Founders and Management
It’s been a while since our last post on this blog. Year end activities got in the way. We were in the midst of a string of posts on what we look for in our investments when we went radio silent. We’ve addressed issues like the stage we like to invest (early), the amount of traction the company has made, our desired role as lead investor, deal size, and our approach to geography.
We figured we’d come back strong by addressing the most important piece of venture capital investing equation – the people we are considering backing.
Background
There are two kinds of people that we have to consider in this process. There is the person or group of people who came up with the idea and started the company, the founders. And there are the people who are currently operating the business, the managers. They are often the same, but not always. And it’s also true that the founders’ role will change over time as the company grows, and the managers’ role will become more important.
But since we are generally investing within a year of the company’s formation, when there are less than ten employees, it is almost always the case that the founder is the person running the business. But it is also almost always the case that the founder has surrounded themselves with some other people whose talents and temperament will have a meaningful impact on the business. We need to consider how all of these people will work together to drive the business forward. We cannot and do not look at just one person when we make an investment, unless there is just one person involved when we write the check. That has already happened twice so far in the short history of Union Square Ventures. I’ll come back to the situations in which we’ll consider doing that later on in the post.
No business is so good that the wrong people can’t mess it up. And no business is so bad that the right people can’t fix it. If you think about what a business is, it’s a collection of people who have been organized in attempt to profit from offering a product or service to the marketplace. So if you don’t get the people part of the equation right, everything else is really immaterial.
And the people issues always start at the top of the company. Great people attract and retain great people and build a culture where the best people like to work. They value people, compensate them well, motivate them well, and manage them well. On the other hand, there are plenty of people who don’t have what it takes to lead an organization. For some people, that is because they don’t enjoy managing people. For others, that is because they don’t have the empathy or self awareness that is required to manage others. There are many reasons why some people don’t make good managers and leaders.
We believe that management and leadership can be learned and we strive to keep the founders of the companies we back in leadership roles for as long as is possible, often that will be until the company is sold. But we also recognize that some people will not make it as leaders and we must be careful to avoid the damage that can result to a fragile early stage company that results from having the wrong leadership followed by a leadership change.
We also recognize that many leadership changes work out badly. There are so many examples of companies where the founder either stepped aside or was pushed aside in favor of “operating management” and then the hired management was even worse. We work very hard to avoid that circumstance.
Our Criteria
So with that backdrop, this is what we look for in founders and managers.
First and foremost, we look for people who we will enjoy working with. We’ve been investing in early stage technology businesses for over 20 years and we’ve backed people we like and we’ve backed people we ended up having great difficulty with. We’ve made the decision that no matter how attractive an investment opportunity may be, we will not get involved if we do not think there is a high likelihood of a very positive working experience. That is partially a recognition that the entrepreneur/VC relationship is critical to the success of the company. But it also a recognition that if we enjoy working with a person or a group of people, it is more likely that others will as well.
We also seek to back entrepreneurs and managers that we’ve worked with successfully before. We realize that this sets up a “club relationship” where it’s hard to break in. And we also realize that some of the best entrepreneurs will be first time entrepreneurs. So we have a process to make sure we back first time entrepreneurs, but the hurdles are simply higher.
When an entrepreneur or even better a founding team that we’ve backed before successfully comes to see us with a new opportunity, we are usually very inclined to support it with our time, energy, and capital. Of course, we have to feel that the business concept has merit and it needs to fit into our investment strategy. And in some cases that doesn’t happen and we don’t invest. But when a team we’ve backed before with success comes to us with a concept that is in our sweet spot, there is a very high likelihood that we will invest. We like to think of these entrepreneurs as “franchise” entrepreneurs.
We are also fans of teams that come back to market with a new opportunity where we were not the investor the previous time. We’ve watched many great entrepreneurs work from afar (or even close up when our companies compete with or work with them). And when they decide to start something new, we are always eager to talk to them. It’s a bit harder for us to be confident that the relationship will work well, but in these situations we do a lot of calling around to learn what it is like to work with these entrepreneurs. We take the time to build a relationship before we invest. We like to think of these entrepreneurs as “serial” entrepreneurs.
But as I mentioned previously, we need to be open to first time entrepreneurs who have no track record with us or others. With this group, we look for traction on the business plan, a service in the market that is being used and getting favorable reaction from the market. We want to spend a lot of time “hanging around the rim” on these deals so we can be certain that our style and the entrepreneur’s style will work well together. We talk a lot about how the entrepreneur plans to develop as a leader or if they don’t, how they plan to develop others to lead the business.
