The other day, I saw that one of my favorite products, Slack, just raised $120mm at a $1.12 Billion valuation. The company is doing about a million a month in recurring revs.
Personally, I think it was kind of a bad idea--not necessarily because of the valuation, but because it seems like $120mm is way too much money for a software company at this stage, especially one that might even be cashflow positive right now. I think it's likely that it will unfocus the company and what it definitely does is eliminate the possibility of exiting for anything less than two and a half billion dollars. That is likely to lead to decisions that might not be in the best interest in the company or the users.
So that's what I wrote on Twitter...
Love Slack, but $120mm and a $1B valuation at this point will almost certainly lead to lack of focus and less than optimal decision making.— Charlie O'Donnell (@ceonyc) November 1, 2014
And then I promptly got Twitter flack from one of the people who works at one of the company's investors. They seemed annoyed that I said anything in the first place.
What was said, who's right, etc., doesn't much matter. The fact is, it's just not cool to criticize the investing side of the venture capital market.
Which is why I'm sure the dude who picked apart the physics of the latest round of UBeam will undoubtedly get eviscerated in the tweet and blog world.
"...Here’s the problem. IT’S AN IMPOSSIBLE IDEA. Having done my share of ultrasound physics AND wireless charging work in the past, the first thing that struck me about the idea was that, to transmit any appreciable amount of energy through sound waves, those waves would likely burn you, or at least deafen you, and any other small animals in the vicinity. This is why charging is currently done inside copper wires surrounded by plastic - so you don’t get hurt!
I’m no physicist - oh, wait, I am..."
Now, I know the company and while I'm actually not a physicist, my instincts told me the same thing--or, even if it wasn't impossible, it would be so inefficient that it wouldn't be an interesting proposition to consumers. Also, I wasn't sure that it was really a problem worth solving. I really don't mind power cords. I'd really rather someone fix the battery problem than the cord problem. This seems like duct tape for the battery problem.
That doesn't mean I have anything against the founder or the investors. Meredith Perry has been working ridiculously hard for the last two years on this and I respect her effort. I just respectfully don't see the same opportunity as her investors do, and I reserve the right to be 100% wrong. I've been wrong many times before. We all have. For her sake, the company's sake, and their lead investor's sake, I hope I'm tremendously wrong on this. I like Mark Suster a lot, too. He's been nothing but tremendously nice to me.
But can't I disagree with him on an investment? Why isn't that ok? Why does it seem to automatically make someone an asshole to be critical of an investment?
This is done in the public markets all the time. Turn on CNBC and you'll see tons of dissenting opinions on publicly traded companies.
But in the private markets, we've got "Yay, founders! Entreprenuership is awesome!"
I think it sucks that we are in a media culture where we're supposed to give everyone pats on the head for entrepreneurship when there are legitimate criticisms to be had about the high profile investments we read about all the time. For the most part, journalists give startups a free pass when venture capital money is raised or when companies that clearly seem to have failed get "acquired".
It's just not cool these days to say anything bad about the business side of startups unless you cross over into the "Big enough to pick on" world, like an Uber. (That might also be the "Everyone thinks the founder is an asshole anyway" world, too, not that Travis really cares--he seems awfully busy running his huge company and making money.)
The problem is that when new entrepreneurs read only one side of opinions on an investment, they fail to understand the legitimate criticisms of business models that are out there in the market. I can't tell you how many times I've been pitched and examples have been made of companies that I don't think are doing that well--but that you'd never know that from the press.
We have no legitimate debate and discourse in the startup market around individual investment ideas and it's hurting the entrepreneurs that are starting companies right now. They're thinking everything is sunshine and roses and it's just not--but you're an asshole if you say it.
No one should get personally attacked, but business criticisms of the business decisions made by founders and investors should be more fair game than they are.
I think we'd all benefit from the public discourse, especially new founders.
I probably do some kind of speaking event at least every other week. This week, I've got three things on the docket. Needless to say, I have a fair amount of startup event experience.
What I find a bit frustrating is how easily some people get onto panels and are put up in front of an impressionable crowd of new entrepreneurs as "experts". You'll get a venture capital analyst from a brand name firm who has just recently taken his job talking about what makes a company successful. You'll get an entrepreneur who has raised one and only one round of financing in his or her entire life--all from relatively unsophisticated individuals, giving fundraising advice.
