Miles To Go.

Xin’s Thoughtful Gift: PBJ and Ramen 2

Being an entrepreneur is a lumpy business at best. And while I’ve written extensively about the mortality rate (95%), I’ve never written about how hard it is along the way for those 5% destined for greatness.

It ain’t easy, and it ain’t easy on everyone.

This is a basket of Ramen Noodles and Peanut Butter, presented on my Birthday by a very appropriate, thoughtful entrepreneur I backed; Xin Chung. Xin certainly has the moral authority to present the gift: he was liberated from Saigon as a child, spent time in an internment camp, and grew up in Valdez Alaska before settling in to SoCal and pursuing his dreams as an entrepreneur. He is now Founder and CEO of TrustCloud which has emerged from a “walk in the wilderness” with 10k passionate users and a growing number of interested clients in the social check space.

The Ramen and PBJ is our shorthand for being capital efficient, a must for start-ups.

My system at Vaux usually provides $250k of less for a team to develop a product that addresses a meaningful market problem, and do it within 90 days or so. This means most for the proceeds are dedicated to product. The next $250k usually goes to determining if anyone cares. The numbers vary, but either way the Founders and early employees do not get rich in salaries off of angel money. Frankly, they have to be prepared to barely eat, and when they do eat for strength. This is part of the ugly underbelly – and not a full underbelly! – of the dedication it takes to pursue your dreams. Every dollar you don’t waste can go to a better product or a better viral coefficient.

And of course, stuff takes longer than you expect. And costs more money than planned. This puts tons of pressure on the entrepreneurs as they debate the next crucial steps, often on an empty stomach. Probably once in my last 10 start-ups has a company got it right, right out of the box and kept doubling down all the way. Most try with a product, revamp, try again, tweak, and try again until there’s no track left. And it leads to some very difficult conversations about where to invest precious resources: make the product better and more people will come… or tell more people about the product and they will spread the word. Development vs. Marketing vs. Biz Dev. It often provokes difficult conversations, and sometimes desperate measures (these guys slept in a van on a Biz Dev road trip that lasted months).

And so the entrepreneurs themselves, while pursuing their dreams of autonomy, making a mark on the universe and yes winning riches, have to absorb the vagaries of what precious resources to assign where… including their own sustenance. I get queasy when I hear comparisons to the comp someone could make in the corporate world, which simply doesn’t apply in start-up-ville. And I get nauseous when I hear debates about how deep down the rabbit hole start-ups should go pursuing the next pivot (which is another term for fail and try again). Luckily  angels don’t have that much patience or that much capital for endless restarts. Which is why, when interviewing prospective partners I always look for that unique combination of resourcefulness, willingness and mental toughness that will see us through. And a dose of reality to know when to put a fork in it.

Entrepreneurship is not a straight line to the summit, it’s a jagged ascent and we have to be prepared for the whole ascent not just the sprint at the top.

~~

Save runway: TrustCloud’s sample T&E guidelines

Use personal credit card; expense every month with invoice. Avg trip: 2nts/3days, $800, $1000max

1. Air: economy $250

2. Ground:  $25/day

3. Lodging: Airbnb $50/nt

4. Entertainment: $75/day

5. Badges: pre-approved

6. Big dinners: pre-approved

Panel at Choate Hall- great space!

Last week, when putting the final plans together for our Boston stop on the Start Up // Choate Roadshow, the bombs went off. And so we paused, briefly, to assess what it meant and what needed done.

The response that came back from our hosts and panelist pretty much sums up what make Boston unique, and what makes entrepreneurs special. While acknowledging the practicalities of navigating Boston after the bombing, the message came back loud and clear: events like this are what we do as start-ups and Americans. We’re undaunted builders of things. We cherish our freedom of thought, expression, and opportunity. It feels great, and we won’t quit. Let’s go.

And so, in a dense rainy night in Boston we had a great crowd of entrepreneurs on hand to listen to a great panel.

One of my favorite comments from Bain Capital’s Jeff Schwartz (P’16) was embrace your ignorance. It can be a valuable tool. Dream about how to solve problems. Live in the future, and build what is missing.