The first time entrepreneur is the riskiest of the three kinds of teams we will back, so when we do it, we want there to be much less risk in other parts of the business. If the service is in the market, gaining traction, with revenues flowing, and the business developing nicely, then there is less likelihood of the kind of conflict over strategy and business direction that creates tension in the entrepreneur/VC relationship.
But even with all of that, we still need to see a personality type or a set of personalities that can create a culture that will attract and retain the best people. We need to see someone or a group of people who understand that a company is a collection of people, nothing more and nothing less. Because we never back just one person, we are backing a group of people who will grow in size and complexity over time and we need to be sure that the people leading it are capable of the challenges that such growth entails.
I promised that I’d address the two times we backed just one person. The first time was Joshua Schachter and Delicious. At the time we backed Joshua, Delicious was already a very successful service in the marketplace, a leader in the category, and a leader in the emerging market we now call web 2.0. Nevertheless, we spent a great deal of time hanging around the rim with Joshua before he and Union Square Ventures decided to become financial partners. We got comfortable that Joshua understood the value of people and that he could attract the right talent to the business. We also introduced Joshua to Albert Wenger who over time became Joshua’s partner in managing the business. Had Delicious remained independent, we were confident that Joshua and Albert would have built a great team and a great company.
The second time is Peter Semmelhack and Bug Labs. Peter is a serial entrepreneur we had watched from afar with great respect. Further, we knew him socially through a number of connections. When Peter came to us with the idea for Bug Labs, it did not take us long to make the decision to back him. Peter has already assembled a wonderful team, a number of whom had worked in his prior companies.
The serial team is something we value greatly. Isaak Karaev has brought many of his best team members from Multex to his new company Instant Information. Dave Morgan brought many of his best team members from Real Media to TACODA. The founding team at FeedBurner has worked together for more than ten years in a number of companies and startups. When you see that at work, you know you are investing in a team of people that know how to work together, where the culture is existent from day one, and where the probability of success is very high.
Statistics
I’ll end this long post (sorry but this is complicated stuff and I’ve barely scratched the surface), with some stats. We have invested in eight companies so far at Union Square Ventures and have term sheets out for three more, none of which are guaranteed to close. The eleven companies break down as follows:
Franchise Entrepreneurs – Two
Serial Entrepreneurs – Five
First Time Entrepreneurs – Four
So even with our desire to back proven teams, we have found a number of exciting first time entrepreneurs to back as well. I expect that when this portfolio is all said and done and we have eighteen to twenty companies in it, about forty percent will be first time entrepreneurs, forty percent will be serial entrepreneurs, and twenty percent will be franchise entrepreneurs. That feels like a good mix.
January 10, 2007 12:46 PM, By Fred Wilson
Tags: founders management
Comments (16)
I really appreciate this post and am now reading the rest of the series. My question on the founders would be, neither of us has extreme experience and are hoping for guides along the way in addition to capital. Is this something that we can expect from investors. I would have a business plan in place if it wasn't for the decision on what avenue to take in generating revenue. Our current product will be meshed with our new line once the sytems are completed this month and has gotten great feedback with no marketing and just word of mouth. You can check it out at mychingo.com. Our new release will be MobaTalk.com. Or you can come to boston on the 30th for the Web Innovators Conference that we will be presenting at.
Posted by Jeff , January 10, 2007 01:53 PM
Great article.
One point that is not addressed is whether you would back a founder/team that you had backed before -- but where the prior outcome was not a success.
I read a research report by some Harvard folks that indicated VCs were more likely to back a team they had backed before (eve if the investment wasn't a success) than a team that they had not worked with before.
Posted by Dharmesh Shah , January 10, 2007 02:33 PM
Hey, great article Fred! Seriously man, if my company ever needs venture funding, I hope we work with your firm. It's your personal blog that really won me over.
Isn't Robert (the first commenter) right on in his assessment of the hurdle that you've set up for entrepreneurs? It's basically a "cream will rise to the top" approach that significantly reduces your investment risk.
But...what about those promising young programmers who need 10k, 25k just to build and launch the first version of a product? Why is it so hard to find investors who know their stuff and aren't afraid of helping out in the really early stage? Why couldn't your firm for instance set aside a certain amount of capital to fund really early stage startups that you think have a great idea and team?