Some of what I hear coming out of panelists is either really skewed to their own experience or just plain wrong.
The problem is that as much as we say we're ok with failure, we're actually not very discerning about people's experience. Some people have definitively had better experience than others.
Other people just plain failed.
I've funded or committed to a few dozen seed companies in the last few years and worked for First Round Capital and Union Square Ventures--two of the best early stage firms on the planet. I feel like I can say pretty much all their is to say about seed rounds. However, I'm not about to dish out advice on how to grow into a billion dollar company, because I haven't taken a company there yet. You should probably get Rob Hayes or Fred Wilson for that. I won't ever be offended if you tell me, "Actually, we were looking for a VC who has backed a company that has gone public."
Sometimes, I see people on venture capital panels that aren't even VCs! In common parlance, "VC" refers to someone who is an investor--who can do a deal. To me, the absolute minimum criteria has to be that you work for a venture capital fund. This means you have a pool of money. You're not a broker. You're not a development shop that takes equity. You literally have a bank account that you have access to with millions of committed dollars already in it.
Personally, I also feel like you need to be a check writer to call yourself a VC. In other words, analysts who cannot lead a deal are not venture capitalists. They shouldn't put it in their Twitter bio.
Analysts support deals, but they don't really vote on a deal in a way that carries the same weight as a partner. If that's the criteria, than most executive assistants should also be able to call themselves venture capitalists. They certainly do their share of work to support a deal and often have the ear of partners when it comes to a lot of the consumer deals they do. They definitely weigh in on whether they like the management team.
If you can't lead a deal, you're not "a VC" and you probably shouldn't call yourself one on a panel. I wonder whether or not you should even be on a panel without actually bringing that up as a caveat--that you work for a partner driven shop and that you can't speak as one of the people who actually write the checks. Some analysts definitely say that. Others talked as if they were the ones doing the deals--even though they're just the ones making the cap tables in Excel.
Dear Analysts: No offense intended, btw. You're smart. You're awesome in many ways I'm sure, but I did your job for years--I wasn't "a VC". I was an analyst.
And don't even get me started about exits. Just because you sold your lost company for a nickel plus a modest amount per engineer doesn't mean we should trumpet that as a qualification to be on a panel. Talking about your acqui-hire as anything but a failure is just plain fraud.
Don't get me wrong--failures are great experiences. I wish *more* people who failed went on panels. I failed and I learned a ton from it--but if your goal is to build a big company and then you flip your dev team to Yahoo! after shutting down your product, you failed. Your speaker bio shouldn't inform the audience that you sold your last company as if your experience is one they should aspire to have.
Same works with pitch events. Organizers need to be really draconian about who gets up to pitch--especially if the point of your event is to trumpet a geography or a type of company. If you give companies with a social missions an opportunity to pitch, they better be really compelling--because otherwise two things will happen: First, as an investor, I'm going to think, "Ugh, all social mission companies are duds." Secondly, the audience is going to think, "It's ok that my startup's plan makes no sense, because I have a social mission!"
If you can't get a really compelling set of people pitching, speaking, or repping any kind of startup experience, just don't have the event. Skip a month. It won't kill you to keep up the quality--and panels with questionable guests or pitch events with really problematic companies are the best way to turn your event into a D lister.
We have a bad habit in the startup community of validating and celebrating everyone's experience as informative, and even authoritative--and it's just simply not true. I think we need to do a lot more questioning and vetting of people's experience and perspective and whether or not they're in a position to dish out any advice. Were you the one who actually led the redesign? Was it successful? Did you actually lead that deal?
The truth is out there.
It starts early.
You're a founder and you're super busy just keeping the company afloat. You don't have a lot of time for much more than eating, sleeping, and selling--whether that means raising capital, pitching to investors, marketing your product or ringing the bell with early revenues.
You don't have time to do things like write an HR handbook or a values statement. That's for a bigger company down the line.
You also don't have time to go out of your way to interview a diverse pool of candidates. You posted a job, the candidates were mostly dudes, and a lot of them were really qualified. You were just happy that anyone wanted to work for your company and you need help *now*. The last thing you want to twist your brain around is trying to figure out how to get more female applicants or people of color. It's too hard and you already have candidates that are really promising.
