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Leadership

Stop focusing on your startup valuation!

June 17, 2020

It never ceases to amaze me how hung up entrepreneurs get on the valuation of their startup as they raise money. It came up in a coaching session again yesterday.

In the abstract yes, valuation matters. It tells you how much of your company you are going to sell in order to raise money. It sets a baseline for you which you will (hopefully) exceed on your next raise. It’s a validation that your work has value.

But it is NOT a measure of pride, or ego, or size.

Your valuation, like a stock price, is a reflection of the perceived value of your company at the moment in time when you are raising money. There will be times when the startup market is hot and you can command more, there will be times when it has cooled because of an economic downturn, or a global pandemic, and your valuation will be lower. Or the market your idea is in is hot, or not.

What matters more than valuation is: Are you getting the right amount of money to give your idea life? Think about the next one, or two, major milestones you need to achieve to prove your idea will work and is scalable. Then figure out how much money you need to raise to get 90-120 days past the critical proof point. Add to that number to allow for the unexpected and that is how much you must raise. Once you have that you are looking for an investing partner who shares you vision and will be with you on the journey.

The other consideration is what value opportunity are you creating for your employees? The higher the valuation on funding the higher their option strike price and so the less money they will make when you finally reach liquidity. Now, if your company is a rocket ship, the difference between an option price of 50 cents or a dollar doesn’t matter, but at a later stage the difference can matter and when there is a preference stack on your company getting greedy can wipe out your employees’ opportunity. We’ve seen this happen with unicorns who achieved huge valuations only to have them come down dramatically on sale or IPO. So don’t lose sight of the need to make your employees money as well as yourself.

I have written before that all venture capital firms are not equal. Some are good, some are awful. The same applies to angels btw. I have seen short-sighted angels do more damage to young companies and entrepreneurs than I would have thought possible by focusing on their cut and not the long term health of the company.

It is more important to a) raise the money you need and b) find a long term investing partner than finding the best possible valuation. If you own 40% of your company but it is worth $20M at the end you have short changed yourself and the impact your idea can have if, instead, you own 15% and it is worth $1B.

Photo: Stone canon balls Jordan © 2017 Penny Herscher

Leadership

The difference between being right and getting the right answer

October 29, 2016 Leave a comment
Entrepreneurs can be a hard headed lot. It takes courage, determination, a lot of luck, and sometimes just old fashioned, bull-headed persistence to create a company but as a result entrepreneurs don’t always listen well.But even if you know you resemble this description, ask yourself – is it more important for you to get to the right answer, or to be right?

You want to be right because your team wants to follow someone who knows what to do. You want to be right because it’s more efficient, and it increases your confidence, and if you’re right more often than you are wrong you have a good chance of winning. And if you believe you are right you are more likely to take risk.

But your potential investor wants you to be more interested in getting to the right answer than being right. When you are building your company you cannot predict what’s going to happen. You may switch markets, your customers may show you a different direction, the company may almost die more than once, you are certain to make some bad hires along the way. It is almost guaranteed that your journey will not be smooth.

As a result, it is much more impactful as an investor to work with entrepreneurs who are seeking truth, seeking to understand, seeking the right answer. These entrepreneurs ask questions, question themselves and try out ideas without fear of being wrong. As an investor you can dig in and problem solve with them. It’s more fun, it’s less frustrating, and you are more likely to get to a great end result together.

So when you are talking with potential investors, or even potential senior team members you want to hire, ask yourself how strong is your need to be right?

Leadership

Are your investors double dipping in your startup?

August 8, 2016 1 Comment

I’ve been working with a number of small companies this year. I’m on a mission to help CEOs, especially women, figure out how to grow their businesses, manage their investors and boards and to create a level playing field for themselves.

But as I have spoken to some of these CEOs I’ve seen several data points which are very worrying, and which I hope don’t make a line! These data points are investors putting money in to companies, and then taking the money back out for services – so effectively reducing the cost of their investment. Double dipping.

For example…. The professional service provider:

This is the case for a small software company, lets call them W. W has developed a software technology to improve building management, and so reduce insurance costs. It wasn’t an easy company to raise money for and in the end the CEO raised from angels, one of whom invested $480k. Nice.

But he then turned around and sold W the development service to create the product from the technology for $490k. He didn’t require it, but it was “expected”. Assume a typical margin of 50% then the service cost for the angel to deliver is $245k and he has a profit of $245k. So he got $480k worth of equity in W for $235k. And to make matters worse, when the product delivery was not to the satisfaction of the CEO she found it very difficult to push back on him in the way she would have been able to push back on an independent contractor. It’s awkward to say the least, but I think it’s what in a public company would be called a related transaction – it is simply not independent and so has the potential for conflict of interest.

