July 29, 2005

Board Behavior Tips for VC-backed Firms

Brad Feld points to an article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled "After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies."

"Written in 2003, this is one of the best articles I've ever seen of the issues and dynamics surrounding the board of a venture backed company," Feld says. I agree.

An Extract:
The Board, and the roles and behavior of its members, evolve with the venture in three developmental stages:
• Start-up/Seed: An embryonic Board assembles as soon as capital is invested and VCs join the Board as preferred shareholders. Their first joint task is to recruit talented employees and define their roles. The optimal size of a start-up Board is between three and five people.This breaks down into one management representative and two venture investors, or two management representatives and three venture investors.
• Early Commercialization: A typical commercialization-stage venture Board has three VCs representing the largest investor in each series of preferred stock offerings (the A, B, and C rounds) and two insiders (the CEO and one other member of the management team, possibly the CTO or a co-founder). As a company grows, a successful Board adds new members with management and financial experience. As it enters the early commercialization phase, the company continues to demand active participation from the Board. Often the participation required is of a different and expanded scope than when the company was in pure research and development mode. Committees may form on an as-needed basis, including strategic review, merger and acquisition, and management integration.
• Productivity/Expansion: At this stage, typically three to five years after inception, the company has successfully launched its product and attracted customers. The VC Board Member is now looking ahead to exit options and helping the company become self-sustaining. While the CEO may be occupied with the company’s performance, the VC Board Members are motivated to look for exit options, such as a sale, an IPO, or a merger, and must also be looking for their own replacements on the Board. Independent directors who are likely to remain on the Board after an IPO often become more active at this time. Board Members skilled in structuring exits through mergers and acquisitions also may play an increasingly important role.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 28, 2005

"Bring new investors in, build value with each round"

Fred Wilson has great advice on what entrepreneurs need to do to protect from investor deal fatigue:
Bring new investors into the syndicate every time you raise money. The investors who wrote the checks in the A round might be tired by the E round, but the D round investors will have fresh legs.

Third, start with a low valuation and slowly and carefully build it in each investment. The investors will be less tired if they see the value of their investment increasing in each round. But if you start at too high of a price and then get stuck there or worse, go down, then you are in for trouble. There is nothing worse than a tired investor with a paper loss on his or her hands.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

"Have a downside scenario in your financing strategy"

Fred Wilson has great advice on how start-ups should plan for their next round of financing:

So how do you go about hoping for the best and preparing for the worst?

I think its best to start with the downside scenario. What happens if your company can’t get anyone to step up and do the financing on terms that are acceptable?

Well there are a couple approaches to this. The first is to do the financing when you don’t really need the money. That’s a great strategy. Maybe you’ve got nine months of cash left in the bank. Maybe you go out and talk to three or four potential investors to see if you can get something done with them on terms you’d like. If you can’t, you stop the process, go back to work, and come back to market in another six months.

If you don’t have that luxury, then you need to turn to your existing investors as your downside scenario.

There are a couple of ways to think about this.

The first is to get the existing investors to tell you on what terms they’d be willing to do an insider round. Get that locked down and then go out and see if you can do better. If you can’t, then you come back with your tail between your legs, but comforted in the knowledge that your company isn’t going to hit the wall.

The second way to deal with this is to put a bridge in place. Get the existing investors to loan the company enough cash to fund the company for say six months and agree to convert the bridge into the next round.

You can even marry these two approaches by getting the investors to bridge a portion of a potential insider round while you go out and try to find a new investor to provide the balance of the round and set the terms.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 02, 2005

