- [Voiceover] So welcome,
great to see you all here. This class what we're
going to do is two parts, the first part is Michael is going to give a lecture that he has prepared which I am actually looking forward to, I've actually gotten some preview of it and I actually brought my cards to take notes because
I'm also going to have the privilege of leading the questions. We have selected questions from the things that you guys have submitted already and I have those on index cards in addition to my own
and I'll interweave them, I've actually sent them all to Michael in the just in time basis
about 45 minutes ago, so he's now computing like, oh, those are the questions that'll come after the lecture. And so as a quick introduction to Michael, Michael teaches at the D school, he actually teaches entrepreneurship he runs a very successful early stage venture capital practice
called Harrison Metal. The way that Michael and I met is I tried two or three
times to recruit him to LinkedIn to which he
told me no each time, we'll get to that maybe more in the Q & A but he is an excellent investor, an excellent product guy and an excellent scale executive so we asked him to come and share some of his wisdom with us. That's it. - Thank you for the invitation. (laughs) This is gonna
be a little strange, but I'm gonna ask you to come with me back in time. And I want to talk to you about a hero of capitalism who's long dead, that's the footnote from Beyond the Grave. Poor John Lilly is
stuck flipping my slides - [Reid] We're fixing
that for the next class. (John laughs) - Awesome. Okay so let's dive into
heroes of capitalism. The first thing that I want
to give you context for, and believe me this all
does tie right back to startups and entrepreneurship I promise. The first thing I want to give you is a thousand years of context. I want to give you a thousand years of reasons why what we're talking about in this room matters. If you can see this and read the title, just digest it for a second and then maybe somebody give us a guided tour of this slide, this exhibit. What is this? - [Student] Exponential growth. - Of? (unclear response) GDP per capita, right? So it's the economic output of every person on
earth from the year 1000 to the year 2000. I wish I had the brain
power to come up with this dataset but I don't. But I did steal it from a person named J. Bradford DeLong who
teaches economics at Berkeley. And Professor DeLong did his study, his paper was actually
estimating world GDP one million BC to the present. I cut the million part off, the million to one thousand part because the answer is it's really low. (laughter) And this tells the story
well enough for me. So therefore it works for you too. So real GDP per capita constant dollars, over time, over a thousand year span on a semi-log scale. So what we're able to do here is to see an incredible change in the circumstances of being human on earth. Give me your thoughts about this curve. When you look at it what are some of the features that jump out at you, some of the landmarks that
really stand out to you. (indistinct response) Yeah. Roundabout the 13th century, any guesses what that is? - [Students] The plague. - The plague. Yeah, yeah. In case you ever do build a time machine please do not put the settings to that because you'll have a one in three chance of not coming home. The population drop was precipitous, particularly in Europe. And so the productivity, is really what GDP per capita is is productivity collapsed. Now if we go forward in time, what else do you notice about this curve? - [Student] Industrial revolution? - Industrial revolution
and where do you see that beginning? (indistinct response) Yeah. This inflection point,
kind of hard to miss right? It's the most obvious
feature of this chart, with the exception of
the incredible amount of flatness over the preceding 700 years. So the flatness with the extra painful dip really bad. Have you ever lived through
a low-growth situation? Now try doing that for 30 generations. That would suck. This inflection point
industrial revolution, anybody remember from maybe other history courses you've taken or just your own readings, what were some of the
big things that happened to make that inflection point possible? - [Student] I heard that
it's correlated nicely with the construction of coffee shops. - Really. (laughter) - [Student] (indistinct) ... and you can correlate this graph with the rise of coffee shops, not Starbucks. (laughter) (indistinct speaking) - That's fascinating but I buy it. The exchange of ideas-- certainly something changed here with respect to think about the density of population in some of the cities, the mobility of people to be able to spend time with one another. Mostly because they weren't in the fields trying to come up with their next meal, right, they had some more free
time to exchange ideas. Yeah what else do you think happened here? - [Student] So like coffee
shops like Lloyd's of London, the first insurance company was founded in a coffee shop by a guy named Lloyd in London near the docks. - Okay. - [Student] So once
people were able to have insurance for business
ventures they could go in and take more risks. And therefore-- it's riskful work so you could have a much greater potential income if you do take risks... (indistinct) - Okay so in that sense you might actually go back to Adam Smith and say the division of labor there started to get more granular. There were specialists in provision of coffee, the provision of insurance there might have been specialists in the invention of new technologies. I want to read to you-- - [Student] Where? America. (laughter) So that falls into the bucket of like, heavily loaded one line
class participation. (laughter) So give me the highlights of what you mean by America. - [Student] 1776 America was founded. - Yeah. (laughter) This is the spirit that
made America great, is the willingness in your first year of undergraduate. Right, you're a freshman. (laughter and applause) No I'm dead serious, this is the courage that we depend on to fuel that curve. I want to read to you a paragraph, we'll come back to this I promise, I'm not blowing you off but I need to think a little bit about how to respond to you so I'm gonna stall
by reading Schumpeter. Joseph Schumpeter wrote this book, Capitalism, Socialism and Democracy and he wrote it in the late 1930s, early 1940s. And the paragraph I want to read to you I think is really special. You'll probably recognize
some of these terms when we get to them. This is Schumpeter
writing about capitalism. Writing about this. The opening up of new markets, foreign or domestic and the organizational development from the craft shop and factory to such concerns as U.S. steel illustrate the same process
of industrial mutation, if I may use a biological term, that incessantly
revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction, capital C, capital D, is the essential fact of capitalism. Schumpeter believed this was due to entrepreneurship. It was due to people you never heard of starting businesses you couldn't quite believe were real, completely unsettling the economic output model for the economy. A couple other things
happened at this time too. One was plentiful sources of cheap energy became available in the form of coal, steam, eventually
oil in the early part of the 20th century so that the scale of the inventions, the inventions that these entrepreneurs came up with, the scale could be many, many times greater than anything
that had been seen before. Humans didn't suddenly become a creative species in the late 1700s. They just started to get bigger levers and gears to turn the
machines they built with. So power was a huge part of this. The revolution in technical innovation, in transportation like the railroads, in mechanization like spinning cotton, all of those things played a huge role in that inflection point. The other person-- John if you could flip ahead, thank you. The other person that's really important to know about is this person, Al Chandler. Al Chandler founded the Discipline of Business History at the