You barely have time to do anything to bring your team together either. It's ok, because the team is tiny. You all sit together and you know each other pretty well. After all, two of you went to grad school together, one was the younger brother of your childhood best friend, and the other guy worked together with you two startups ago.
In fact, you're feeling pretty good about the team. You're always on the same page. You like working together. You go out together after work. You have the same sense of humor. You joke about age old sports rivalries. It works for you.
That's the problem.
It *only* works for you guys.
What feels like a cool little club to you can be a really unwelcoming environment to anyone else not like you. It's not that you're doing anything bad. You're not sending porn around your Slack chat or making racist jokes. You're just not actively managing the culture because you're busy doing other things.
Great cultures have values that everyone can be a part of--and these values need to be built in to everyday life at your company, no matter how small it is. If you don't, bad things start to happen. They're not obvious. They're quite subtle, in fact.
The one woman you ever hired didn't quite work out. There were communication breakdowns. She felt isolated and you felt like she wasn't making an effort to connect with the other people on the team or to just go and get the information and feedback she needed. You wanted her to just get shit done like the guys on your team do and she was frustrated by the lack of direction and support. She left. It didn't bother you much, because you guys are killing it anyway. You don't need the drag on overhead if she's not making it rain.
You do need more help, though, so you ask your team for recommendations on anyone they know.
More white guys fill the pipeline. You don't give much thought to the idea that if you're only hiring white guys, you're only hiring from about 20% of the population in New York City, for example. That's not even counting the age thing either.
You say you want the best people, but you're missing 80% of the top of the funnel in terms of leads. You'd never be comfortable with any other aspect of your business, so why this one?
Aren't people your most important asset?
Moreover, of the 20% you are pulling in, the highest potential professionals value environments that have a diversity of perspective. If your team looks and sounds like a Wall Street trading pit from an 80's movie, are the best people really going to want to work for you? Doubtful.
The best professionals want to work in places that care about culture and values--because they know actively managing that has second order effects. Someone who takes the time to actually write down on a piece of paper that respectful communication is an expectation in your company isn't likely to be the kind of person you get in arguments with. People want to work hard, but they don't want the unnecessary stress of dealing with difficult people.
You're not difficult because you're an asshole--you're not. You're difficult because you don't make it easy to have difficult conversations.
Furthermore, when you've got a team that basically thinks the same way, creativity starts to decline. You get blindsided by things you don't see coming because everyone sees things the same way. You miss opportunities because everyone is paying attention to the same kinds of things.
And nothing creates tension like poor performance. Morale goes down when people start to realize that this isn't the rocket ship you promised. If it's not, then the less than stellar culture you let rot from the inside isn't worth it for people to work at.
The good people you do have will get approached by companies that value and support their people--that make a wide variety of people feel welcome and able to do their best work. The difference in the vibe of those places versus what you've got is night and day. You're getting lapped on environment and in a tight talent market, your people will be gone in a heartbeat.
God forbid a negative cultural reputation gets out in the market. That stuff travels like wildfire.
What can you do to prevent all of this from happening in the beginning?
Here are a few things:
Have both individual and group communications with your team that encourage people to speak up, to superiors and to colleagues alike. Nothing encourages people like support.
Ask people directly: "What do you think of our culture and environment? What would make it better? Do you feel supported? Encouraged? Respected?"
Ask questions in a way that don't necessarily put people on the spot. For example, "In what ways have you felt respected by your teammates? Can you give an example of a difficult conversation that went really well?"
If people are struggling to come up with examples, their might be a problem.
Create safe spaces for conversation. Maybe there's a standing meeting on the calendar that is away from people's normal work environments. Structure it in such a way where your employees can ask for help, thank each other for things they do for each other, and bring up things that aren't great for the company.
Turn the conversation away from specific people to things that go against the companies values. Without stated values, every conversation becomes personal. If you feel like someone was dismissive of you, it's not about them, it's about an environment where dismissiveness is happening. Maybe the root cause is because that person is stressed and overworked--and it has nothing to do with you. Get to the root of these problems in a way that doesn't make anyone feel targeted, to blame, or like a complainer or whiner.
Sometimes, these conversations aren't so much about culture itself, but just about your day to day. If you're the first designer, and you have no structural way by which you talk to the founder or the team on a regular basis, you might feel like you're on an island.
