ZangZing – Group Photo Sharing. Simply and Beautifully.

Posted by Joseph Ansanelli on Feb 16, 2011 in Recent, Startups | 0 comments

ZangZing – Group Photo Sharing. Simply and Beautifully.

Hi Everyone!

We just rolled out the beta signup for a Group Photo Sharing company I co-founded at www.zangzing.com.

You can learn what we’re up to at our first blog post and thanks in advance for signing up for the beta at www.zangzing.com

Joseph

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Startup 132: Why an Exit Strategy is a bad idea

Posted by Joseph Ansanelli on Jan 2, 2011 in Execution, Recent, Startups, Teams | 10 comments

Startup 132: Why an Exit Strategy is a bad idea

My apologies that it has been so long since I’ve written but I’ve been a little busy the past year and a half. I started a new company called ZangZing which is building a new service to help groups share photos. You can sign up for the beta here. I am also on the board of 3 other companies – Lookout, Smartling, and ccLoop – and an adviser to a fourth – MobileIron.

Exit Strategies
I have been meaning to write about the question of “Exit Strategies” for many months.

Not only has there been lots of press about exit strategies with Groupon turning down a multi-billion dollar offer from Google, but in about 1 out of every 2 recruiting interviews, I am asked the same basic question, “What’s the company’s exit strategy?”.

Let me get right to the point.  If you work for a company or meet with a startup CEO that says they have an exit strategy, then you should find the nearest exit.  Think of a company with an exit strategy as your floor lighting that will illuminate and guide you to the nearest exit – which may be behind you.  (OK, after flying almost 1.5 million miles, airplane humor is too easy).

Now some of you might be asking, “But Joseph, you sold a couple of companies. Why and how can you credibly you say that?”

Well, it’s simple.  I don’t believe there really is such a thing as an exit strategy.  And I have never had one for any of my companies.  An exit strategy implies very short term thinking about how Google, or Facebook or some other deep pocketed, cash rich company is going to come along and scoop the company up.  And that type of thinking is simply a bad idea. Check out the definition of exit strategy from Wikipedia:

An exit strategy is a means of escaping one’s current situation, typically an unfavorable situation. An organization or individual without an exit strategy may be in a quagmire. At worst, an exit strategy will save face; at best, an exit strategy will peg a withdrawal to the achievement of an objective worth more than the cost of continued involvement.

When you think of a startup, it’s probably not a good idea if the team is thinking about escape or saving face or withdrawal.

Instead of thinking about the exit, startup teams (and potential employees) need to be laser focused on a success strategy.  This means thinking (and asking) about the 3-5 most important things that will make the company successful, e.g. Who do we need to hire?  What products do we need to build?  How do we grow our user base?  How do we make money and become profitable?

A success strategy is about building value. And when you are successful and build value, then you will have lots of options including continuing to grow the company, selling the company, taking a company public, merging with another company and more.

So stay focused on your company’s long term success and along the way you will have lots of hard choices about if and when to “exit”.  In writing this, it seems so obvious, yet I am continually amazed that so many people think and ask about exit strategies.  Hopefully no one will ask about exit strategies in any future interviews and if they do, then I know they are not good at doing their homework. ;-)

Leave a comment and let me know what you think.

And here is another post about strategy planing that you might appreciate. If you don’t know where you’re going, well, you’re lost.

Lastly, you can also follow me on twitter or subscribe to email updates.


 

Exit sign courtesy of heathbrandon
Airplane exit sign courtesy of joeshlabotnik

 

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Startup 131: Term Sheet Dilution Calculator

Posted by Joseph Ansanelli on Nov 9, 2009 in Dilution Calculator, Recent, Startups, Term Sheet | 0 comments

Well, it’s been a little long since my last post and I apologize.  Life sometimes has a way of getting busy but it’s been great.  Anyway, given all the interest and posts about Startup Term sheets, I thought it would be useful to share a tool that Charlie Fortenbach, Vontu’s head of finance and operations extraordinaire, created for calculating dilution at various stages of investments.

It’s an excel spreadsheet and fairly straight forward.  Please consider it a beta release and we would love feedback, comments, bug fixes, and suggestions for improvement.  Also, if you make changes, it would be great if you can send them back to me and then we can incorporate them for everyone.