I know there's a limit to the number of different investments you can watch over and contribute to, but with the relationships you've cultured via your blog and through email with various entrepreneurs, why couldn't you take more of a gamble with a lot less money?
I know if I were an investor contemplating this idea, I would make my own set of criteria. I'd want the founders to be bloggers, and I'd have to like how they think. I'd have to like their idea and see that they understand some of the very basics. But from there, why not put in 25k to help get the first version of the product done? Why not trust your instincts and take a few more shots from the hip?
Thanks for listening to my rant!
Posted by JontheWayne , January 11, 2007 06:15 AM
JontheWayne,
It really shouldn't cost $10K to launch a new service (if we're talking about software). For starters, hardware is cheap these days - as is marketing (via blogs). There are two types of entrepreneurs in the software/web-world;
The developer:
This entrepreneur knows that it won't cost $10K, or even $5K. He knows that he can go to the local grocery store and pickup some Red Bull and start coding for 24 hours straight, then rinse and repeat. He can have his product out in as little as a week flat with no cost to him. He can launch in beta, and if the site hits it big, scale the servers appropriately.
The non-developer:
This entrepreneur says to himself "I need developers to build this idea". He quotes a firm of 10 developers who give him a price tag of $50K for development - ouch! The entrepreneur starts building a business plan based on presumptions, hoping an angel will throw in some cash.
How can the "non-developer" succeed?
Network yourself outward - you WILL find a developer with at least a BS in CS. Tell the developer you have a cool idea, and his skills would make him the perfect co-founder. If they're not too busy, most developers are eager to join a startup. If you happen to secure this person on your "team", you now have a winner. You have the crucial piece of the business that you were missing. You can now get things done on a shoe-string budget...
If someone wants (or expects) to be paid, they are not a good co-founder. Find someone who is willing to do a "50/50" split (don't be greedy and "shaft" the person either - that's not nice). Of course, you would need a legal document drafted in order to prevent a rotten co-founder from running off with the idea, or falsely claiming there is some sort of verbal or implied agreement.
Posted by Robert Dewey , January 11, 2007 11:07 AM
Robert Dewey,
Can you direct me to a developer who just might be looking for an opportunity? Send him over to engenios.wordpress.com.
I've been putting a team together for a new project and I need a 'geek' to saddle up along side this vision. No cash available....yet, but I am willing to consider equity discussions.
Once we get our ducks in a row, well come back to Fred's place and pitch it!
Thanks
Gary A. Flynn
MyGeniosidea
engenios.wordpress.com
Posted by Gary , January 11, 2007 09:58 PM
Robert Dewey,
Can you direct me to a developer who just might be looking for an opportunity? Send him over to engenios.wordpress.com.
I've been putting a team together for a new project and I need a 'geek' to saddle up along side this vision. No cash available....yet, but I am willing to consider equity discussions.
Once we get our ducks in a row, well come back to Fred's place and pitch it!
Thanks
Gary A. Flynn
MyGeniosidea
engenios.wordpress.com
Posted by Gary , January 11, 2007 09:58 PM
Robert Dewey,
Can you direct me to a developer who just might be looking for an opportunity? Send him over to engenios.wordpress.com.
I've been putting a team together for a new project and I need a 'geek' to saddle up along side this vision. No cash available....yet, but I am willing to consider equity discussions.
Once we get our ducks in a row, well come back to Fred's place and pitch it!
Thanks
Gary A. Flynn
MyGeniosidea
engenios.wordpress.com
Posted by Gary , January 11, 2007 09:58 PM
good comments and questions here.
Robert - yes, you have correctly stated the "traction" hurdle that we require of first time entrepreneurs
Darmesh - yes, we would consider backing an team we had backed before where the outcome was not a success, but the lessons of the last deal would weigh on our decision
Jon - Robert has provided the exact set of guidance that i would have given
thanks Robert!
Posted by fred wilson , January 13, 2007 08:31 AM
Quote: "then the hired management was even worse."
It is very interesting that you mention this. Been there, done that. It must be common enough to be a problem. I wonder how often is is or isn't recognized after the fact.
I didn't mind that the VCs wanted to hire someone with more experience then me. In fact, I helped find and recruit the guy. What was frustrating, and drove me from the company, was that once the new guy was hired my opinion suddenly meant nothing. Nobody would listen to me that we hired the wrong guy.
