Miles To Go.

Great name!

Yes, Marissa Mayer is out there honing her strategy for a next move, and lots of buzz is around Mobile Ad-Tech. I’m quite keen to those developments, because of my activity in the space… you might say.

But before her time, Yahoo made an offer that prompted one of the best “What Would you Do” conversations of our generation. I caught the gist of it at during Peter Thiel’s talk at SXSW, but Inc. does a better job of describing it here:

…Facebook was just two years old. It was a college site with roughly eight or nine million people on it. And, though it was making $30 million in revenue, it was not profitable. “And we received an acquisition offer from Yahoo for $1 billion,” Thiel said.   

“Both Briar and myself on balance thought we probably should take the money,” recalled Thiel. “But Zuckerberg started the meeting like, ‘This is kind of a formality, just a quick board meeting, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here’.” 

At the time, Zuckerberg was 22 years old.

Thiel said he remembered saying, “We should probably talk about this. A billion dollars is a lot of money.” They hashed out the conversation. Thiel said he and Breyer pointed out: “You own 25 percent. There’s so much you could do with the money.”Thiel recalled Zuckerberg said, in a nutshell: “I don’t know what I could do with the money. I’d just start another social networking site. I kind of like the one I already have.”

Now for the What Would You Do part- a/k/a- WWYD.

If I were Mark Zuckerberg, I would have done the same. His talent is towering, his vision is far reaching. I would also say his youth might lead some to say he didn’t know what he didn’t know, but Zuckerberg probably did know. He had one great idea, and the likelihood of having another of such epic scale and impact was remote. He knew that lucky and good are not the same thing, and the former rarely strikes twice. He was, and is, part of an asset light generation that I have written about before.

But, I am not Mark Zuckerberg. Not even close.

I am not a sole founder (um, was Zuck?) and I would not imagine to be able to run something myself without the great work of those talented people around me. I might have other ideas I’d like to back, and more entrepreneurs I’d like to work with. I also deeply respect the stakes held by each of my shareholders, and would give due consideration to what they may want as well. Everyone has a number. And working for Yahoo, especially the new Yahoo, might be quite interesting. I may have hit the bid, not being Zuck.

But most of all, I love the fact that it was a ten minute Board meeting, or he thought it should be!

By the way, What would you do?

Gate is actually the basis of the Vaux Logo

Despite focusing most of my writing efforts on my blog, and keeping up with the world via my twitter the year-end letter to Vaux angels is a tradition well worth continuing. I’ve cribbed the best of it here…

 Discover. Develop. Deliver.

These three words are scrawled across everything I do for Vaux. They are three parts of my personal mission to success as entrepreneur and angel investor, which I had the honor of mapping out in a 2012 white paper for the Family Office Association  “Angel Investing for the Family Office” . I took a hard look at the process of building a foundation on the long journey from inception to exit, and nowadays I plan my week based on these categories. I color code each meeting in my outlook. They might as well be scrawled on my bathroom mirror in lipstick. They are the cycle of life for Vaux les Ventures and the angels that have supported these endeavors for nearly 10 years. Here’s what these simple words mean to me:

Discover is about being very focused on what you can do well, and what markets will have an impact that can generate angel returns. Big market trends that people don’t yet see, or are unwilling to accept. Trends that will obviously converge, but no one knows exactly when. It means being early and brave, but it also means being patient to find the right mix that can sustain the long march. This is where the DNA of the business is set: habits formed early are virtually impossible to break. Many people in the business call this “deal flow”, and I did too for a while but I soured on the term as too many IB ‘s and VC’s (both of which I have been) over-use it. Having a well know criteria for how to invest and who to invest with seems to do very well in attracting the right types of people. So does being a good guy. But it’s about discovery as much as it is about network. And that discovery includes markets and their real problems as well as solutions and the best team to build them.

A recent example of this would be my work on WellAware, the mobile health solution. I’m as committed as ever to the trend of mobile devices having profound affect on health and wellness. And I truly believe that very simple data can have tremendous impact on lives. The Wellaware team did a tremendous job developing the platform for this theory to play out, but certainly overshot the MVP standard. What we need in 2013 is more cycles with large user bases to refine our solution, likely in the mobile environment.