The model is pretty simple to use.  For a series A, simply follow the five steps below.

  1. Enter the “Pre-money” valuation for the initial financing round (typically a seed round, or Series A venture round).
  2. Enter the investment amount for each Series A investor.  The spreadsheet will handle up to a total of four distinct investors (Investor AAA, Investor BBB, etc.).  The model makes no assumption regarding pre-emptive investor rights, such as “pro-rata shares”.
  3. Enter any issuance of Series A Preferred warrant shares.  The issuance of warrants is typically associated with venture debt or convertible notes which is common in the early financing stages.
  4. For the initial financing round, enter the % of total fully diluted stock (post-money) that will initially be apportioned to the employee option pool
  5. Input the total “pre-money” stock fully diluted.  Given the “Pre-money” valuation, this will set the Series A Preferred Price / sh.  In the initial financing round the Preferred Price is generally driven to a round number, typically $1/sh.  Certain adjusting splits may need to be applied to drive this price to $1/sh.

One piece of feedback we’ve already received is dealing with convertible notes and we’ll get to that eventually or if someone wants to update the sheet and send it back to me, that would be great.

Also, if you want to talk with Charlie, let me know and I can forward your info.

Enjoy.  And if you like this, please share it with your friends using the add to any button below.  And if you’d like an email or Twitter update on future posts, feel free to sign up for either.

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Startup 130: 10 Questions for Ray Rothrock of Venrock

Posted by Joseph Ansanelli on Aug 18, 2009 in Recent, Startups | 1 comment

This post is an “email interview” I did with Ray Rothrock of Venrock.   I sent Ray 10 questions on venture capital, what he looks for in his investments and the people he backs, as well as what are his favorite iPhone apps.  Enjoy.

On Venture Capital

1.  Venrock is celebrating it’s 40th anniversary this year.  That’s a long time in the Venture Capital business and does not even include Laurance Rockefeller’s “venture” investments in the 1930s in Eastern Airlines and McDonnell Aircraft.  How has the venture capital business changed since those early days and in what ways has it stayed the same?

Differences in the business are around the limited partners.  These days the money comes from all sorts of institutions – foundations, endowments, retirement funds, etc.  In older times, it was largely from wealthy families and individuals.  As such, in the 90s the venture activity morphed into an asset class for these institutions as they diversified.  The data for this asset class was based on a much smaller business, fewer venture capitalists, less money and still a fairly information inefficient world.  That is all changed now.  Today, success has a much higher bar because of information flow and ease of access of capital.

Similarities in the business are all about the entrepreneur.  There are still people out there trying to invent things and change the world with their ideas.  In short, entrepreneurs are still entrepreneuring.  I think the personal drivers are also the same – it’s about changing things, not so much about wealth creation.  Wealth often comes after success, not the other way around.

2.  With so much money “chasing” both consumer and enterprise companies which can get real traction by leveraging services such as amazon’s ec2 and open source software, what are your thoughts about the suggestion that today’s venture model of large funds and big investments does not work?

Big outcomes are mostly driven by huge markets.  If the market already exists, it is very hard to take share from incumbents.  If the market does not exists, then you need some good luck for the market to happen.  So, betting on the creation of huge markets and good luck is really hard to sell.  I think a lot of folks have downsized because it is easier to develop numbers for the limited partners that will keep them investing, e.g. ROI.  I think venture is about creating wealth – cash on cash.  You cannot use ROI to buy a Christmas turkey.  Make no mistake, small funds that have great results are wonderful things.  If you have a big fund, then you are in a different returns regime.

3.  What are Venrock’s top 3 investment areas going forward?

There is a huge trend of outsourcing everything and it is accelerating.  Infrastructure that supports this is a huge trend – clouds, networks, SaaS, etc.  Data control and management.  As the world becomes more and more dependent on data, protecting that data is HUGE.  Third, healthcare information.  You can only manage what you measure.  I think healthcare will see a revolution in measurement and systems associated with that.