Harvard Business School. Before he retired and sadly passed away, I had a chance to spend
a lot of time with him and his colleagues at Harvard. Chandler's view was Schumpeter's right. Entrepreneurs play an
incredibly central role in the process of industrial capitalism, in the growth of output, in the wealth of humanity. But managers play an
equally important role in amplifying the genius
of those creative founders. Chandler's whole view was that the managerial revolution, which scaled with these companies. Remember the entrepreneurs came up with the technology, the company scaled
because of energy sources, they had to be managed at a scale that was unlike anything ever
seen before in history. And so Chandler says that this invention of managerial capitalism
was a fundamentally new invention that came
with industrialization. So what do we have? We have this painfully flat period of about 700 or 800 years, we have this rapid change in direction of output per person on the planet Earth, by the way totally unequally shared, correlates beautifully
with population growth, collapse in infant mortality, the widespread availability of education, medicine, et cetera. The increase in the dirtiness of our air, some would argue the
temperature of the planet, this is a mix of things here happening. But all of the terrible
things that came before it, now we finally have an engine that can pay the bill to fix those things that are horrifying about life on Earth. Slavery, war for food, all of these things were commonplace in this period. They were invented long before capitalism. Capitalism finally gave us an engine to pay the bill to get
rid of these things. This is the context, the thousand year context that I want to have in our mind when we
talk about entrepreneurship. Yeah? - [Student] (unclear question) - Well if I understand
the point correctly, yes the ability of the colonial powers to distribute technology, ways of work, legal structures, not by choice but by force was a huge driver of economic growth in this period. But what's interesting
about industrialization in each of the countries
where it happened, first in Britain then in the United States and now in places like China and India in the last half-century, it always comes with an
expansion of political freedom. It always comes with an expansion of personal freedom, it always comes with
the writing of terrible hundred year, many
centuries old injustices. And we're gonna come back to that topic in a second. Go ahead. The other thing to note that connects you and what you're talking about in this room to the really important
stuff in human history, the money that comes to Silicon Valley to fund these startups, to fund entrepreneurship, to fund the creative destruction of today. It doesn't come from the wealthy fat cats, some of it does, but a lot of it, most of it comes from
research institutions, universities, museums,
foundations, hospitals, the guardians of civilization. So this cycle of Creative Destruction that drives economic productivity that spins off wealth that comes back and fuels institutions, that is something to
be very, very aware of. The cycle is all linked. No pressure, but it's your
turn to drive this train. We've got to understand
the Schumpeterian view of entrepreneurs as the engine
of Creative Destruction. We've got to embrace
the role of managerial capitalism to scale and amplify the genius of those founders. We've got to use to proceeds of whatever we create to make that situation-- make our situation better to eliminate those
things that are terrible about being on earth that have been around for a long time. Poverty, injustice, ignorance,
sickness, et cetera. No pressure but
civilization depends on you. There are three really fascinating parts of this curve. I've zoomed in here just to reorient. Same curve zoomed in on period 1800 to 2000. And there's three separate
periods in that window that are really interesting. The first is the mechanization of manufactured cotton. The second is the
transportation revolution, characterized mainly by the railroads, the railroads of Western Europe and the United States and third the technology revolution of Silicon Valley and the modern age that we know so well. We're going to zoom in
kind of right about here. Early on-- No we're not gonna do Slater's Mill today, although we could. We're gonna do railroads. Sorry I left a Slater's
Mill slide in there. The thing to know about railroads is that they were startups once. They were startups once. This is a locomotive that was manufactured in 1830 in the UK. And at one time this was a startup very much like the startups that you know and love of today in Silicon Valley. And the startups were run by people like this. This is Daniel McCallum and he's the hero of capitalism who's going to speak to us from Beyond the Grave today. This is him in later life obviously, but when he started out he came to America in 1822, he was born in Scotland, his family moved to Upstate New York when he was just seven years old. He came to Upstate New York from Scotland, he looked at what his
father did for a living, his dad was a tailor, and he decided the tailoring thing is not so much for me. So he started to think about what else he could do. Very young boy 12, 13 years old began to work with wood. He taught himself how to build practically anything with wood. He ended up creating something called The McCallum Arched Truss Bridge which got him a patent. He became something of a magician with wood-working and with bridge-making. So self taught woodworker became self taught architect
became patented architect was hired by the New
York and Eerie Railroad to be the bridge apprentice
in Upstate New York. He was then promoted-- this was all the span of a couple years in between each of these milestones-- he was then promoted to head of bridges, to superintendent of bridges pardon me, for the entire line, then was given a general manager promotion to the head of the Susquehanna branch of the railroad and then finally become the CEO of the entire railroad when he was about 43 years old. So this was somebody, if you just looked at
his career you would say this is about as
entrepreneurial as it gets. Son of immigrants decided he had no future prospects in
the tailoring business, decided to go into something he loved working with wood, continued to get promoted and create a career for himself out of thin air. Found himself inside a company that had once been a startup that he knew well and loved as a local member of the team in Upstate New York, but then got promoted to be the head of the whole thing. And let me give you a sense of the scope of the whole thing. This is his bridge by the way. The nice thing about this bridge is it lasted a lot longer than typical bridge designs and it
required substantially less maintenance. And so you can imagine why in the capital constrained
early days of railroads that would be a really good thing for the railroads to have. So this was his claim to fame, he built many of these bridges throughout the Northeast. This is the scope of his operation. He started out as a maybe third or fourth rung employee in Upstate New York on one of those tiny red lines and he ended up running this whole thing. So why does this matter I thought we were talking about startups, not big huge enterprises? It matters because McCallum in 1855 wrote a beautiful letter to his boss. And the letter he wrote to his boss, you can have it it's online. It's one of the earliest