The investors with a side business:

Another small app company, raised money from an angel group. The angel group has a strategy of creating an ecosystem from their companies, and providing services to them to drive the market adoption. But, unlike the old school VCs like Mayfield and KP, or even the new large scale guys like Andreessen Horowitz, this group turned around and charged the company (which had only raised $1.5M) $11k/month for marketing. That’s $132k per year – which could have been spent on another engineer or a lot more marketing consulting from an independent.

The board member who wants a salary:

This time a technology company in the security space. Killer technology, but a turnaround from a prior (not-well-run) incarnation so raising money was hard. In the end money came in from a PE firm. But after the close the PE firm put in an executive chair to “help” and insisted he be paid $180k a year for a few days a week. Now I am supportive of a board deciding a CEO needs some help and adding in an exec chair if the CEO agrees (or even if she doesn’t if it’s really needed) but to pull a salary out of a company that is not profitable is very tough on the company. And in the end it’s not in the best interest of the investors; it doesn’t make sense.

I wonder if I have seen a few outliers and this is not the new normal, or if this is a new trend? Is it a result of the number of angel groups out there who are not professional investors (and so to give them the benefit of the doubt we could assume they don’t realize the impact of what they are doing), is it a result of the tightening of investment (and so they can get away with it) or it is a result of the simply huge number of startups and first time CEOs who can be taken advantage of? If you have an example in  your own company inmail me on LinkedIn.

Equality

The oldest profession in the world is alive and well in Silicon Valley

April 1, 2015 2 Comments

Of course we’ve all been agog at the Ellen Pao trial. Silicon Valley loves nothing more than to talk about itself. The self-obsession goes hand in hand with ego, intellect and ambition.

But an unexpected side effect of the discussion of the blow-by-blow of the trial is now, for a while, everyone will be looking for covert sexism. And nowhere better to find it than cougar night at the Rosewood hotel in Menlo Park.

This is not a new phenomenon. I blogged about it in 2011 after spending an amused Thursday evening there people watching. Even back then the VC, wanna-be, hooker dynamic was in full force.

Now, it’s out in the mainstream press. New York Magazine no less, reported on “Where Silicon Valley Looks for Love in the Era of Ellen Pao”. The crowd in question at the Madera bar, sitting outside in the fading sun and rising moon, is a mix of older (white and Asian) men, older women, younger women, and, just sometimes, ordinary people wanting a cocktail with a friend.

And this latter case is how I usually observe “Cougar Night”. The Rosewood is on my way home. It’s the only high quality bar on the 280 corridor (indicating a market opportunity I suspect). It has very good bartenders who can make a mean Basil Grey Goose Martini (except on Thursdays when they take it off the menu because it takes too long to make – so you have to know to ask for it). And by Thursday I am often in the mood to relax, meet a friend and have a martini on my way home.

It was one such Thursday a few months ago that I saw just how efficient the scene is at the Rosewood. Three middle aged men (one white, two Asian) sitting in one of the large outside booths. The waiter comes up and introduces them to three women who were about 30. Each had long hair, each had a skirt that would not have made it past the nuns at my middle school (i.e. only an inch or two below the crotch) and two had plenty of back skin showing. Initially they sit together, but within 5 minutes they had moved around so they were each paired with one of the men. It was like a dance. The toss of the hair, the hand on the thigh, the eye contact.

I watched in admiration. The oldest profession is alive and well preying on the equity-rich customers who are hoping to not only benefit from the greatest wealth creation of our time, but also find some love at the same time.

My friend chastised me when I said I wanted to take photos to document the dance. She was sure we’d get thrown out and not be allowed back, and the location is just too convenient for us to blot our copy book with the management. So I behaved (unlike the time she and I were asked to leave a restaurant in Rome for being too noisy) but watched in fascination and amusement. The girls were good!

Rest assured, dear reader, Silicon Valley may seem like a dry, stuffy place filled with male nerds, but it’s not. There are actually plenty of interesting, professional tech women hanging out in the Rosewood on Thursday nights (because, after all, the drinks are good), but they’re the ones smiling, watching the dance.