4.  In addition to a successful information technology practice, Venrock also has a very successful healthcare and medical investment team.  How does the complete team work together and make investment decisions on things that are seemingly so unrelated?

Every deal is reviewed and approved by all partners.  Technology is only part of the due diligence.  Building a business – recruiting, selling, customers, all pertain to every business regardless of category.  Since we focus on people, the CEO and team are crucial, even if I don’t understand a science or a market demand.

5.  It seems most VCs keep a list of deals they “missed”.  What’s your list?

We don’t keep one.  We all have our story.  Ours was Yahoo.  Because of our early internet investing, we saw it very early when it was still at Stanford.  We chose not to pursue.  Ouch.

On Entrepreneurs and Startups

6.  On the “quantitative” side of things, what are the most important things you want to learn about a company in a first meeting?

P&L and Balance sheet are really important.  We do all sorts of “unit analysis” and compare margins, rev/empl, and things to determine if a plan is reasonable.  One thing not to do, don’t show five year detailed projections unless you know every number.  Someone will ask you about why the marketing budget, for example, change in 2013, and you better have a good answer.

7.  On the “qualitative” side of things, what do you look for in a company and its founder/CEO? And what turns you off as well?

The CEO must be a leader and a good one.  First impressions are crucial as well as impressions after the fourth meeting.  I always ask myself if I would want to work for this kind of person.  They of course must be knowledgable about all aspects of the business.  They should not be flip in their remarks and answers.  If they don’t know something – they should just say it and move on.  The biggest turn off is, when asked a question it should be answered immediately.  Don’t talk for 5 minutes and wander around.  That tells me you don’t know the answer or afraid to state it or whatever.  Answer, then elaborate, not the reverse.

8.  What are the top 3 do’s and don’ts for an entrepreneur presenting at an all Venrock partners meeting.

Do – be mindful of the time and keep the presentation complete
Do – a demo if possible as this conveys best what it is you have
Do – know who are you are talking do.  Do your homework.
Don’t – be too jocular or sarcastic or dismissive
Don’t – assume every one in the room has detailed science background to understand.  If science is important explain it at a level all will get it
Don’t – don’t forget to tell us why we should invest, e.g. returns, outcomes, comps, etc.

9.  What makes for a successful Board of Directors/Investor/Founder/CEO relationship?

Trust and openness.  In meetings, keeping an agenda and sticking to it.  Startups are complex and staying on point is important.  Investor/directors need to be respectful of the preparation for a board meeting and do their homework, e.g. read the materials in advance.
Talk often.  This eliminates things drifting too far before the group resyncs.

Bonus

10.  What are your favorite 3 iPhone apps?
Music 2 by Simplify Media – access my home music server on my iPhone – I don’t have to carry my iTunes library with me.  Shares with 30 people.
TripIt – trip itinerary automation.
AroundMe – access to local business and activities based on location.

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I hope you liked the post and feel free to leave a comment or question and I will relay to Ray.

Lastly, if you like this, please share it with friends using the buttons below. And, if you want an update for the next post, sign up below or follow me on twitter. Thanks.


 

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Startup 129: Term Sheet – Board of Directors

Posted by Joseph Ansanelli on Aug 2, 2009 in Recent, Startups, Term Sheet | 3 comments

This post is a continuation of the series about venture capital term sheets.  If you have not yet read the previous posts on Valuation and Dilution, Liquidation Preferences, Anti-Dilution, and Voting Rights and Protective Provisions, you might want to start with them.  In particular, when thinking about the Board it’s important to understand investors Voting Rights and Protective Provisions, and the requirement of investors’ consent on certain decision.   (The links are at the bottom of the post as well…)

There are lots of things to consider for a startup’s Board of Directors including its role, who should be on it, and how to best work with the board.

You’re Fired! (or Hired)
To start, a Board of Directors has one primary job, which is to hire and fire the CEO. Sounds a little like your worst Donald Trump nightmare, eh?  What this truly means is that the Board is an oversight organization for all the company’s shareholders and an advisory group for the company’s management.

The Board ultimately holds the CEO and the executive team accountable for meeting agreed upon objectives, manages compensation for the top executives, and works with auditors to ensure appropriate accounting and business practices.  This is their “ongoing” job.  Additionally, over the life of the company, the Board will vote on key decisions such as raising more money or selling the company.

