Learn to code? How about learn to sell!

There are a lot of reasons not to like the space that Publicstuff is in.  The company sells to local governments, real estate management companies, educational institutions--anyone responsible for public or private infrastructure.  That alone is enough to make a lot of VCs throw up a little in their mouths.  Slow sales cycles.  Joe and Mary Bureaucrat who don't even use the internet because Smalltown, USA blocks it as the decisionmakers.  Ugh, right? 

Except that its working.

Business Insider wrote about our investment in the company yesterday.  So what attracted Howard Morgan, the VC with the hottest hand in NYC as of late (Turntable.fm, Fab.com), to bring the investment back to First Round?

Lily Liu can sell--and she's selling into a huge market.

I'd bet that anyone who looked at this company's early sales traction would have asked her, "Wait... so...  how many salespeople do you have?  Just you?  And what percent of your time have you spent on it?"

What's most astounding is her close rate.  She contacted 500 local municipalities in one batch, and had, up until recently, just been working through that initial funnel, closing an significant number of those cities.  It was enough to make anyone who didn't love the space realize that she had cracked the code of breaking into government sales--and once you're in, you're in forever.  Their product--"311 in a box" if you will--is clearly resonating with entities that can't afford to spend tens of millions of dollars on building the kind of citizen information system that NYC has, which is basically almost every city besides NYC. 

There is a lot of talk about needing to be a technical founder.  Sure, maybe to get into YCombinator, but, remember, most venture backed companies don't go through YCombinator.  If you're not going to build (or design) a product, then you need to be amazing at selling that product (or acquiring customers if you're a SaaS tool).  First Round has backed a bunch of great salespeople--Brett Hurt of Bazaarvoice, Wiley Cerilli of SinglePlatform, Chantel Waterbury of chloe + isabel, Sean Black of SalesCrunch, and it's great sales-focused additions to the leadership teams that is driving the success of companies like GetSatisfaction and Monetate

You can sit in a pitch meeting with an investor demoing your product, and hypothesize as to whether or not there will be a market or even a business model for something, or you can role reverse and "Show them the money".  Not everyone's business is a built first, figure out the business later kind of thing like Twitter--and in a world where only 1 out of 100 businesses get funded, figuring out how to sell and generate revenue as early as possible feels like a good strategy--so long as the revenue isn't a distraction from your big vision.  I think there's way too much "customer discovery" that involves surveying and not enough that involves check writing and credit cards. 

I'm excited that PublicStuff is one of our now 45 NYC area investments.  If you're looking to get into the startup world and want to start a career in sales, they've got customers, and a product, and a huge market ripe for the picking. 

The end or the beginning? Thoughts on the current startup environment

Just as an additional disclosure, these are my thoughts, not that of First Round Capital, my employer.

The other day, Adeo Ressi wrote in TechCrunch about how we need more venture funds, because

"Every investor and entrepreneur knows there is something scary about the current startup economy.  There is an enormous amount of angel capital available, while at the same time there is a small amount of Series A and a large and concentrated amount of late stage capital... At least nine out of ten high-quality angel-funded startups face an unnecessary death, because there is no Series A money to help them survive critical expansion. In the end, more funds will save the good companies..."

To me, there's some seriously flawed thinking here.  Just because there's a lot more angel money available (by Adeo's own estimates, $80 billion vs $30 billion just three years ago), doesn't mean the system needs to provide additional follow on capital.  If anything, this kind of situation actually makes things *better* for the environment.  More entrepreneurs get to try out their ideas with smaller amounts of capital, but the bar remains the same to get to the bigger rounds.  More ideas, more companies, but the system vets the ideas earlier before they require tons of additional capital--and better ideas make it.

Just because an angel investor that made tens of millions of dollars gives $50k to a startup, and got 9 of her friends to do the same thing, doesn't mean that company deserves to get a $5 million check.  Companies that find product/market fit deserve to grow--and if there are enough of those, there will be enough capital to follow them.  The entrepreneurs that don't make it, they join other, more successful startups showing more traction and take their learnings with them--or go back and try another idea.   It's actually a great situation for the ecosystem.  So, yes, the end is near for many, but it's a healthy end--and one that will probably teach a lot of lessons to some new angel investors as well.