Jeffrey Mullen (Founder and CEO, Dynamics, Inc.) who is a legit freak of nature (lawyer, EE degree, patent holder, CEO, addicted gamer, nice guy) was around the question of singularity (will we live forever if we live to 2046, per Ray Kurzweil). “Sure, I checked it out- living forever is basically an engineering problem”. And you know, he’s the one person that I believe probably has.

Michael Holthouse former CEO of Paranet (sold to Sprint) added that the “plastics” of tomorrow may well be energy. How we make it, store it, and consume it will become vital to our future sustainability. 

So, I ‘ll remind those from Choate that are reading this (sorry, group closed otherwise)… We started a LinkedIn group (now one of the school’s most active) and a twitter feed (at this point twitter’s most inactive account , but getting better ) and planned a road show highlighting the best and brightest minds from the Choate universe of StartUps. We’ll do(ne) SanFran, Boston (last night), and New York (tonight).

So far,  while I think this will become a HUGE benefit for our alumni, it is actually our gift back to  Choate. It has long deserved a great start-up network. And for Choaties themselves, who have a great network anyways, this one is finally going on mobile, social and local to press the advantage.

Which seems entirely normal to me. Doesn’t it you?

I am asked a lot about my investment criteria, but lately many of the questions have focussed on my criteria in the sharing economy. This is pretty amazing, because less than a year ago, I could not have told anyone what the sharing economy was.

Now sharing is something I do love, as I abhor waste and adore ways to get more out of any asset. Ask my wife.

In the past year, a movement has surfaced that is global (big) , reflective of our economic state (sucks), green (uses our planets assets more effectively), driven by a connected group (mobile powered millennial), and highly disruptive to a bunch of  old models of doing business. It is alternatively called the Sharing Economy and Collaborative Consumption, depending on who you ask. I like the former because I have a hard time spelling the latter, but either will do.

But overall, there are big and sustainable trendwaves. The kind that I like to ride. (Disclaimer: my favorite investment in sharing so far is TrustCloud, probably). So, within the Sharing economy, this is how I break down the key ingredients to my angel investing options:

Networks or Platforms: Many winners, or winner takes all. This is emerging as a very big theme for me, and depends on what stage one enters the market development. I believe every new trend breaks into two types of opportunities; networks within a trend become a story of many winners. For reference, look at the online ad nets, with plenty of $100M+ businesses. Look as well at the mobile ad-tech business, and the several winners to date in the networks (Millennial Media’s monster IPO, and sales by Admob, Quattro, even Amobee). Now look at the platforms that sold picks and shovels in ad-tech: Atlas ($6B), DoubleClick ($14B or $3B, depending on who’s counting) and the incumbent adserver in mobile (another Vaux investment, I wrote about here).

The point is, the networks are great businesses that scale quickly and become an exercise in good sales and marketing systems. The barriers to entry are low, and scale counts. But margins erode at the top end of the scale, because they rarely have a technology platform underneath. I’ve seen it before, trust me.

On Leadership: Bold enough to be early, seasoned enough to run a fortress. In an age of SUPER angels, I am anything but. I don’t have the braincells or the checkbook to attempt 500 startups, the coding passion of prgrammer king FAKEGRIMLOCK, or the patience to do the TechStars or Foundry stuff. But I have the courage to be early and the capital to be patient. So when we latch onto an idea we like, I can land on a beach with a team of Startups SEALS, secure a niche and talk my way inside the castle walls before claiming the fortress to support a large organization. Teams of five are fun, teams of five hundred are awesome. I’ve led both. As such, passive roles and stakes just don’t excite me. Frankly, they distract me.

Karma: Makes me feel good, as in “I did that!” To be frank, I think the best monuments in the world are contained in the Emerson Poem “If” (that my father recited at my wedding, amazingly). To have made the world a better place, even in subtle ways, is sure gratifying. To point to a logo, an event, or even a business process and say “I helped to build that” is really special. Sharing makes me feel that way. Up top now, anyways

Lean: develop a product for $250, acquire users for $250. Scale with real capital. These days, I gravitate to digital media because it doesn’t cost much to develop a product that solves a need. (and almost all the proceeds are for just that- product). Then, a little more to ramp users, again within angel range. But sooner or later, most digital media companies will need big capital to scale, which is where access to VC (where I have again been blessed) is key.