writings that survived anybody saying here's what I think about general management, here's why it matters what we do as general managers. And in this document he writes about the incredible-- the relative ease and fun and joy he got working on a small railroad of 50 miles long in Upstate New York, and compared it to the toil and suffering and awfulness of trying to run a road ten times or 100 times longer. And so McCallum wrote this letter to his boss just to say we gotta rethink how we do this because we've lost, essentially, he says it in a more 19th century hard to understand way, but he says we've lost what made it easy and fun running a small company because now we're trying to run this big behemoth. Does that make sense? And this goes very far West, I mean this is all the way into Kansas territory 1850s so you get the idea. I will save you-- you should go read this letter, but I will save you all
of the pain and suffering of reading it if you don't want to and tell you what he says. He says the joy of
running that 50 mile road was because I could see
people with my own eyes, I could talk to them with my own voice, I could get the group of people to work on the right
stuff at the right time. I could give those people responsibility because I knew who they were. I had a personal connection to them. I was also able to make
sure the job was getting done day in day out because I was putting my own eyes on the problem. And in that 50 mile road
in the startup railroad, I knew how things were going because I could see the trains moving or not, I could see the freight
coming and going or not. It was always very visible to me. And also in the 50 mile road we had a relationship with each other we had respect for each other and we talked to each
other like human beings. In the 500 mile road
or the 5,000 mile road all of this went away. And so McCallum was struggling to say how do I bring back what I loved about the small road to the big road. And these are the five questions that he asked his boss. He of course had an answer
for each one of these, for example how do you make
sure the job gets done? His answer was you get
on the freakin' telegraph and every hour you tell me how it's going in Nebraska. And you tell me in this format so my clerk can write it on the board and I can stand in New York City and I can see how it's going out in the Hinterlands. And every hour on the hour you send this formatted update back and forth using telegraph and that's how I replicate
the visibility I had at the small company level to the big company level. Does this make sense? Any observations about this list, anything surprise you
about McCallum's list of key questions for managers? Or about history in general? Yeah. - [Student] It's very applicable to today. - Isn't it crazy? The first time I read this which was about 25 years
ago in grad school, I really thought this is
odd that somebody who, remember apprenticed as a woodworker, no formal training, didn't educationally
go beyond grade school. There's no such thing as business school there's no role models he had no apprenticeship he was promoted every 24ish months into higher and higher levels of responsibility with no
clue what he was doing. He basically admits as
much in this letter. These questions are really useful today. - [Student] There are no financial constraints or goals in there. - Yeah. It does kind of take for granted the financial viability of the business which by the way was not a good thing to take for granted because about two or three years after he wrote this letter, the railroad failed. (laughter) But you know, we honor that (laughs) I should say more importantly than all that stuff you saw-- can you flip it back to the picture of him? You see what uniform he's wearing. He became the master of railroads for the Union Army, thank God. Right 'cause if he'd
been in the Confederates we wouldn't be talking
about Daniel McCallum. He was on the Union's side, he played a huge important role in commandeering the supplies to feed General Sherman's
attack on Atlanta. Hero of the Civil War as well as hero of capitalism. Yeah these five questions. No financial milestones or a preoccupation with finances, still pretty relevant today. Anything else jump out at you? Yeah? - [Student] He appears pretty enlightened for I guess working with
quadrennial workers. - Yeah. - [Student] He's concerned
with his providence... - The fact that this is on the list, now the way he says it is something to the effect of execute all of the above so as not to create embarrassment for the management, the managers. That idea of respect was
really totally surprising and very unique I think for the times. Yeah? - [Student] Not only
how applicable they are but how unsolved they still are and he wrote this 170 years ago. - I find it a great relief that I'm not the only one who doesn't know how to do any of these things, or who tries to figure out ways to do it. This has been going on a long time, this has happened before, still unresolved. Was there somebody had
a hand over here, no? Anything else before we keep going on? Okay. Just to put this in context, what was McCallum doing? He was participating in his own small way right about here where the shape of this curve was by no means a foregone conclusion, in fact they didn't even know that it was going this way. They sort of felt like
something was different but they didn't know
it was going this way. They certainly didn't know the amount of wealth that they were part of creating. And they certainly didn't know that what McCallum was doing in a weird way, was directly tied to that injustice stuff that I talked to you about before. This is a book called Things as they are in America. A British guy named William Chambers came to America in the late 1840s, early 1850s and he wrote a diary of what he observed in the then very young country pre-Civil War. So one of the stops he made was to see the slave auctions in Virginia. And I'm gonna read to you-- this was happening a few hundred miles to the South of where McCallum was struggling with these lofty ideas of, geez, how do we get
people to work together and how do we make sure that the work gets done and how do we make sure that the right amount of responsibility is conferred on people? All those general management challenges that he laid out in his letter about the railroad, a couple hundred miles to the South. This is Chambers writing about his visit to Richmond. Here according to the announcement on the paper stuck to the flag, there were to be sold a woman and three children. A young woman, three men, a middle-aged woman and a little boy. Already a crowd had met, composed I should think of persons mostly from the cotton
plantations of the South. He goes on to describe the situations, the situation in the room where the auction was being held. And he writes, while intending purchases were proceeding with personal examinations of the several lots, what he means by that is that the people who came to buy the other human beings was poking and prodding them and
looking in their mouth and checking their hands to understand how much they should pay for those people. I took the liberty of
putting a few questions to the mother of the children. The following was our conversation. Are you married, woman? Yes sir. How many children have you had? Seven. Where is your husband? In Madison County. When did you part from him? On Wednesday two days ago. Were you sorry to part from him? Yes sir, she replied with a deep sigh. My heart almost abroke. Why is your master selling you? I don't know. He wants money to buy some land. I suppose he sells me for that. This cures that. That's why what you're doing matters. This would never have happened without people like McCallum and the wealth that was created from that industrial revolution paid for the destruction of this disgusting industry. So that's why it matters. Oh that's it. So no pressure, but civilization depends on you. And now I'd be happy to have a chat. - [Voiceover] So in reading McCallum's letter did you get a sense that he was a micromanager? - [Michael] Oh terrible. - Yeah.