Develop is where the entrepreneur (in anyone!) takes over: translating a vision for a product solution into a product itself, and testing it with users to see if the darn thing works. It takes tremendous amounts of courage, persistence and luck. Some attempts are ridiculously off the mark. Ironically, more often there are overshots than undershots when going for the minimally viable product. And users are rarely the viral dream everyone hopes for- more like a block-by-block struggle to get to a vantage point where people notice you. But more than product and users, the team is the big part of the develop picture. Entrepreneurs have a passion for building things are not always Schwartkoffs when it comes to leading people. And that is where the coaching and mentoring foundation is laid. Capital begins to show up at this point, as we have baked enough of the risk out of the opportunity for larger sources of capital to begin to show interest. That too is a major challenge in this phase, and if you grow fast enough, it never ends.

[Major edits here from the angel letter. Sorry, that's not public.]

The poster child for the develop phase is certainly TrustCloud, which just 9 months ago had product solution in search of a problem, no user base, and a team that had already endured a few pivots. Such are the risks of being early! But the saving grace was each of the founders used the sharing economy and saw what it could deliver, as well as its limitations. Something had to give, we thought.

And 2012 was full of such breaks, as TrustCloud found its core team, delivered a product and began building users at an impressive clip  (10x from July to December) after the Wall Street Journal picked us up. Check out the product here, or the very impressive Facebook TrustCloud user group (which tracks bugs and promotes the product passionately). The Company rolls into the New Year with a new Peer Protect insurance product to couple with it’s ever growing number of sharing networks.  Kudos to the indefatigable and imminently coachable CEO Xin Chung, who details the year here:

 I shared keys to my NYC apartment on Airbnb, rides through San Francisco in a Sidecar, and my workload with TaskRabbits. I’m not alone– people worldwide are sharing more than ever with millions of room-nights booked, cars rented, and dogs walked by reputable strangers. The movement is called The Sharing Economy, Collaborative Consumption, or as Mary Meeker calls it, living Asset Light. (this is a great read! Don’t miss it!)

 Flush with VC funding, the movement scaled fast in 2012– but not without growing pains: A quick look at recent sharing history would give anyone pause before sharing with a stranger. Home sharing market leader Airbnb had a redux of its 2011 EJ incident with the so-called airbed & brothel snafu where a Swedish apartment was literally pimped-out. Carsharing had it’s own collisions with the luxury carsharing service HiGear shutting down due to thefts, car sharer RelayRides’ liability issues with a fatality crash, and regulatory fines for on-demand ride-sharers.

 These events highlighted that trust between strangers in peer-to-peer marketplaces must keep pace with their own rapid growth. In the offline world, hotels have long adopted star ratings, rental cars are licensed and insured by brands spend billions to give consumers confidence to buy. Since online, peer to-peer marketplaces powered by micro-entrepreneurs don’t have time to brand themselves or vet strangers, they are much less efficient as buyers and sellers waste time sizing each other up, figuring out a schedule and even haggling over price before committing. Trust can make these transactions much faster, and insuring the risk is something we look forward to. Read more at TrustCloud’s Blog.

Deliver is where all the hard work pays off. That would seem like a triumphant moment, and I’ll allow myself a few. But as I have matured it has become a little more bittersweet. Here are companies we have built from scratch, communities that started with a handful of people, angel capital that came in for under $1M pre money. And despite some intermittent liquidity opportunities, in some cases these companies have futures that remain bright(er). We have seen large that we turned down; we may see 2x-3x-4x from here (or of course, we may not). So parting with some or all of the ownership isn’t as easy as “see ya later”. It’s an asset, with a value that has to be managed detachment that is at arms’ length, hard as that may be. We also live in a world of high risk, so those precious few windows of liquidity opportunity have to be considered when they are open.

[More major edits here from the angel letter. Sorry, that's not public.]

In summary, I guess I feel every venture I have been involved with has contributed to the next. Things I have learned about the Discover phase have allowed for better Develop results. Those few short peeks at liquidity in Deliver have been viewed with a paradigm that allows the whole group to consider individualized risk and reward before deciding on liquidity. And of course, the success through the process has allowed us the opportunity to feed the beast, return to what we do best, and further diversify with another opportunity.

I am extremely grateful for the opportunity to work in the field that I do, side by side with talented entrepreneurs, backed by caring and value adding angels that ask good questions and have the patience to help realize the vision I had almost ten years ago. We’ll see great opportunities in each of the three key Phases in 2013. Drop me a line and we’ll discuss which ones best fit your criteria in the days ahead.

All my best in the New Year,

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.

EO: Great Group of Entrepreneurs

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website. 