Involve Everyone in the Values Conversation
What do all of the early people at your company want to see as the company's stated values? What's important to them? What ideas do they have? What do they value? Have they seen negative situations in previous jobs that they want to avoid? How do they work best?
Test and Evaluate
The more people know about themselves and how they communicate, and what they value, the better they can contribute to a positive team dynamic. Have you ever tested yourself on what kind of a communicator you are? Have you ever had your team tell you how you're like to work with? Are there things you are actively working to improve?
Each person on your team should have something personal that they were working to improve that also contributed positively to the company's culture. Their efforts should be public. Is your lead engineer trying to be more social, because his natural inclination is to put his earphones on and code in his own little mind palace? Is your head of sales trying to be more caring, because he defaults to focusing only on ringing the bell and the outbound call numbers and not whether or not the members of his team had good weekends?
Write Things Down
When you write something down, you hold yourselves accountable to it. Making a statement of values as well as examples of how you embody them in your day to day makes them something even the lowest level employee can fall back on.
The bottom line is that best cultures are actively created and fostered. They aren't about having a fun time, they're about enabling everyone to feel like they can do their best work, because they are respected and supported. And yes, it will often times feel like a lot of handwaving until the day you realize that it sucks to go to work at your company--and you feel it too.
What should you price your seed round at?
Well, it depends...
I could probably write a book on venture round pricing dynamics. It would have lots of philosophy, religion, theory, fiction, and pontification.
However, since I only have time for a blog post, I'll settle for actual data.
Since January of 2010, when I led my first seed investment in Backupify, I have led or committed to 27 investments. That includes all the deals I did at First Round, with the exception of Refinery29, which was a Series A. That also includes 16 Brooklyn Bridge Ventures deals done and five agreed to term sheets. Yes, it's going to be a busy fourth quarter.
The criteria for what is a Seed and what is a Series A for these purposes is whether or not the first round of the company was within the same year that I did the investment, and it had to be less than $750k of prior money. Refinery29 fell out based on timing.
So what does the data say.
Well, if you group them all up, here's what you get:
|Pre-Money Valuations (M)|
You wind up with about a four-ish valuation, mostly right around four, but with some outliers that bring up the average.
But price doesn't tell the whole story. What about the round size?
|Round Size (M)|
So the average round that I'm participating in is about a million bucks. For those of you that have trouble doing division, not surprisingly, that puts the average dilution right around 20%, which isn't surprising.
So, if you're looking at pre-money valuations saying "But hey, my deal wasn't valued at X, WTF??" then you need to take a look at the dilution numbers.
That's the dirty little secret of pricing:
Pre-money isn't the price. Dilution is the price and you're all pretty much getting the same deal.
On the other hand, stage matters, too... and stage generally impacts the resulting pre-money. How much money you get from investors reflects your stage. You start out at an accelerator or just raising some friends and family and that tends to be small potatoes. Maybe you raise a pre-seed after and that's like $750k to a million. Next round might be $2M, next after that $5M or more, etc etc. The further you progress, the more money, typically, that you get.
There's less money available for riskier and earlier deals, which makes sense.
So, if you're raising $750k and someone else is, you're probably at about the same stage, but if you had to give up half your company to get it and someone else only had to give up 10%, that's really where pricing matters--not so much the pre-money.
It's quirky, but that's the way that VCs think.
That also means that the best way you can move your price up is to create demand for your round. If you're oversubscribed, but don't want to take additional dilution, you can usually move the price up.
So what effects pricing and how much people raise. Across these 27 deals, here's what I saw...
Does it matter if you're launched? What about if you have some revenues?
|Pre-Money Valuations (M)|
Some interesting things happen here. There's very little difference in whether or not you've officially launched. However, having revenues does seem to make a big difference in the Pre-Money price. 12-20% depending on how you look at it.
But what really counts is the dilution. Did you have to give up more of the company?
Yes, for sure, especially with revenues. Launching may or may not give you less dilution based on whether you're looking at the median or the average, but across the board, having revenue changed how much dilution an entrepreneur had to take. When you're making your own money, your need for other people's money goes down and so does how much of the company you have to give up.
Can you raise a bigger round based on launching or having revenues?
Here's where the data gets really screwy, but I have a theory.