- Terrible, he had practices not only for those telegraph rules that I mentioned before, excruciating detail
about how the telegrams were to be addressed, the time table on which they were supposed to happen, how you would decide to break a tie between two trains on the same track, it was an excruciatingly
detailed operating manual. - So it might be somewhat
given the education level, but he was like send me
a telegram every hour, I can imagine a startup
in Silicon Valley saying report your status every
hour (laughs) right? It wouldn't be a great
talent retention strategy. - No he was flailing around for any tool he could get his hands on to try to recreate the intimacy of managing a small business on a large one and of course he failed completely. - Well and the financial one was a very good question. It was kind of a question of well there's other things that go into doing this although, before the lecture I
didn't know about McCallum and he actually may be the very first example of a systematic attack on the scale up problem. So in the book we're working on, we're going to read the letter and we're going to see if
we're going to include it so it's awesome. So when you look at the curve, one part of that curve is obviously capitalism. - Yes. - But another part of it's also invention of technology. And those two are actually in fact obviously somewhat correlated although how deeply is
a little bit unclear. When you think about this exponential growth and value how much do you attribute to the incentive system that essentially capitalism does to create a decentralized system of incentives, and how much technology invention and how do you look at that curve? Or that cycle? - I think of them as mutually reinforcing and if you took one away
the other would collapse. And we know that because we accidentally ran an experiment for
800 years as a planet where we had lots of smart
people running around inventing new ways to do things, you could look at banking in Florence or printing in England, but these became very small enterprises. They sort of topped out at like the 20-30 people range and of course the capital that accumulated around
those businesses was tiny. What really unleashed it in my view was the disconnection of the good ideas from the money from the management. So when you had to have one person who happened to have money, happened to have great ideas and happened to have managerial ambitions, that's a small set of people. When you suddenly say ah, the money people can be different than the inventor and the inventor can yet be different
than the general manager, that allows a multitude of connections that wouldn't have happened otherwise. - And when you did this kind of learning, did you also include kind of the weird paradox of venture capital that was essentially invented post World War II? So it's actually very late in that curve. - It is very late in that curve and I think what you have to look at is the substitutes for venture capital were essentially rich families, and rich institutions and you can go back to Slater's Mill, the people who put the capital for Slater's Mill. Oh that's why I had that
damn slide in there. The people who put up the
capital for Slater's Mill were the Brown family of Providence, the people after whom
Brown University was named. This was a family that made their fortune in the slave trade and
then the textile business. And then had no clue how to mechanize their spinning operations. Slater was the embodiment of somebody who had the technical
skill and inventiveness ideas mostly which he stole from the UK and they were able to
pair together in a way that wouldn't have been
possible previously. In prior generations the Brown family would have had to have the incredible good fortune of
understanding the technology and having the money. Now all they had to do was be rich and they were good at that. - And also by the way the history of venture capital actually it's all moved in many of the elite funds to the institutions you're mentioning. But actually the starting
of them was actually also wealthy families.
- Yes. - By the way it was a
similar kind of thing that was kind of an interesting - Absolutely. - recapitulation of history. - Yep. - Alright now shifting somewhat, we're getting to hone into some of the scale of stuff but at the very broad. So it's kind of a call
to arms for capitalism. It's a call to arms for entrepreneurship it's a call to arms for
creative construction. When should someone, we have a bunch of students here, when should they consider doing a startup and when should they not consider doing a startup and how is some of the way to think about that? - Well one of the things I've noticed over the last about eight years I've been exclusively focused on
early-stage ventures is that they kind of
can't keep it inside them. It kind of bursts out whether it's a good idea or a bad idea. The founder has this explosion that they can't keep inside anymore and they irrationally allocate time and resources to this idea because they can't stop thinking about it. I think that's a prerequisite
if you're gonna-- so if you smell that about yourself, if you feel like you can't stop thinking or working on an idea, if you find that you're working on an idea and the hands of the clock move and you never even noticed that the sun went down and
you missed two meals, that's a really good sign
that you have an idea you have to get out of your system. The other characteristics I think of the folks when they know they're ready is that they are accidentally, not even trying to recruit other people, but accidentally getting their friends fired up too. And so the friends come
and start saying like, hey remember that thing you
told me about last week, I was thinking about it a little bit more. I'm not like a mystical person, but I kind of think the
market talks to you, that's the market talking to you, that's the market saying tell me more, I'm pulling on you for more insight. If you have those circumstances going on those are good indicators it's time to do something about it. - And what are the
indicators you would use for checking the idea. Because obviously you could have those indicators you could be crazy about them. - Yes. - You could be jumping off a cliff with no ability to assemble an airplane on the way down. - Right. - What are the crosschecks you think people should do? - One really good one is to give a chunk of time in the schedule to devil's advocacy. And this was a tactic that I learned from Michael Eisner at Disney. I didn't work for him but I worked for somebody who worked for him and the whole idea there was every big good idea is going to be subjected to a devil's advocate case. And somebody probably the smartest person he could find is going to be in charge of trying to destroy your idea. And he or she isn't
gonna be held as like-- they're not going to be considered to be out of bounds for trying
to destroy your idea it was their job to try
to destroy your idea. And that technique of saying okay you please spend the next two days finding everything wrong with this, and then you have full permission to be the biggest asshole you ever met, trying to torpedo this idea. If you can find some people in your life who can play that role, that's a huge positive as a founder. I think the other technique that I like to do with founders is let's do a pre-mortem. Let's admit now that we failed. And let's forecast what it is that would have gone wrong to cause our death. And if we can do that openly and honestly and make a list of what
those deadly risks are facing us in our venture, we may decide to bail we may decide to keep going, but we can't keep going without building shock absorbers for those risks. - Love the two ideas, the version of the first one is when you talk to every
smart person you know and you should specifically ask them what's wrong on the idea. Because the problem when
you're talking to them I go to my friend Michael and say what do you think of my idea? They'll be like oh he wants reassurance, so oh it's great. - Yeah. - You should do that. That's terrible that should be negative value not positive. But what's broken? I think I already called
John out on telling me that LinkedIn was a totally bad idea. (indistinct speaking from audience member) - Yes that's true that's
a very good point. - People need that by the way, people need that permission from you as a founder. For you to give them permission to say I want you to be negative now I don't even care if you believe it but give me your best shot. That social permission, especially in an area that's so happy smiles and rainbows as I was gonna say Silicon Valley but Stanford's that way too, in a good way. Let's have a little bit of shock absorber against the rainbows. - And actually specifically part of the thing that John's feedback was very good on is that you can't build to enough critical mass and so that helped confirm the strategic thing was