At the same time, we're seeing new sources of capital come online and some firms getting a refresh.  Chamath has a new Series A fund, the NYT just profiled Reid Hoffman, who is part of a generational shift at Greylock, along with John Lilly.   AH is out raising a huge new fund.  So, while we might feel like its a "crunch" because a lower percentage of all these seeded deals are going to make it, trust that you're not going to have some kind of Armageddon where great companies can't get funded because there are always new venture players being formed and reconstituted.

In addition, the public offerings of LinkedIn, Groupon, Zynga, and eventually Facebook are going to create a lot of new angel investors--so whatever the VCs don't pickup, I'm sure you'll see individuals continue to fund.

This brings to mind a bigger question of where we're going from here.  Are we in a bubble?  Is 2012 going to be 2000 all over again?  There are a few reasons to be concerned and some other reasons why perhaps we're not so close to the edge.

Valuations...  There are a ton of companies being funded at $500+ million valuations--seriously limiting exit opportunities.  There aren't very many companies that can swallow up another company for this kind of money, so it's going to either be going public or nothing.  The difference between many of these companies and what we saw back in 1999 is that there are real revenues and revenue growth at many of these companies--and their costs are largely in people, which can always be trimmed down.  Facebook is doing billions in revenues.  LinkedIn has great revenue growth.  Many of the private companies like AirBnb, Dropbox, and Square and that have been rumored to have big valuations are real, growing businesses.  Are their valuations justified?  Who knows, but it's pretty clear these companies are not going anywhere.  The have actual revenues that are growing.  Worse comes to worse, they'll just stay private longer and grow into their valuations, focusing on generating cash if they need to.  As for companies like Twitter, Tumblr, Pinterest, Instagram and Foursquare--the jury remains out on whether or not they'll create business models that justify their valuations, but they're well funded and will have the runway to figure it out.  As for Groupon, is it the next Amazon, where the numbers won't look good for a long time before they turn it around, or is it a ponzi scheme?  I don't know that either, but here's something I do know...

Public market holdings aren't dominated by internet companies with questionable business models the way they were in the late 90's.  When the bubble burst in 2000, many of us felt it in our pockets.  The public had largely participated in the funding of these tech companies.  Our 401ks aren't going to take a huge hit if Twitter doesn't make it. On March 20, 2000, Barron's wrote, "America's 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8% of the entire U.S. stock market."  These were mostly companies that didn't have revenue, or whose revenues were from other tech companies.  That's problematic and we're nowhere near those levels now.

There are a number of major trends that give me long term hope for the innovation ecosystem.  First off, if nothing else, the sheer number of broadband subscribers and smartphone users has created a market that is several times greater than the one that was supposed to consume all these web services in the late 90's--and that's just in the US.

I met with a major institutional limited partner the other day--the kind of money that funds VC's.  He said they were putting 10-15% of their new deployments in China and some in India--and already seeing some solid early results.  These huge global markets with improving infrastructures and growing middle classes represent significant growth opportunities.  While so far American companies haven't necessarily fared very well here, I have no doubt that there will be global online services brands built that originate here.

I'm also fairly optimistic about the potential for innovation as more and more devices go online--when my car gets connected to the internet, my TV (in a more elegant way), my fridge, home lighting, etc.  Even my phone, with as many apps as it has on it, could stand to become a lot more useful as a payment tool and key to the rest of my life.  We haven't really even scratched the surface when it comes to connected devices.

We're also just seeing the beginnings of how online and mobile services can create opportunities for the labor supply--how services like Uber and Taskrabbit can help create more liquid markets for services where previously people had limited options for monetizing their time.  These types of services will help put people back to work by matching talent and services to opportunities in a more liquid, efficient market.