That was 10 years and several companies ago. The last company was bootstrapped and I was president when we sold it. I have more experience now but I'm still open to hiring someone who is better then I am at whatever the company needs.
I'm starting the thought process for another startup. How much funding will it need? Bootstrap, angel, or VC? Etc.
I still fear the loss of control that taking VC money usually means. Being replaced by someone who is less effective then you and watching things flounder is a horrible insult for a founder. Hey, that is my baby that you are screwing up!
Posted by Cookie Monster , January 13, 2007 06:16 PM
Gary,
Referring to us as 'geeks' isn't going to get a good one to saddle up with you.
And 'considering' equity in exchange for pay won't fly. You will need to 'offer' it.
Interesting article - and site.
Posted by _Jon , January 17, 2007 09:07 AM
Robert,
Trust me, there are plenty problems where you can't do it "for free". Does the problem include a very large data set? Hello tens of thousands for servers - even just for the prototype. Will development take months and months? Hello rent for an office. Do you need to license data? Do you need complicated agreements with partners as part of your product? Hello lawyers (and $$). Etc etc. A startup can be expensive, even if everyone is working for the interesting challenge.
I (and a few partners) are working on a self-funded startup and while it is a "software service", let's just say we are well beyond having invested $10k. :-)
Sure, we could have started with a smaller dataset and used a few cheap-ish rented servers; but one of our differentiators is that we didn't. Or we could have saved the office rent and taken turns using our living rooms or a spare bedroom for an office, but one of the reasons we are doing this is because we want a fun and inspiring work environment.
- ask
Posted by Ask , January 18, 2007 02:04 AM
great article -
just wanted to let you guys know that I wrote on this topic from a startup entrepreneurs perspective on my blog today.
heres a link if anyone is interested: http://www.promoterforce.com/2007/01/19/the-value-of-team-and-strategic-partners-in-building-a-winning-venture/
Thanks again for this insight!
Posted by Hasan Luongo , January 19, 2007 02:10 PM
Ask,
If you have to spend that much money to develop something so complex in order to compete with an 800 pound gorilla, then perhaps that's not a good startup opportunity for an underfunded team. That's probably a task more suited for an existing company that can handle large costs (i.e. Microsoft and X-Box -- the game console industry isn't what I would call "ripe" for startups, but MS has the money to lose).
My vision of a startup is one that can start small and scale only as needed. Scalability is the key - it's essentially your stop-loss. If you're service doesn't take off, you've lost nothing (or close to it). If your service hits it big, you can scale as big as you need to. Scaling before a service even launches is a big gamble, IMO.
A good example would be Google - they didn't start out with 100,000 servers and an index of over 5 billion pages. They started small, and scaled... And as a matter of fact, they are still scaling.
Look at Union Square Ventures' portfolio (and many other VC portfolios) - you will notice that most, if not all, of the companies are ones that started small and scaled appropriately. Delicious is one that comes to mind right away.
I just think we have two different views on what a startup actually is. Not saying you're wrong, but just stating my own opinion. I definitely wish the best of luck to your venture - luck is something we all need.
Posted by Robert Dewey , January 20, 2007 10:52 AM
Jon,
My apologies. Sometimes formality is a lot more becoming.
Having said that, and in a continuation theme of my post, if I launch the site with a basic look, but wish to partner with a more experienced code developer, for phase II or III, would that remain as appealing?...
Nevertheless, my ...considerable?... 'offer' still stands.
I appreciate the kind words....keep watching, I have some "engenios" ideas that will be revealed in time.
Gary Flynn
MyGeniosidea
engenios.wordpress.com
Posted by Gary , January 22, 2007 07:33 PM
I am interested in investing my funds in your company.
For more contact me Via email romanabramovichinator@yahoo.com
Posted by Roman Abramovich , May 8, 2007 11:29 PM
I have to agree with one of your previous posts - I think the biggest "invest in me" flag is traction. If an entrepreneur (or team of entrepreneurs) is strong enough to conceive a business idea, build that idea into something tangible, and then have ability to drive many users to that business, then that entrepreneur would be a solid investment opportunity. That's traction right there.
That, IMO, is a summed up "hurdle" that first time entrepreneurs would need to overcome.
Let me know if I'm on the right track.
Posted by Robert Dewey , January 10, 2007 01:17 PM