the very first thing at LinkedIn was to
build the critical mass. Because when you get to good feedback, it doesn't necessarily die, but they say ooh this is the mine. Make it past this mine because smart people going this is the mine you're like pay attention to that. Make sure you understand that and that became the very top list thing that Allen and I and a
bunch of other people were working on on a daily basis. Last thing in terms of founding a startup or at least this part of it, what role do you think
considering competition should be on whether or not you have a good idea or not? - A lot of times the founders who pause on the issue of competition, they pause for the wrong reasons and they say things like, well isn't big company
XYZ going to do something just like this? That's totally irrelevant. That's totally irrelevant. The perfectly competitive product that promises what your product promises is almost never the actual competition. The competition is almost always the substitute for buying your thing is doing nothing where hacking their solution in their daily life, the user I'm talking about and so I think if you're
a friend of a founder or a founder yourself, steer the conversation more like wait a minute I should not worry about big companies because they're slow and usually bad but I
should be worried about what's occupying my
target user's attention today because that's really what I'm competing against. If you can answer that question, that's a lot more valuable
than a competitive matrix that like a
consulting firm would do. - Actually frequently that one I'd say to scout the large company as competition unless like you're doing a search. - (laughs) - Or unless you're doing marketplace for you is good. And it's eBay. 'Cause then you gotta understand, but discount otherwise. Do think about other startups, right because sometimes like a startup man should have a better approach on the market than you and then that actually
is a relevant variable. It's not to say you should pattern your strategy on them,
- Yeah. - But you should be on
the consideration side. So actually given that one
of the more funny things, given your presentation
what would be your advice for eBay now that you're years past, how would you reinvent? - Well you've got to keep
in mind I've been gone longer than I was ever there. So I've been gone for almost 10 years, but I do of course watch it. My advice is do more of
what they've been doing, which is this unbundling of PayPal was I think the right thing. I think it was the right
thing for shareholders, it was the right thing for employees and the users to create
more of a competitive market for the ideas. One of the nice things
about the combination of lots of complementary assets is you can do command and control economy inside, you can allocate capital
by the decision of the CEO. And what happens over time is his or her judgement is fallible and the market is actually a much better
allocator of capital than one CEO or one investment committee inside a large company. I like the unbundling, I would encourage them to think about doing more of it. I certainly would also think about the amount of people that work there. It sure feels like a lot. And I'm not advocating for layouts, although I guess maybe I just did. (laughter) - You're advocating for
asking the questions. - Yes. - Funny, I actually don't
know your view on this. Some of the leading edge
Silicon Valley people think that you should organize internal companies based on markets versus command and control. Do you have that point of view, if so why if not why not? - I do particularly
with respect to product development resources and I tried a handful of times where I've actually had management responsibility for a product process allocating software and hardware development time, which is the scarcest, much more scarce than capital. Two particular projects tried to create a competitive market internal to the firms so that there was vigorous and in some cases maybe even negative productivity but the competition for resources was very intense. And the internal mechanisms for drawing the line were driven by the economic value of the idea rather than the whim of a particular senior executive. - [Reid] But how did
you make the decisioning happening because the decisioning, is it voting what was
the proxy for the market? - Net present value, we would do--
- But that's models, right? - It is so you have to have faith that people are not padding the models you have to have devil's advocates tear apart the models, it becomes quite a bit of overhead, but if people are held accountable to economic evaluation of their ideas, over time you can start to get a pattern, you can recognize a pattern whether people are good
predictors of their own economic value of their ideas and then allocate the resources on the basis of the highest
NPV projects on the list. The downside to this is of course that you feed the beast, the mothership business because the NPV the Net Present Value of assigning more resources to the highly profitable
already huge businesses is unbeatable really in an internal market and that's why these big companies end up being slaves to their core business and they can't beat you, they can't beat you on
innovation or speed. - And would you recommend that a startup implement the marketplace mechanism in the beginning, yes or no? - Yes but with a different pricing model. I don't think startups
should have to go through the rigorous pricing
and valuation analysis that a large company should. I think that ultimately the founder has to be the guardian and the editor-in-chief of that product roadmap and she or he has to say here's where we're drawing the line and here's why. Everybody can submit an idea, everybody can make their case and I'm gonna listen to everything but it's a benevolent dictatorship on the product side. - Interestingly I think I
disagree with you there. I actually think the frequent thing that characterizes the startup phase is we are all casting our
lot in this one direction. Actually in fact having somebody who is an autocrat or a small
number of people who are autocrats in doing it. For the efficiency of focus on doing that is actually in fact a
key part of the success but I do think it's
interesting that as you get to the higher levels in
order of a magnitude scale, there's a fork in the road that happens there that's actually super interesting, who do you think is the most successful company that implements a marketplace internal mechanism for this? - Hmm. I've been very impressed with how Airbnb allocates resources for
product development. And I say that because I think their-- I think, and this is an
outsider's point of view I don't have any special
insight knowledge, but the people I know who work there often talk about like the things they need to invest in today for how the user experience needs to be 9, 12, 24 months from now. And so I think they have a perspective on managing the portfolio of investments it's pretty evolved and very effective it seems. I also think that they're very economically driven I think they do the math on these
investments that they make. Now Airbnb is not what you might call a startup anymore, but it is an early stage company in the spectrum of companies
that decades long that are big companies
that are decades old. I think smaller companies, there's a company that
I work with right now called Signal Sciences which is 10 people in the app security market and Signal Sciences has product about as wide open a
funnel as you can imagine on the front end of the process and the founders do sit
at the center of that and they listen into every idea no matter how far off, wacky, in line with the strategy and then they cull it and then they have an honest conversation about why we're building
what we're building. So it's kind of a hybrid of like wide open chaotic market on the front end but benevolent dictatorship when it comes to writing stuff on the roadmap. - In that case probably benevolent sometimes benevolent sometimes not it all depends. (laughing) So shifting. There's kind of a mainstream view now that contrarian is being important. So it's a very common or a consensus view that contrarian isn't important. Do you think contrarianism is important in a startup idea, if so how and if not kinda why not? Is it critical to be contrarian? - I don't think it's imperative, I do think it's a nice
feature of a startup. I think it's certainly the place where you find value as an investor because of course it's the wild enthusiasm of conventional wisdom that chases prices higher in those investment rounds. I appreciate contrarian thinking in a founder from that perspective. I more enjoy the contrarian point of view because it helps me understand how the founder's brain works and his or her road map