So will we have a market correction?  A bubble burst?  I'm fairly optimistic that it will take longer for some of these companies to exit, a few big ones might go away, and many many seeded companies will disappear, but that the pain of all this won't be so severe and we'll continue to find new opportunities for innovation over the long term.

If you've ever overpaid for a legal document, sign up for Docracy, First Round's newest investment

After funding GroupMe out of last year's Techcrunch Disrupt Hackathon in NYC and Docracy this year, it won't take long for people to catch on to First Round's secret plan--to get invited to judge every single hackathon in the country.  I can't wait until next year! 

I met Matt and John, the developers behind Docracy, during last year's Techcrunch Disrupt, when they were working on something a little less professional.  It was a mashup of Foursquare and Face.com that rated the quality of a party based on the visual results from a facial analysis using the Face.com API.  "Nerd Alert" didn't get funded, unfortunately, but I'm pretty sure that was a major oversight on the investment community.  :)

The one thing that struck me about these guys was how great they worked with others.  I got to watch them over the course of a weekend and see how they helped others, accepted feedback.  They absolutely seemed like the kind of people I'd want to work with and who could create a great culture at a startup.  When I saw them at this year's Techcrunch Disrupt Hackathon, I was excited to catch up with them and even more excited to cast a vote for their new project to win the competition. 

What I like about Docracy is that it follows some patterns of successful startups that have generated gamechanging businesses:

1) It leverages crowdsourcing to disrupt an established business where there is a lot of pain and frustration.  Who doesn't feel like the legal overhead of starting a business is far too costly?  Plus, I'd make the argument that Docracy's initial userbase will be people who otherwise wouldn't have went to a lawyer at all, going without documentation or using something probably not appropriate for them.  There's also no reason why you can't pay your lawyer to draft a document, put it up on Docracy for the sake of transparancy, and fork it when you need to make private adjustments for individual situations.

2) It has a single user proposition, like playing the Foursquare game, saving your Flickr photos, or keeping interesting stuff you see in Pinterest, it works even if there's no community.  On Docracy, you can just use it to store your documents in the cloud, use free e-signing instead of faxing signatures back and forth, and keeping track of your executed copies.  Being useful for the first and second users is critical if you're ever going to have a million users. 

3) It gives away for free most of the value that it's competitors, because of their high cost structures, can't afford to.  LegalZoom, which just got $66 million in funding, has over 500 employees, many of whom are writing legal docs themselves.  That's why it has to charge for its documents.  Craigslist, on the other hand, has about 30 employees and is doing about the same amount in revenue--meaning that most of the stuff you can do on Craigslist won't cost you anything.

4) It will seemlessly brings social value add to an otherwise solitary, inefficient experience.  Anyone who has done a startup has asked on Twitter or a listserv for an employment agreement, NDA, software license agreement, etc.  We hardly read or understand any of this stuff when we get them, but we don't want to have to pay a lawyer to overchange us for a boilerplate agreement.  We figure, probably rightly so, that an employment agreement that has been used a bunch of times by another startup will just do fine.  Well, what if we could work together as a community to derive *the* standard employment agreement for hiring a developer--and discuss and debate various terms?  

First Round is excited to work with Matt and John, and their first hire, Veronica, on building Docracy into the your first stop for free legal documentation.  They're looking to meet potential partners, law schools, professional associations--anyone who has a stake in producing standardized, transparant, and fair legal documents for everyone to use.  Reach out to me and I'll be happy to make an intro.

Also, very excited to work with the teams at Vaizra and Quotidian and angel investor/cool-guy-at-large Rick Webb.

First Round staying fashion forward with Refinery29

In continuing my theme of winding up in investments where I'm undoubtedly the last person on the face of the earth you'd associate with the company, I'm happy to announce First Round's investment in Refinery29, along with Floodgate, as reported by AllThingsD earlier. 