Any SFO considering allocating a portion of their assets in venture toward angel investing has to acknowledge the significant risks in the market. One sobering take from the US Small Business Association is that roughly 80% of small businesses fail in the first year, 10% in the second and 5% in the third, leaving a paltry 5% of new ventures that even qualifies to deliver a return for investors. I am a member of EO (logo at left), a global organization with 8,000+ members that fosters entrepreneurs, and the odds are just slightly better there I think.

Sticking with the digital media businesses discussed in the last section, here’s a brief summary of the early stage venture risks associated with this sector:

Operational Risks are legion in startups. First out of the gate is execution on the development of the product. Many products and services simply fail to launch, whether due to poor specs, loose design
concepts, or from just plain misjudging a market need. Another common problem is never solving the cold start challenge and acquiring users. Assembling talent, accessing sufficient capital, maintaining differentiating advantages over competitors, and a go-to-market strategy are a few more risks to consider.

Timing Risk — also referred to as Luck. Often, an entrepreneur’s vision has merit, but market conditions have not yet gelled to support it. Frequently, capital is wasted on development and/or marketing in
anticipation of a developing market. When the tide doesn’t rise in time, the company is left high and dry. One example? The many mobile/ social networks that tried to deliver hyper-local advertising audience and failed. In the meantime, Gowalla and FourSquare entered the market just as mobile and social converged, and were propelled to higher and higher market caps. Likewise, any mobile/social solution launched now with similar attributes would be too late and face heated competition.

Funding Risk can be mitigated by an SFO in the early stages of the company, but in our digital media example, additional capital will be needed — or at least easy to acquire –in order to scale the business. A good example of funding risk affecting returns would be the inability for mobile ad networks/ platforms to raise capital before mobile was “proven” viable (see AdMob’s sale to Google and Quattro’s sale to Apple within a 6 week period). Before those landmark deals, funding sources constantly questioned whether there was a “real” market in mobile, citing the struggling networks who hadn’t succeeded, despite $250,000,000 of combined capital. Several early stage companies faltered for lack of capital, and several other investors suffered dilution from large downdrafts in valuations. An SFO can, of course, prolong the agony by continuing to fund (Fred Wilson’s famous quote here is “I have a 0% mortality rate- I just keep funding!”) but the effect on returns when others do NOT fund, or fund at lower prices, is undeniable.

So, if you are considering angel investing with your SFO be sure to match the risks with the rewards. There are more of the former than the latter!

 For a complete copy of the complete paper, visit the FOA website. 

Shields up!

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website.

I am often asked how I have dealt with risk as an entrepreneur and now more often as an angel investor. Short answer is I have just become accustomed to it, and at least always know when it’s there. Here are a few risks that both angels and entrepreneurs should consider:

Structural Risk must also be considered before making angel-type investments. While there are several angels who’ve become well known with their “spray and pray” philosophy, diversity won’t save an investor if the structure of the investments isn’t optimized. Unless the criteria are to be entirely passive and devoid of value-add to the company, then an SFO might consider putting some basic protective structures in place. These can be as simple as board and information rights for the SFO or one of its angel partners; basic protective provisions in the stock purchase agreement or reasonable valuations that still leave room in the cap table for another, larger investor later on.

Super-long hold periods are a recent – and generally unwelcome — development in the angel market. These are primarily a result of the moribund IPO market in the tech market over the last few years, as well as VC’s managing billions of dollars in committed funds. As a result, most companies are being forced into “hold” periods that can last 7-10 years — without liquidity. The VC’s have a vested interest in funding the company for a bigger exit (as they’re paid in part based on the amount of funds they manage). Entrepreneurs and angels are on the other side of this argument, as many have committed their lives, livelihood, and capital, and continue to risk significant portions of their net worth (in the entrepreneur’s case) and investable assets for the sector (for the angels) over an entire decade of risk exposure. The pressure has begun to release in the form of secondary funds like Second Market and Millennium Technology ventures, which purchase founder and angel shares far before the respective VC would consider doing so.

There are so many risks to being a start up, and those risks can be compounded (and/or mitigated) through how you go about angel investing.

Best rule of all: go in with eyes open!

Not exactly the deal honeybadger

This excerpt is serialized from a whitepaper by The Family Office Association and Vaux les Ventures.  For a complete copy, visit the FOA website.