Leadership

Venture Capital Is Not All Equal

December 16, 2014 Leave a comment

Like people, VCs come in all styles, so here are 5 characteristics to consider as you interview potential investors.If you want to raise venture capital to fund your new company and your great idea, plan out your vetting process first, because all VCs are not the same. Some are really helpful, but some are horrible and damaging to your company.

  1. Pick someone who has the same Vision and Values as you. You are (hopefully) in your venture because you believe you can change the world (if you are doing it to get rich, stop now, because you don’t get rich in the startup world by trying to get rich, you get rich by building
    something) and it’s very important your investors want you to change the world too. There are many tough moments of truth when building a company, and none more so than when you get an offer for your company before you think you are ready–before you have built the strategy and value that you believe is possible. That moment is when you find out whether your investor truly shared your vision on how to change the world or was just telling you she did.
  2. Pick a partner who can do heavy lifting for you when you need it. Great venture partnerships have a rich, deep network to help you recruit, develop partnerships, find initial customers, manage sticky HR issues and even find office space. Andreessen Horowitz are changing the game with the amount of help they give their ventures. They have teams of people to help you: recruiters, sales people, marketing people and they’ll get you started with office space. Ben Horowitz’ book, “The Hard Thing About Hard Things,” is packed with advice on building a company and is a good example of the type of advice you can get from a great VC who’s built their own company in the past.
  3. Avoid the money-based VC who’s motivated by running a portfolio–often former investment bankers. Find someone who walks the talk and truly builds great companies. If you can, find a VC who has been doing it for more than 10 years and who has a great track record–and interview their CEOs–or find one who’s been a CEO, built a good company and taken it public. When you work with someone from a leading firm like Benchmark, Oak, Sutter Hill, Sequoia, Greylock or the new kids on the block, Andreessen Horowitz (and they’ve been a CEO or a VC for many years), you get access to a level of wisdom and advice that you simply won’t get from the a small firm with relatively inexperienced investors.
  4. Don’t get greedy. Yes, valuation and how much of your company you need to give away is important. But it is just as important that you get great advice and that your management team and employees make money too when you are successful. If you get greedy and aim for the highest valuation, a couple of bad things can happen. First, you can end up with investors who don’t have the experience you need (one of my friends has a Saudi Prince as an investor–very difficult to get alignment on strategy), but second, you can find yourself in a situation with such a high preference and threshold valuation on your company that unless you are the next Facebook, only your investors will make money when you sell (and maybe not even them). There are many hot startups in San Francisco today who will face this problem when they try to get to liquidity. A great VC will coach you through this and not be greedy either.
  5. Pick someone you enjoy being with. Building a company is an intense, emotional experience. Most companies take many years to mature and if you are going to meet with your board every month for 5 years, and at dinners and strategy discussions in between, it certainly makes the
    journey more fun if you enjoy interacting with them. Of course, in the end, you do need to get funded and you may need to take what you can get, but if you have the chance to be selective, the right investor is more important than the highest valuation because you’ll build a better company and change the world (and make more money for you, your team and your investors along the way).
Leadership

What makes a great venture capitalist

November 8, 2012 Leave a comment
The venture capital world lost a master last week. Paul Wythes of Sutter Hill died at age 79 – he was a pioneer of the industry in California and a gentleman.

Reading his obituary in Business Week I was struck by two things he said
in an earlier interview that capture key characteristics of a great VC. I have little time for the celebrity VCs who court the press and like to take attention and credit for their companies. I believe the VC who is there with advice when you need him, leaves you alone when you don’t and provides unwavering support as you ride the roller coaster is what a founder or CEO really needs.

First, I love the description of Paul’s deal flow process:

Wythes
described the early days of his industry in the San Francisco Bay area. 

“What
I’d do is get in the car and drive down to Mountain View or Sunnyvale
— not so much the East Bay in those days — and look for signs,” he
said. “The sign of the company would say, ‘Technology,’ and I stopped
the car, go in and say to the lady in the lobby, ‘I’m so-and-so from
Sutter Hill, here’s my card, and I’d like to meet the CEO.’” 

The
best chief executives “always spent the time with you,” he said,
“because they were smart to realize that someday they may need venture
capital.”

He had an unassuming way about him that would be disarming to a CEO. When I did a short stint as an EIR at Sutter Hill he didn’t have to spend any time with me, but he did, just because he loved the business of building technology companies.

And even more revealingly he said:

“Venture capitalists don’t create successful companies, entrepreneurs
do,” he said, according to Gupta’s book. “Some venture capitalists and
some venture-capital firms today think it’s exactly the reverse, but
they are the ones that have it reversed. I think if you can be
supportive of a company as a venture capitalist, and be in the
background, not up front making it look to the world like the venture
capital firm made this company successful, it’s much better.”  