According to this, launching and having revenues caused the round sizes to go down. What??
Well, it's simple. If you haven't launched and you don't have revs, you're simply going to need more money, because you have more things to do.
One thing I thought of is that if you're able to raise money pre-launch at all, especially with a larger round, well then you must be the world's greatest team, right? That would mean you get a better price, right?
Well, that didn't hold above, right? The rounds are bigger, sure... but you're still taking the same if not more dilution than everyone else. So, yeah, you and your great team may get more money, but don't expect less dilution as well.
Can't have your cake and eat it, too.
How I learned to change the oil in my car and found a new office because of Shake Shack and a hackathon
Random story that I recounted recently to someone the other day. It's super interesting to go back and trace connections and relationships that led to new opportunities. If nothing else, it serves as a good reminder that every thing you do now is an investment in the future.
In 2009, I was introduced to Havi Hoffman. She was working as a developer evangelist at Yahoo! and got me on a panel at a hackathon she was working on. In turn, I wound up inviting her to a 300 person event that I threw at the Shake Shack in Madison Square Park. After seeing my ability to bring a big community together, she wound up introducing me to TK because he was running a hackathon of his own around the first Techcrunch Disrupt in NYC in 2010.
My friends Daniel Raffel (colleague, yahoo) and Tarikh Korula (Uncommon Projects, Brooklyn) + Etsy’s Chad Dickerson are organizing a weekend Hack day on 5/22-5/23 in association with TechCrunch Disrupt. More detail from Tarikh below. They’d love your help getting the word out and can answer any questions. It’d be great to get a mention in NYC Innovation. Thanks in advance for help getting the word out.
I wound up not only helping to promote that event, but actually attending, because if a bunch of hackers were going to be in a place in NYC, as an early stage investor I figured I should be there. So I went--the only investor at the time to actually hangout during the pizza and hacking part of the hackathon, not just the demos.
Techcrunch Disrupt is where I met Steve and Jared from GroupMe and what led to me backing the company when I was with First Round Capital.
Later in 2010, I was introduced by Fabian to Andres Wuerfel, who was leading Deustche Telekom's Innovation Group. It seemed like a good intro for GroupMe, so then I put Andres together with the GroupMe team.
Andres stayed in touch. When I launched my fund, he reached out and asked if I'd be willing to speak on a panel in Berlin. Why? Because someone who launches a fund in Brooklyn would have an idea of how ecosystems outside the Valley can survive and thrive--so that's what I spoke about. It was a great trip, but it also reconnected me with some New Yorkers that I hadn't seen in a while--namely Chris Muscarella, the co-founder of Kitchensurfing.
When I checked in on the app formally known as Foursquare, Chris reached out and invited me to a dinner in Berlin--which is where his co-founder Bo was from.
That's partly when my obsession with building communities around food began. I got to know Chris and Bo and wound up at a Kitchensurfing chef test meal, as they were vetting the chefs that wanted to join the platform. I met Chris' brother Stephen at that lunch. Stephen is an interesting dude who builds things and wants to enable other people to learn to build things, too. He bikes a lot and isn't too shabby at softball, so he wound up joining my softball team.
He also wound up teaching me how to change the oil in my car.
Getting to know the Muscarella brothers is also what led to a change of scenery for Brooklyn Bridge Ventures. About a year ago, I started talking to some of the crew from Studiomates about joining them in a new location. Their old home at 10 Jay was being renovated and that community was trying to figure out where it would go next.
As it happens, Kitchensurfing wound up growing out of their space in Gowanus and recently moved out. Chris reached out to me to ask if I knew anyone that wanted to take over. Our group was still on the hunt for space and so it wound up being a great fit.
So by the end of the month, I'll be moving Brooklyn Bridge Ventures from Dumbo over to Gowanus and bunking up with a great group of folks that are tied into the same community that produced Brooklyn Beta and led me to my investments in Tinybop and Editorially. Gowanus is an up and coming Brooklyn neighborhood that is now home to a Dino BBQ, the best pie place in NYC, a shuffleboard club, an Ample Hills and soon, a new boutique hotel.
I'll still be in Manhattan regularly and making the regular ride up and down Brooklyn's western shore to my investments in Williamsburg and Greenpoint, but I'm excited about the new surroundings, my new housemates, and the even shorter commute to work.