Term Sheet
Typically the language in a term sheet is very straightforward and will simply outline the number and names of people on the board.  The Series A will set the basic blueprint including the representation of the common shareholders and founders.  The following example language is from the NVCA’s sample term sheet:

“At the initial Closing, the Board shall consist of [______] members comprised of (i) [Name] as [the representative designated by [____], as the lead Investor, (ii) [Name] as the representative designated by the remaining Investors, (iii) [Name] as the representative designated by the Founders, (iv) the person then serving as the Chief Executive Officer of the Company, and (v) [___] person(s) who are not employed by the Company and who are mutually acceptable [to the Founders and Investors][to the other directors].”

Not only is this common language, but this also happens to be a very ideal structure with two investors, two common shareholders including the CEO and then an outside, non-employee and non-investor board member.  It’s ideal because all shareholders are represented and if needed, the outside board member can serve a tie breaking function.

As you raise additional rounds of funding, almost every investor will want a seat on the board which can get quite unwieldy.  I strongly encourage companies to have a small set of board members (ideally 5 but no more than 7) who appropriately represent the shareholders.  Only if needed, offer to future investors “Board observation rights”.  Observer rights allow an investor to sit in on a board meeting but they are not voting members of the Board.

The Board is Your Team
Choosing your board members is as important, if not even more important than the structure.  Think about each board member as if you were hiring them to work for the company.  Do they have certain technical competencies that make the company better? Ideally each board member brings experience with startup execution or understands the business and market or both.

It is also important that they have the right relational competencies to work well with you, the rest of the board and the entire company.  A board of successful people does not necessarily mean a successful board.  They have to work well together.  (Read It’s the people, stupid part II for more on relational competenticies.)

Making the best of it
Now that you have the board set up, the question is how to best work with your board.  Despite what many fear, the Board is not responsible nor does a good board want to run the day-to-day operations of a company.  Does that mean that the Board will simply let you do what you want?  Probably not but if your board wants to run the company then you have not put together the best Board or, and I hate to be blunt, it could be that you are not doing a good job.

The key to a successful board relationship is leadership.  Being a good leader means you have followers.  And the best way to have the board “follow” you is to set a plan, deliver on the results and keep in regular communications especially sharing bad news early. I have never heard of a successful company having a difficult board dynamic.

For more on this idea, I suggest you check out the posts If you don’t know where you’re going, well, you’re lost, and A few golden rules for a great Board relationship, and Control Freaks Are Us to learn more about how to ensure a successful board relationship.

Anyway, I hope this helps.  Enjoy the other posts and please feel free to share your thoughts or questions. And to get notified about future posts, please to sign up for email updates or follow me on Twitter.  Thanks, feel free to share the post with your friends, and go get started…


 

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Startup 128: An Interview with Bill Gurley of Benchmark

Posted by Joseph Ansanelli on Jun 28, 2009 in Recent, Startups | 5 comments

Startup 128: An Interview with Bill Gurley of Benchmark

Bill Gurley pic

This post is an email interview with Bill Gurley of Benchmark Capital.  I sent Bill 10 questions on what he looks for in his investments, the people he backs, the state of the venture capital business and why Benchmark invested in Twitter.  Enjoy.

On Venture Capital investing today

1.  What are your top investment areas going forward?

We don’t really work that way.  All I could tell you is what are the three most common investment themes looking back.  We simply don’t sit around planning the future.  We try to meet with as many great entrepreneurs as we can and then make a judgment on the quality of their vision versus the state of the market. Recent themes have been cloud computing, open source, user generated content (UGC) Internet plays.

2.  What are the most important things you want to learn about a company in a first meeting?

•    Quality of the idea – this is from both an economic standpoint and a defensibility standpoint.
•    Quality of the founder – smart, motivated, goal oriented.
•    Mode of operation – frugal vs. excessive.

3.  It seems most VCs keep a list of deals they “missed”.  What’s your list?

It’s long and painful.