from technical insight to the product idea that they have. If it's totally surprising, there's a lot of interesting stuff happening in there. I like it more from what it tells me about the founder's thinking process. - I actually think that to get a massive discontinuous result in something, that usually has to be contrarian at least at the time
of founding and going. Because otherwise we have a lot of different entrepreneurs, a lot of different efforts, the actual limiter factors, a lot of people competing for the same capital talent, market space, customers, et cetera. On the other hand I actually think part of where the whole contrarian theory goes too far is actually in fact you can have something that is maybe specifically contrarian
like take work day. Which said okay, people didn't believe that going to the cloud was important so it made that key contrarian decision, but actually that next generation of high quality HR software said well this is much easier to use much better it has the benefit of like it made one key contrarian decision but everything else was
just very good execution. Because it's not contrarian to say I have a much better UI. Or it's not contrarian, you know like those kinds of things. And so it's a new onset that
I think is actually important. Okay shifting to some of the kind of more what you think of is kind of how we do startups questions. How do you think people should think about evaluating themselves as founders? Like when they think, am I a good founder or not, should I do this or not? Part of it is having the passion that you mentioned before. But part of it is also other attributes. What are the things that you think people should consider
in their self evaluation? - I think there's two
separate answers to that. Let me do one which is really simple, and one's a lot more complicated. The simple one is that the stages of life you'll go through as a founder. First you have to have an insight, a technical insight. Second you have to turn that insight into a product, and third you have to hopefully, God willing turn that
product into a business. Those are about as different sets of pursuits with very little
in common with each other. And so if you are energized by the idea of coming up with a technical insight and then moving to productization and then moving to the
business building phase, that journey will be satisfying and exciting to you. If you find yourself totally in love with the technical insight
manufacturing process, that is a real problem. And then you end up
having science projects, not companies. If you find yourself endlessly prototyping and tinkering with the product without regard to the business economics, then that's a warning flag as well. I think you have to be energized, in today's market where the expectation is that if you're onto something, you're not just moving from these stages, you are screaming across those stages. You have to be willing
in the earliest days to see yourself as okay we're in technical insight mode, in a month we're gonna be productizing, we're gonna be worried about business economics shortly thereafter. - [Reid] And after we get
to the other nuances of this I'll actually add a few things but how do you find co-founders, how should you select co-founders? - The advice I normally give people is take inventory of your own brain. There's a video on my website on Harrisonmetal.com called the Cognitive Distortions of Founders. And this is an inventory of the five most common wacky ways of seeing the world that I've
observed across thousands of founders that I've talked to over the last decade. The founders if they have an idea, let's say I'll pick on one which is a black and white thinker. Somebody who's very judgmental about people and products, they form very quick opinions and they are very strongly held. The black or white thinker often times needs to be paired or shock absorbed by somebody who can point to the gray or the nuance or say I like this thread of it but what about this idea over here so that the other people in the team don't get shut down by the visionary black and white thinker. So I think of it like pairing your deadly risk with
great shock absorbers. And just acknowledging that you've got deadly risks that are the flip side of your great strengths is a huge step in the right direction and that pairing the co-founders is probably the most powerful way to shock absorb. And ideally you're even
shock absorbing each other. - And actually since you mentioned that one of our students'
questions and apologies if I get the name
exactly right or wrong on the pronunciation Nihit Desai asked as an investor what kinds
of cognitive resources do any of you look for
in founders and how? - Well the ones that I really zoom in on is first a sense of
personal exceptionalism a sense about themselves that, you know some countries
have this about themselves, this is a sense that you're not destined for an average outcome in life, that you're somehow operating outside the boundaries normal for your peer group. That sense of personal exceptionalism comes in very handy when you're founding a company. The black and white thinking one is a real example, I think that's an important skill. For me it proxies for the
speed of decision making, I don't actually like
black and white thinking because the error rate can be high, but I do like the speed part of it, and speed is almost all
you have in those days. Another one is very related
to Joseph Schumpeter who we talked about earlier, a Schumpetering mindset which is no matter the pain the creative part of Creative Destruction is what gets me up in the morning so I am so excited about building the new thing that I will put myself and others through the torture of the destruction. There are a couple others in that list. Let's see... - [Reid] Go to the website. - Okay yeah go to the website. - And we'll post it.
- Okay. - So one of the things I
would add to what you said is you've got to think about in addition to the whole passion product kind of company as and are. You have to think a little bit about, do we have the key foundational skill sets that can actually tackle this market? It's anything from can
we build the product to can we go to market, and how do we acquire those? The ones that are in the founding team have to be without this we shouldn't even try this product. Obviously there will be a lot of skills that you acquire through hiring and we'll get to that in a second. So you have to think about that as I think as kind of a cross check. And then I actually think that part of what you have to think about is part of the role of
founders different from people you're hiring is being generalists. Tackling any problem
that kind of comes along and that flexibility because there's just a laundry list of unexpected pivots, you know and challenges that you're not anticipating that one or more of the initial team is gonna have to go jump on so one of the things that we think starts very heavily in
this phase is generalist. And you get to more hiring a specialist as your scale. Those are the kind of things to think about adding to this. - [Student] Actually
Michael was saying earlier about you go from technology or product to modernization you
really love technology, too bad you can't do it. It's one of the things about good patterns is you're drawn to follow
everybody else on your team. You have to look unique because nobody else will do that. - Exactly. So let's talk also about
the first few hires. Like how do you hire well, you've got ideally ideal teams of two or three sometimes it's solo sometimes it's five, two or three is usually
the ideal founding team. Now you make your first three hires your first five hires. How do you advise the very startups you work with what kind of hiring process to run what to do what not to do? - Well I get very worried when I see people come with a shopping list. And they're saying okay, I need 32 ounces of front end developer, and I need a pound of IOS backend. It just doesn't work that way and I think the early
stage should be about surrounding yourself with people who share your passion but who also will pick up and do anything. And of course there's
a checklist of things they have to be able to do, but I think of it like I look back at the successful early hiring experiences versus the unsuccessful ones, the shopping listers almost always a red flag on there's
something gonna be wrong here. And the most successful hires I think in the early days come from your network or one degree separated from your network. And that's because the passion has been transmitted in an organic way, not through a recruiter or a third party or an ad. I think that has its place, but it's much later in the cycle. Those first few I think you probably already know them. - [Reid] Yeah and I