Amen to that.

I’ve been lucky enough to work with two old-school style firms who take the approach Paul described. Mayfield — and Gib Myers — funded Simplex and they were quietly unwavering right up to and through my IPO. Oak Investment Partners — and Bandel Carano — have funded FirstRain and again have been supportive and unwavering, this time through the challenge of the great recession.

Great VCs know the founders and entrepreneurs are doing the heavy lifting, and they put the company out front and support it completely, right up until the day the company either reaches liquidity, or the VC decides to write it off. There is no middle ground. The Sutter Hill masters know this too.

So when you’re interviewing VCs for your deal, remember All Venture Money Is Not Equal, and look for a VC like Paul.

Equality

Cougar night busted in Silicon Valley!

September 9, 2012 Leave a comment
The bar at the Rosewood Hotel, at the end of the fabled Sand Hill Road of venture capital fame, has been building up a reputation for a while now as a pick-up joint. I wrote a blog about the bar scene more than a year ago now, not realizing I was seeing the myth develop in front of my eyes.

But last night, as we sat at the outside bar watching the sun go down with some good friends, we commented how odd it was that a bar and restaurant that had always seemed packed seemed half empty.

And now this morning I found out why. The bar has been faux-busted for Thursday cougar night. According to the Merc, “a recent report that police
had arrested several big-name venture capitalists for solicitation — by
all accounts, a false story on a satirical Web site — seems to have
helped chill the scene, at least for now.” 

Faux-busted, not even really busted. The VC world is actually pretty conservative. Mostly white men, mostly funding deals they’ve seen before, following the pack. Only a few are truly risk taking visionaries. And sex is under cover here. Cars, wine, jets, houses are all on show, but the women I meet through my VC friends are almost always wives or daughters. Even so, the scene had definitely been building up at Madera, but who knows if it was pickup for fun or for money (or both)?

The scene will be back. And in the future, as we get more women in power in technology, maybe the Joss Whedon imagined universe of Firefly will happen even here.

Equality

Why are Women Funded Less than Men? – a new conversation

August 30, 2011 Leave a comment

If you are thinking of starting a company, or raising venture capital, and happen to be female then Pemo Theodore’s new ebook is for you.

Why are Women Funded Less than Men? a crowdsourced conversation presents a thoughtful collection of advice on how to do it and the challenges you face, drawn from a fascinating set of video interviews. Pemo interviewed VCs, entrepreneurs and advisors, asking them all to speak about the issues and challenges facing women trying to raise venture capital.

In a world more than 95% run by men, and 95% invested in by men, advice for the female entrepreneur is invaluable, and by presenting the advice in short video form, Pemo makes it very easy to absorb and enjoy.

Raising venture capital has never been a problem for me, and as I watched the videos I found myself thinking was I lucky, good, or just really ignorant of the challenge? I very much resonate with the advice to not be aware of your gender as you pitch, to be aggressive and to ignore that you know most VCs are not women friendly – your idea is still great.

I also resonate with the advice from Janice Roberts at Mayfield Fund that you can empower yourself by choosing the right VC. Finding the right investing partner is critical – my advice on how to pick a VC is in this post.

Many of the contributors speak about how important confidence is. So many women let themselves down by expressing self doubt. DON’T. VCs are already taking enough risk – they won’t invest in someone that reveals their fears – and men don’t let on no matter how scared they might be. Be confident, project confidence, and your investors will follow you.

As I said in my forward for the book:

While the facts are that only 3-5% of venture capital goes to female entrepreneurs there is simply no good reason for this to be the case. Women are as strong and smart as men, and often have the advantages of better management skills and stronger team building ability. But today’s venture world is dominated by men looking for the classical male style of leadership and until that changes women need to adapt to the current rules of the game, get funded and win so they can change the game.

It take confidence, courage and authenticity and a healthy dose of advice and encouragement. This wonderful collection of advice, shared experience and often humorous stories will be an inspiration to any female entrepreneur. Pemo interviews across the spectrum: VCs, entrepreneurs, those who have succeeded, some that have failed, all that have learned and share their experience with you. It’s a terrific resource if you are raising money from venture capital, plan to do so for your next brilliant idea or are a VC yourself wanting to unlock higher quality deals by tapping into the female advantage.

The complete videos of Pemo interviewing me on raising money are here and here too.