I met with all of these companies at an early stage before they raised venture capital.
•    Overture – Bill Gross was kind enough to show this to me
•    Akamai – this was Mark Gorenberg’s deal at HummerWinblad, but I should have been supportive, and I missed it
•    Skype
•    Baidu
•    And of course the big one: Google.  I have profound admiration for John Doerr and Mike Moritz for knowing to step up here, especially at a high price.  It was far from obvious.

I probably forgot 1 or 2, and I am confident there will be more.

On Entrepreneurs and Startup CEOs

4.  On the “qualitative” side of things, what do you look for in a entrepreneur or startup CEO? and what turns you off as well?

On:
•    Intellect
•    Salesmanship without being overly promotional
•    Pragmatism
•    Resourcefulness
•    Confidence

Off:
•    Overly promotional
•    Doesn’t listen
•    Unwilling to focus
•    Lack of appreciation for finance/economics.

5. What are the top 3 do’s and don’ts for an entrepreneur presenting at a Benchmark partners meeting.

I would suspect they are mostly the same (as question 4).

Here are a few tactical things for the partner meeting presentation
•    Don’t bring people that don’t have a role in the meeting
•    Always include at least one “financials” slide even if its more about costs than revenues — weird to have to ask, and even weirder to reply “we don’t have one with us”.
•    Don’t use over 20 slides.
•    Control the flow of the meeting.

On the Business of Venture Capital

6. Opentable (Nasdaq: OPEN) is one of the first “silicon valey” initial public offerings (IPO) since the economic downturn.  Why do you think the company was able to get public and was received so well?

I actually believe that the buy-side has ample demand for IPOs.  The key problem is a supply problem – most companies either don’t want to be public or aren’t willing to make the tough choices it takes to get public (healthy margins, sarbox implementation, etc).

Being public isn’t easy, and for the CEO and the CFO it’s downright brutal.  I think that’s why the valley is obsessed with “alternative markets” these days.  They want the benefit of liquidity without the headache of being public.  I think they will be disappointed.

7.  What do you think about the suggestion that today’s venture model of large funds and big investments does not work in a world where companies can get real traction both as a consumer company or a enterprise company by leveraging services such as amazon’s ec2 and all the available open source solutions?

I don’t think the data proves this theory out.  With the exception of Salesforce.com and Siebel, I don’t know of any multi-billion dollar public companies that didn’t have venture capital.  You might be able to build a feature for $1mm, but its much harder to build a company.  All of the $B Internet companies have/had venture backing.

This doesn’t disqualify the accusation that some funds are too large.  They are different issues.

8. Clearly, the startup world is much more “flat” with companies existing across borders and getting started around the world.  What is your long-term view on Silicon Valley as the “epicenter” for venture capital in the next 10-20 years?

We are tremendously excited about the future of Silicon Valley — it is our unquestionable focus as a venture firm.  We want to be the best firm in Silicon Valley.

That’s not a reflection on the opportunities elsewhere.  I happen to be very bullish on China, Russia, and Brazil when it comes to venture opportunities.  I just think those will be best served by local firms on the ground in those regions.

9.    Benchmark has a unique structure in that all partners are equal – equal pay, equal carry, equal votes, etc.  Why has that worked and why haven’t more firms adopted that model?

It works for 3 key reasons.

First, our partner’s don’t need to negotiate compensation every time they raise a new fund, so we are incented to all work together versus proving our worth to one another.  My partners deliver value-add to the companies I work with all the time.

Second, it keeps a high bar on who comes in.  There is no junior team at Benchmark.

Lastly, as an entrepreneur, you are always dealing with a General Partner that has a say in the firm — your deal won’t get trumped by the “Senior partner” back at the shop.

Others don’t adopt it for the same reason other partnerships in legal, investment banking, and real estate haven’t — it’s good to be king (from a financial standpoint).

On Twitter

10.  Benchmark recently invested in Twitter at a pretty lofty valuation.  What drove the investment and how are they going to make money other than the often-rumored acquisition?

See my answer to question #3 above.

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I hope you liked the post and feel free to leave a comment or question and I will relay to Bill.

Lastly, if you like this, please share it with friends using the buttons below. And, if you want an update for the next post, sign up below or follow me on twitter. Thanks.


 

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