Partners: Coachable entrepreneurs. I’ve said it before, and each day it gets more relevant: life is short, and I have long ago given up having to work with buttheads (knowingly). While most of the entrepreneurs I work with are younger, they all possess a common thread and that is the thirst to learn and the courage to recognize and work on their mistakes. It helps not that I am the most direct guy around, so the chances for setting people back is always there. But I speak the truth, and I always speak the same in front of people as I do behind them.

Of course, there are many more criteria for selecting a sharing business, but these are some that ring true. I will be discussing them with a panel next month at the Shared Squared event, and I’m sure there will be more added to it.

Oh, one more reason I like sharing: my mother always said it was kind.

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The Social Network is a hell of a movie, but the real people upon whom the characters were based have stated that the film’s version of the founding and growth of Facebook was overly dramatized. And appeared way more fun than it actually was.

Face it, entrepreneurship is hard. Angel investing is doubly hard. While we read about spectacular successes, one can hardly keep up with the many outright failures preceding them. The thin veil  can really only be perceived once you are on the right side of it-it’s practically see through! But if you are on the wrong side, the thin veil might as well be a brick wall.

Someone once said the two best traits an angel investor can possess are a strong stomach and a sense of humor. The strong stomach will tolerate its share of quick deaths from being too early, too late, poor execution or leadership, lack of funds, or just tons of competition. The sense of humor will come into play when you attempt to tell your God which element of your portfolio is going to be The Big One. God will invariably laugh and throw at least one thunderbolt, wreaking havoc with your “sure thing” — but turning your also-ran into a winner. (No kidding, it’s happened. But to protect the innocent, we won’t name those we feel were luckier than they were skilled.)

Other sources of angel heartburn include those frustrating periods of illiquidity…the fast pace of technology which upends business models and proprietary positions quicker than at any time in history… the global markets bringing competition to one’s door on a massive scale… the high valuations of exposed deals,…the lack of influence when part of a syndicate…the competition with other angels (and now, VC’s). The list goes on.

The angel game can be summed up in the words of the “advert” placed by explorer Ernest Shackleton (1874-1922) ahead of his Antarctic expeditions (none of them successful, by the way):

“MEN WANTED FOR HAZARDOUS JOURNEY.

SMALL WAGES, BITTER COLD, LONG MONTHS OF COMPLETE DARKNESS.

CONSTANT DANGER, SAFE RETURN DOUBTFUL.

HONOR AND RECOGNITION IN CASE OF SUCCESS.”

And yet, we do it.

Mobile Global: Click 2 see cool pic

I work hard to get lucky.

1. The Carriers used to think they were content curators. Seriously, there was no other way to get distribution than to program in bizarre carrier languages (BREW, etc) and pay them through the nose to be “on deck”. Hey, they got the idea from the old AOL days. But these people did not realize the comic effect of managing content on a 2″x2″ screen. Plenty of money was wasted getting on those decks, and getting the content optimized. At one point, I counted an easy $500MM of venture money was poured down that rabbit hole.
2. Eyeballs began to shift. First it was getting email and text on phones. Then a few games and stock quotes. But the iPhone and its 250,000 apps out the gate brought all manner of information and entertainment to the mobile screen. The PC reached a plateau.
3. People were no more willing to pay for apps than they were to pay for the “old fashioned” internet. It should be free, man continued as the digital credo. And except for very few exceptions (iTunes being one), the entire mobile revolution has been driven to date with ads.
4. Tablets followed shortly, and guess what: they’re mobile too. Meaning all the ad serving technology, all the geo-location and device data was much more like a mobile phone than a PC.

With a little knowledge as an angel/board member with digital yield optimizer operative (now Operative One) and some domain expertise from Cellufun, I went on to start mobile ad network/ad server Mojiva with co-founders Krish and Dan.  And I have since been founding angel in mobile powered projects like MyBailiwick (crowdsourcing too early!), TrustCloud (trust in the sharing economy getting hotter now) and WellAware (mobile health and wellness platform). I think my bets in mobile media have been pretty lucky, and i will continue to make them for all the basic reasons above (and many more that are regularly laid out by tech guru Mary Meeker).