Tips for Recruiting

Adam Shah has some good tips for recruiting - especially on interviewing and checking references:
# recruiting. [Apr'04] Recruiting is the single biggest determinant for success, with the people you hire literally being the DNA of the company. The challenge of recruiting is often under-appreciated by people who've never been responsible for it. First, you need to "sell" people on joining your venture, which isn't easy. Remember the old adage "good help is hard to fine"-- that's because smart, reliable, hard-working, no-nonsense people are never without work, so you have to lure them away. Here's some basic tips: (1) strategize: list reasons why people would join your venture instead of others, including reasons they wouldn't. Then, use this to source candidates. For example, when talking with recruiters, let them know these things. When considering how to source candidates, emphasize channels that tend to fit your criteria. (2) treat hiring like a project, including realistic schedules, budgets, risk analysis, contingency plans, etc. This avoids a lot of heartache when candidates ask for a lot more money, can't join when you need them, etc. (3) use pipeline management-- an ordered set of steps, with tracking of how candidates are getting through the process. You can optimize the pipeline by front-loading the steps that are most likely to filter-out candidates, and which are the least time-consuming. A proper pipeline also lets you optimize each step separately. For example, my first contact with a candidate is designed to be cheap-- usually an email with some basic information. I call candidates who express interest-- sadly, I haven't found a way to avoid these bazillion calls, since I don't like to pre-screen too much. (4) respect legal and ethical guidelines. Long before lawsuits or violence, hurt feelings are common in hiring. Since life is long, you may run into candidates in the future, where they remember your rejection. The world is a small place, so be careful of your reputation in the hiring process. Ditto this advice in day-to-day management after hiring. If you're recruiting for someone else, remember that you've built a relationship with the candidate, and should be available if problems arise. I like to check in from time to time. (5) tips for checking references. Of course, you check references, right? good. And you don't hand this to HR, right? good. They ask dumb questions like "how long did you work with X? what are X's strengths and weaknesses?" These questions have obvious "correct" answers, which neither avoids fraudelent references, nor elicits the issues that would lead to not hiring the person, much less provide information on how best to manage the person after they're on board-- which is the real value of reference checking IMHO. And HR won't impress the reference-giver, who will often talk with the candidate afterwards about their experience. Instead, you can chat up the reference-giver and impress them that (a) you know the candidate and can articulate why you're excited about working with the person, (b) your company and department are a great place to work and that (c) you'd be an awesome boss. Oh, and this is also an opportunity to source candidates for other positions. Some good reference checking questions:
- what project(s) did you and X work on? This detects fraudulent references, and also tells you how sharp the reference giver is, which IMHO is a good gauge of whether you should trust this reference-giver. Make sure the reference describes project(s) in enough detail.
- what was X's most shining moment? This helps gather stories, which you can then use to butter-up your management if you need to ask for deal-terms (e.g. money) that are outside your parameters. This question also butters-up the reference-giver for more difficult questions, such as...
- can you describe a situation in which X failed to deliver on his/her goals? Then followup with "how long did it take X to realize s/he wouldn't succeed?" and "how did X communicate this?" and "how did management react?" This detects "kicked-dog" syndrome, and lets you know what sorts of sensitivities the candidate might have, and how they might react in a politically-charged situation.
- can you describe an corporate culture or environment that X would NOT be successful in? You may have to push a little and pidgeonhole the reference who's intent on blowing sunshine. It helps to ask this before you describe your company, of course.

(6) interview tips. Obviously, respect is the key here. Don't show up late, take a phonecall or eat a burger during an interview. And treat every minute as precious and not recount stories from childhood. Don'y ask stupid HR questions like "describe your strengths and weaknesses"? when you could instead ask "what do you like about this position and why do you want it?". Don't ask a easy or trivial technical questions when you can instead ask deep, hard technical questions that detect junior vs. senior talent and detect incompetence. This is best phrased without acronyms or jargon. For example, my favorite question at Addamark for engineers was "managing big data-- say several terabytes-- is a big pain in the neck. Can you describe some of the challenges?" Junior people will talk about technical details, senior people will talk about fundamentals. Incompetent people will get those details wrong. There are a slew of miscellaneous tips I've found-- YMMV. (1) I try to schedule interviews for after lunch, say 2pm. This avoids wasting all day in a first interview, avoids taking candidates out to lunch, which empirically seems to hurt the hit rate (sorry, I have no explanation), and also uses the staff when they're least productive and most reasonable, i.e. while digesting burritos. (2) ask a person the range of cash compensation they want in the first phonecall, apologize for the awkwardness, and do it before saying anything about you want to offer. This avoids interviewing people you can't afford. Also, some people will name low-ball numbers which could either be a good or bad sign. If the number is in range, I tell the candidate up front, which puts people at ease and lets them focus on the job itself, rather than compensation. (3) stock compensation is messy because candidates either under-value or over-value the stuff, which creates deal-closing and post-deal management problems. (4) In an hour-long interview, I look for the candidate to tell me something (relevant to the job) that I didn't already know.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Is your idea a project, product, or a company?

Adam Shah has some good advice:

Before getting too excited about your latest idea, ask yourself if it's a project, a product or a company.
A project is some useful and innovative tool or service, but unlike a product, it's unclear if anybody will enough pay for it to justify its manufacture (and delivery, i.e. through channels) -- much less whether this is still true in the presence of substitutes and knockoffs. Products are projects that are sellable-- they have financing, designs that incorporate feedback from prospects or customers ("people who can pay enough"), reasonable quality controls and processes, legal representation, etc.
A company is a product with headroom: infrastructure to grow, a fleshed-out management team, the ability to create multiple products, etc. Since companies can be tiny and have one product, the real distinction between "product" and "company" is whether the financial returns of the product justifies the corporate structure necessary to make it successful. A classic problem is starting a company that doesn't attract enough capital or talent to give it life beyond the founder's personal investments in time and money, thus starving the company of longevity, the ability to weather storms, the plethora of different skills to execute on the vision, etc.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Reading List for High Tech Startup Entrepeneurs

Adam Shah has a good "must read" list, including:

# High Tech Startup . Some financial and legal subtleties of the game. It is worth noting that the normal rules of business simply don't apply, and you need startup specialists to help you in HR, accounting, legal, office management-- and of course, financing. Nesheim's book explains many of the important details.

# Crossing the Chasm . How to get a general-purpose, new technology to be embraced by a mainstream audience. This is the startup playbook, read by virtually everyone in silicon valley.

# Selling the Wheel . A light-hearted, fictional account of how the wheel was brought to market. A great complement to the Moore books above -- but an easier, faster read.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.