actually agree with that. Not just because the signal, but also because of a bunch of other characteristics like are they gonna go through the valley of shadows with you cause you're almost always there. Are they actually in fact committed to we're gonna get this ship to port? Are they for example things that are very difficult to measure, even in reference checking which is obviously critically important. I always prefer reference checking to interviewing if I had to pick one. But questions like for example, how much in general learners are there, how much generalists are there, how much can they pick up something new that you don't expect? You get all that much
more through your network. - I also think that these conversations have to be focused on tell me about a time when you fill in the blank. Tell me about a time when you faced like a horrible disappointment, tell me about a time you consider your greatest victory. Tell me about a time when you realized you were different. You know go back and talk to people about their lives. People repeat the same strengths and weaknesses over and over again and all you have to do
is ask for a few stories and you'll get a very good view into who they actually are. - Like solving key problems. - Solving key problem, what did you decide to
do with your free time, when you had your summers to yourself or when you had an open space in your course calendar, or you had three months to go do whatever you wanted between gigs, what did you do when
you had perfect freedom? - The students are probably having a little bit of deja vu, some questions like this were on our application process. - Oh is that right good, good, good. - And there's a reason for that, by the way which you were revealing. So now you've got your founders together, you may have hired a
few people you're going. What are the first
things that you focus on? - Well it goes back to that McCallum list, I mean that is, I walk around with that thing. It comes up every single day for me with founders as you know, who's working on what, is that the most important stuff? Do they have the authority
to keep moving ahead or are they blocked by something? How do we know how it's
going along the way? You'd be amazed how many ten person companies get surprised
at the end of a release or a roll out or a month, they'll be like oh well that didn't work. Well how can that be, we're sitting right here
how can we you know. So those McCallum questions
that he was really trying to say, look running the 50 mile road is a joy and easy compared to this
nightmare that I'm in. Here's the things that I
know are the fundamental duties of the leader. And that's I think just as true today in startups as it was for McCallum. - [Reid] Is there a question you would add to McCallum's list if you were to have a seventh? - For early stage
ventures I probably would go back to the question
about financial viability. Are we sure that we're
building a business? And unfortunately in the
current funding environment, many things are being
backed with venture capital that are not in fact
going to be businesses. They're either public goods, science projects or hobbies. But they're not businesses and so I think that's a discipline that I would add to the McCallum list. - [Reid] Hobbies is a very gentle word. What is the importance and when of having a go to market and distribution strategy? - I think that you have to
have a hypothesis of it. And I know that it's very
unfashionable to have the idea of a full detailed
plan on founding day is not what's going to happen. But I do like to know how the founders think about that because it helps me understand how their brain works. So I think of it like
an opinionated person who has the guts to found a company ought to have some hypothesis about how it might go to market. - [Reid] Would your decision to invest ever gate on that? - Yes because if it doesn't exist, it's a laziness of mind and a red flag. Now I think you have to distinguish is there a prototype
answer to that question versus how close to awesome is that prototype answer? It doesn't need to be awesome because we're gonna have many, many cycles to figure that out. But there has to be a prototype. You can't convince a
stranger to give you money. You shouldn't be able
to convince a stranger to give you money if you haven't said, and here by the way is
how we will go to market. You could be completely wrong but you can't withhold
that view into your brain. It's like saying I don't
have a prototype yet of the actual software, you'd never say that. - So I'm going to give you a brief list of things that are my suggestions but you can mod them and comment. I want you to actually specifically comment on them. What are the things you can ignore? What are the things you
go at the early stage don't pay any attention to this, or do minimally or do intensively? A board of directors, hiring executives, knowledge about advertising campaigns, planning your brand, applying for scale in customer service,
detailed analytic dashboards. - These are all on the list of things you can safely ignore. - [Reid] Mostly. Not always there's always specifics. - I would say every founder should have his or her own list of
things they plan to ignore. And they should also
know that if I'm going to ignore board of directors, I need to have a governance approach, I need to make sure that somebody is looking at this who isn't just me. Who can critique the strategy it might be an advisor it might be a trusted colleague it
might be a cofounder who has the-- - [Reid] We're only
talking about 5-15 people kind of in the company this is this phase. - Well and the reason
I'm zooming in on board is because most of the companies I fund are that size and I always put a board on and I'm always on it. So I think they serve a really good and valuable function
and if you're gonna do without one of these
things you should just have a hypothesis or a shock absorber in its place to do that function. One of the things I wish was on your list, and maybe it is further
down is freakin' PR. And the idea that founders are brands and that companies need
to have high profile and be written about by whomever is a lie. It's a complete and total lie. And it's manufactured by the people who sell ads for page views to convince you that you need to talk to them. And it's a complete and total lie. You may decide for your own reasons to go do PR for your company, but it doesn't actually
change the outcome. In fact many times it can actually tip the outcome in the wrong direction, and recruiting is a
perfect example of this. If you are deciding to do
PR because of recruiting, the people you'll attract
are the wrong people. Because most of your life as a company will be spent not being written about in a flattering way. And so if that's what
they need to be motivated, then they're going to
be very disappointed. - By the way as a pointer here, in the first class we
mentioned that one of the things you'll see
is we go through each of these stages between these very smart people doing this. If some things will be
reiterated they're kind of surprising and those are the things to actually pay attention to, and some things we'll obviously disagree and that's fine. This was one of the points
that Sam was making, Sam Altman was making
them in the last class. That actually in fact
is a reiteration point. And that was part of
the reason that I'd kind of point out what the
patterns of surprising similarity would be. On the board of directors, what I more mean is actually in fact if you find a financial partner, co-investor you should
actually get someone who is maximally adding value. The normal position is for them to partner with you by board of directors so I actually agree with
you just to be clear there. However sometimes I see a founders way, okay how do I build out my board? Like how do I have
independence now et cetera. At the 5-15 people...
- No. - [Student] If it wasn't
the other way around why do you need a board of 5-15 just build products... maybe you could talk a little bit more about what you mean (indistinct) - I think it's the healthy accountability to the market. Which you have to remember, if you've got no customers and you've got no product, but you've got a pile of money provided by those awesome institutions it's a citizenship duty
to actually sit down and say here's where we're gonna spend it, here's how long it's gonna last us. Is there anything we should be doing differently in your opinion? You can get that a lot of ways, I like it with a board just because I think it gives people in the seed stage it gives them a dress
rehearsal of what it's gonna be like when they are dealing with Sand Hill Road people. - I don't really like to be identified as a Sand Hill road
person but that's okay. - You know what I mean, you know what I mean. (laughter) - [Student] Reid's a
loser nobody's denying it. - Yes.