I can barely dress myself, and its not like anyone accussed the guys at First Round of being fashion trendsetters, so feedback from friends can be helpful in making you take a longer look at something.  Every single time I checked in to the company's offices, I'd get comments, direct messages and emails from my female friends telling me how much they loved the site.  The investment couldn't come at a better time either, as I just heard Filene's Basement is closing, so I'm going to need some ideas on new places to shop.

All kidding aside, Refinery29 is a little bit of an off-model investment for First Round--but at the same time it has a lot of characteristics we love.  We also feel like certain aspects of the company are right in the sweet spot of where we can provide a lot of value.

I can't give enough credit to Philippe and Justin, and their team, for how far they've gone with this business.  It's non unusual that First Round will invest in a Series A company that has previously done a small angel round.  It is, however, unusual that the company gets to a $15 million annual run rate based off of that small angel round.  So, it wasn't clear exactly what stage to think of this as.  In the last year, the business has taken off from them so quickly that there were a lot of management tasks that hadn't been done yet, which is similar to other early companies that we meet.  On the other hand, few of our companies have over 25 employees when we make our first investment.  In fact, I think that might be a record for us. 

The upside opportunity here is, like other early bets we make, based on future products and further development of some newer efforts.  Sure, the traffic is going through the roof--busting through all of the projections they've ever had, and their advertising business is doing terrific because of it, but it's really the blend of content and commerce where we believe the company has a chance to excel.  The DNA of the company is in providing compelling and creative advertising opportunities for brands--so it's only natural that they'd extend that to commerce as well.  That's why they're refocusing on their relaunched Reserve product and will look for more ways to seamlessly integrate that into the rest of the site.

One of the areas First Round hopes to add a lot of value is on the recruiting front.  The company is long on creative vision, but needs experienced  technical, creative and sales professionals to help get there.  Seriously, I can't say enough about all of the really cool ways in which the company wants to turn its huge and growing audience into a thriving community and a commerce destination.  Every time I show up there, I leave with my head spinning about how the company is going to change the way what inspires people to buy and be stylish.  It's a great team and a fun culture so if you'd like an introduction, please feel free to reach out to me at charlie@firstround.com

One other note--I'm very excited to be back in the boardroom with Ann Miura-Ko at Floodgate, who is also a co-invester in chloe + isabel.

People who don't run your company

I asked a company the other day whether or not they were going to take advantage of a great event here in NYC.  Its an opportunity to pitch Sony on a biz dev deal--a no brainer for nearly any company given the scope of Sony's areas of interest.  (applications are due this Monday the 31st)

The company said no because their main angel investor didn't think it was a good idea to let an audience see their pitch.  He was afraid someone would steal the concept.  I asked them how they felt, and they knew that if all it took to replicate their idea was seeing their high level biz dev pitch, they wouldn't have much of a company.  Then I asked how much of the company the investor owned.  The answer?  None.  He was in on a convertible note and, if the note converted at the cap, it would be about 10%.   They knew it wasn't a controlling share, but it was the bulk of their angel capital and they couldn't have worked on their company without it.  They felt an allegiance to him to listen to how he thought the company should be run.

Its important to get feedback and advice from experienced people, especially stakeholders in your company, but it's even more important to realize that you run your company--no one else.  Ultimately, it's up to you, after careful consideration of advice from experienced people, to execute your vision, your plan, and build your company the way you want to.

None of the following people run your company:

Your lawyer - Remember that your lawyers work for you.  They advise.  You make the call.

Your board - Board members are representatives of the shareholders, or trusted independents.  They set CEO pay, change management, and approve options grants.  As long as you're still employed, you're making the calls.

Your investors - Investors take a minority stake after believing in you and betting on your vision.  You should listen to them, but they don't run the company.  That's how buyouts work, not venture.

Your advisors - Again... might be very smart, and you should listen, but...

Everybody - This is the worst group of people to let run your company because you don't know "everybody".  You may think that everybody thinks a certain way or does things using X method, but you need to do what's best for you.  "Everybody" is often wrong.

Users - If users ran Facebook, we'd have no newsfeed.