, but this misalignment often leads to a painful half day and a totally ineffective use of resources. A board of directors is just another great leverage point for you. Take advantage of it.

This column was originally published here.

In recognition of Global Entrepreneurship Week, NVCAccess is featuring guest blog posts from NVCA members about isssues that entrepreneurs commonly face in building innovative startup companies. This information is intended to provide mentoring and guidance to entrepreneurs, and is not meant as investment or fundraising advice.

Last Updated on Tuesday, 19 November 2013 11:48
 
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