I am often asked- by both entrepreneurs and angels- about where the best places to find superior deals and superior angels. Well, your hang out Group will determine Your Structure (for better or worse). One of the most important – yet frequently overlooked – elements of angel investing is how an SFO or angel arrives at terms for investing in a company. How you source and who you associate with will dramatically affect how successful your investment might be, regardless of how well the company does.

I’ve always trised to keep an open mind as to where ideas come from, and avoid getting locked into all the same sources.

On this point, here are some things to consider:

EIR Program- “create your own deal” is the scenario in which an SFO has the greatest control over terms. They literally dictate. While this seems ideal for an investor, it does leave out of the equation market forces, setting up surprises if outside financing is ever sought. The venture landscape is littered with rejected companies whose cap tables and governances were reflective of a controlled situation — that don’t fit into real-life market conditions.

Angel Networks drive a unique dynamic in funding companies, often referred to as “herding cats,” a/k/a the Syndicate from H*LL. Companies on the prowl for more investors than they can naturally attract will show up at any number of angel networks. They often pay a premium to present to “qualified investors”, and even endure a vetting process to get into the room. But once they present, something troubling occurs: many of these angel investors don’t have the resources or the confidence to take down the entire round themselves. And so, the company attempts to set the valuation and the terms of the placement. The results are often disastrous, with unwieldy expectations and no one investor to keep them in check. The typical result, especially in a frothy market, is that the angels do deals with terms that are not negotiated with any sort of leverage, and no hopes of control or influence on the future of the company. While some companies do get funded this way, and some angels actually emerge with decent returns, the odds are stacked against it.

The Angel Alliance [or, “Buddy Deal”] there’s one significant advantage to a small group with the resources to do an entire round: leverage. If an SFO is fortunate enough to align itself with a group capable of filling every round, it offers the entrepreneur a solid financial partner that allows them to focus on growing the business. This typically results in enough equity for the angel group to share some with the member stewarding the deal, and still leave room for attractive valuations and reasonable governance structures. If the economics aren’t there, most groups have the benefit of enough deal flow to move on to the next opportunity in the sector (as opposed to the EIR), while still maintaining their leverage.

So, while many angels are wondering how they arrive at better terms on more interesting deals, what they sometimes fail to realize is if they look in all the same places, they are likely to see all the same deals, and all the same types of structure.

Said another way: get out more often!

For a complete copy, visit the FOA website.

Hobbes said it: Nasty, brutish and short.

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. Those looking for tales of my latest death defying adventure may find it extremely boring. Entrepreneurs looking for angel, or vice versa, may find it shockingly illuminating.  For a complete copy, visit the FOA website. 

People often ask why I have gravitated to digital media. Point number one might be I have been doing it long enough I have seen enough ways to fail that I might know how to succeed- by process of elimination. But Digital is efficient and Angel investing works best with capital- efficient businesses, where startup costs are minimal but exits are still attractive.

• For example, Manufacturing is tough to justify, as the capital investment is significant, the likelihood of finding other capital sources is remote and the necessity of leverage is likely if the business grows. Likewise, the exit multiples are generally based on historical earnings power and don’t command hefty multiples.
• Conversely, Digital Media has many of the attributes SFOs find attractive for angel investing. Here’s some of what drives leaders like Facebook and Groupon:
• They sprout from vibrant eco-systems that help solve the “cold start” problem and give quick scale without huge capital requirements.
• They leverage the power of the social network and the mobile phenomena that symbiotically drive adoption and always-on usage.
• They enjoy lower development costs as the recession and web 2.0 has enabled developers to launch “minimally viable products” for a fraction of the cost of many launches from even five years ago.
• Likewise, go-to-market costs are dramatically lower than five years ago, a result of the leverage of the global affect of social and mobile media.
• Younger entrepreneurs are starting many of these businesses, bypassing the carrying costs of their more established brethren. “Ramen noodles and peanut butter” have a certain appeal for first time entrepreneurs unburdened with mortgages, tuitions and families to support.
• Digital media businesses typically have global potential for an audience from day one, without the costs of setting up operations in multiple time zones. This is especially true with mobile applications and solutions.
• The jumps from Angel valuations to Series A and even exits are significant for those enterprises that execute well.

Factors like these have generated a significant uptick in interest in digital media companies, but consider a few more facts. Those that succeed usually do so dramatically; those that don’t die in equally dramatic fashion. But, because of the dynamics in the market, one success in the portfolio should pay for more than a handful of total failures, and still leave plenty of return.

Downside of all this is: it’s no secret. Plenty of guys coming to compete in this market. Game on.