I just never knew where the tipping point was.

I do now. High five.

Michael Arrington is blunt.

That ouchie brought to you by Michael Arrington at a recent Tech Crunch Disrupt Conference.

It’s not as bad as it seems.

I find myself initially defensive at this comment, made by the headline grabbing (headline making!) founder of TechCrunch. I fall on the other side of thirty. If you check out this graph, which represents 300 responses from startups financed by Ron Conway, repeat founders under the age of 30 get more $500M+ exits. 

So if this is true, are old(er) founders more cautious, prudent, and take earlier, cheaper exits for security? Possibly. Whereas a younger founder will let their company brew for a while, gaining value, or be more tolerant of the risk along the way.

Older founders have also likely seen the game played before, and know how to judge incremental success, while a younger buck is more likely to bet the farm. But what is most interesting to me is which of these personalities match best with todays “2 & 20″ VC dynamic, where small hits don’t clear their preference hurdles. If you need a moonshot to make a buck for your portfolio, by all means go find a kid.

But they are getting less naive every day.

Depends on how you play the game...

And very little by selling too late, I imagine.

So said legendary financier J.P Morgan, who was an amazing creator of wealth and value. As the market for digital media has heated up, the question of founders and/or angels taking money off the table has heated up as well. There are at least two sides to the story, and I’ve lived them both.

On one side of the argument are the VC’s, who state that they want the Founders committed to building as large a company as possible. They reason that, if a Founder has 99.99% of his net worth in their deal, then his attention is undivided.

On the other side of the argument are the Founders, who’ve pretty much risked everything they have to start the business, or the angels, who risked a lot to grow it. Having cleared the horrible mortality hurdles (95% going toes-up within 36 months), they’ve arrived at a clearing in the Forest of Risk. A sunbeam of liquidity shines upon them, there for a blink of an eye. So its time to pay the mortgage and sock away some tuition with some of the stock, now worth 100x or 1,000x what they paid for it as Founders… or return to the dark Forest of Risk and wait for another sunbeam.

Not surprisingly, the best-known liquidity cases involve some of the hottest Web companies on the planet right now, like the daily deals services LivingSocial and Groupon. Half of LivingSocial’s newest $400 million round was used to purchase employee and early founder shares. Meanwhile, Groupon investors have twice returned money to founding investors and employees, including last April, when Digital Sky Technologies led a $135 million round, and again in January, when Groupon raised a staggering $950 million from eight firms, including DST. Indeed, a filing showed that just $377 million went to the company and that the rest was used for shareholder liquidity. More from PE Hub in an article titled Mercenary or Missionary?

Fred Wilson has written about it (it being a secondary for Etsy in this case) in his AVC column. His Union Square Ventures is one of many firms that have long given their blessing to entrepreneurs once they’ve achieved “something meaningful,” as he says.  Ideally, “meaningful” means “more than [that they’ve just gotten] a product out into the market that lots of people are using but [also] built a business, a team, a revenue model – maybe even become profitable.”

Being both and entrepreneur and an angel, here’s where I come down on the thing: somewhere in between.

Entrepreneurs looking for seed-stage capital and thinking they’lll take 25% of the raise off the table are either selling into a tremendous bubble, sending wild red flags about their commitment, or both. But once a company has developed product, team, revenue and perhaps cash flow, the discussion shifts dramatically.  No sane VC would walk into an LP meeting and say “I have 99% of our investable assets committed to one deal”, so asking entrepreneurs to tell their “Family LP’s” the same thing verges on hypocritical. Entrepreneurs actually become risk averse as their holdings become overweighted, provoking the exact opposite behavior that an investor would want. Likewise, allowing angels to recycle some of their funds allows them to invest in more early stage deals, which feeds the VC dealflow pipe.

Of course, this discussion is moot with 99% of angel investments, because they never get there. But for the lucky few entrepreneurs (and their angels) who build good businesses and have VC’s at the table for a secondary find themselves basking in the warm glow of a liquidity opportunity after a very long hike. It doesn’t last long, and turning back to the forest on an empty stomach can be a very cold, dark experience.

Think it through.