- It's fine. - I live in denial. - You get to name yourself Reid. - I try. (laughter) - Yeah so I think of it
like a dress rehearsal for varsity level company management. - [Reid] Well since we're
on this part of financing, what recommendation do you give just founding teams, the founders, the first couple people in terms of how to think about financing? What are the key dos and don'ts? And obviously the backdrop is everyone's reflex is simply go for the highest valuation and the highest amount of money because it looks like a scorecard. - Well it's even worse that that because the conventionalism today says punt totally on valuation. And use convertible debt, or even worse something called a simple agreement for future equity which God knows what that is. (laughter) You know I think-- - [Reid] Schumpeter
probably wouldn't have-- - No listen nobody came to this country because they wanted to have great convertible debt terms. People thrive in this environment because they want ownership, they want to add value to their ownership and then they want to sell their ownership later for more. And along the way they're gonna create hopefully a fortune that will do good things for the world. We kind of can't help ourselves when we make a fortune. As a species we do good
things with the money. Even the worst people you can imagine, when they drop dead that money is going to go to really good use. I think this is an ownership economy, and I'd like to be part
of an ownership economy. I encourage founders, treat yourself to real shareholders. Real shareholders. People who rise and sink with you. People who do not have a particularly special downside protection. People who do not have a lender's claim on your assets. This is all nonsense created by the legal profession and some I don't even
know what to call them, hucksters who want to explode the size of the venture capital business. - [Reid] Corporate capital from your earlier description. - Something. It's a terrible disservice
to teach founders that they don't deserve shareholders who rise and fall with them, who don't sink and swim with them. Who aren't tied to the mast with them. And that unfortunately is, you do not get that when you sell convertible debt or when you have highly distributed financings from people who for you it's like a generous tip that they gave you, it's not even really skin in the game. So treat yourself to shareholders have the hard conversation
about valuation. It's perfectly okay to
disagree with somebody about the valuation of your company. By the way the math to do evaluation on an early stage
company is really simple. How big a check do you want to write, divided by what ownership percentage do you want to have. If you can do that, and I know you all can because I could do it in fifth grade, you can value a company. That's all it is. So ignore the advice you're getting from lawyers or whomever to do convertible debt with no valuation. It's a terrible poison in
our industry right now. - [Student] Do you think
the same thing about convertible notes with caps? - Yes even worse. They're disguised as... Lipstick on a pig is that the right thing? - [Reid] That is an idiom. It's still not ownership, and by the way that cap is never the today value of the company so what you're asking the investor to do, and you would never do this because you're smart, you're in the front row of this class. (laughter) You would never take the deal where I said okay I'm gonna ask you to help me on a bunch of stuff and then I'm going to give you shares valued at the price after you're done helping me. That's a terrible deal. Why should you pay for value
that you helped create? Why should you not benefit from the upside that you get from taking that venture risk at the beginning of the venture? You should get a price that reflects the value today, not the hypothetical value 12 months down the road. Does that make sense?
No? - And actually I will take these questions in a second because this
is an important issue, the key way to look at this is if you are actually
selecting a good partner in building this business, you want someone who is motivated by trying to magnify the value of your business as much as possible. You want to give them actually a stake at where your valuation is and then you come to an agreement that actually is a good process it's one of the few
things in entrepreneurship with zero sum it's what percentage. Because it's a zero sum negotiation. But the way you navigate that zero sum conversation is actually
in fact very helpful for understanding how good partners you're gonna be in the future. It's a good test on both sides, because it's a difficult
thing to navigate. But once you navigate that, you've solved that problem and then you've given your partner an incentive. The how do you grow the business as much as possible. And so that's reason why uncapped convertible debts are a terrible idea. Right like just horrible. And almost never do them, personally other than like minimum checks that say sure fine, it doesn't really mean anything. But I almost never do them. Cap is still a problem because you should do exactly what Michael is talking about. Sometimes cap is a hack that you know, that is more acceptable for that reason. Now we have two questions. One was here. - [Student] So as a founder if you're trying to raise money and you have options to take money from like in the form of a convertible note with
a cap or without a cap, I think part of my understanding of your criticism is
it seems like an unfair deal on the financier's side. Because you're helping grow valuation of a company without
getting a piece of that. But as a founder if you're raising in competitive fundraising like right now where it's much easier to
raise money than historically, if you still think that
you're gonna be getting like the valuable
benefits of a partnership and because of the competitive nature of the seed right now, some are willing to give you like a capped convertible note that inflates your valuation. How much of that is important versus working with a partner who will provide like this beyond. And obviously from your perspective as people who are providing. - We're teachers in this context, not venture capitalists. - Well and the other thing we are is we vote with our dollars right? And so if an investor
is willing to do that deal that you said, a capped convertible note and she or he is saying I will help you just the same as I would with straight up equity. You have to just ask
yourself if you believe it. I'd say about 60% of the meetings I have on a weekly basis with founders are people I don't even have a business relationship with, they're just people who say like, hey can we talk because I need help? The number of those founders who are showing me polluted cap tables with useless investors who do nothing, who promise the world who said my rolodex is your rolodex, if you're in trouble call me. The phone's ringing, shit's hitting the fan
nobody's picking up. That doesn't happen. That just doesn't happen when somebody is going to lose a lot of money and a lot of ownership in the business. It just doesn't. I think that you have to ask yourself if the idea of equity was invented after thousands of years of people trading with each other and learning how the human
operating system works. And there's a reason why some people like to be owners. It's so they can help and they can make it worth more money, not because they're altruistic, but because they're highly motivated to put points on the board financially. And so to ask that, to believe that the human operating system isn't what we for thousands of years it seems like it is, is really a stretch. And I'm seeing lots of
founders who are just, they're looking at their list of 30-40 investors each of whom have put $25,000 or $50,000 or $100,000 in and they just can't get any help because it was a lie from the beginning. - Two amplifications I would do is one is at every single financing we did in LinkedIn we did not actually take the maximum value. We actually in fact made choices based on who we were partnering with in terms of the offer. Because it was very much on partner. And then the second thing is, I personally and a bunch of investors have passed on deals because the cap table is too screwed up. Because that means it's likely to screw up the company on the road because we're investing at a five to ten year horizon, so we're looking at patterns
that actually in fact will trip you up and
that's actually in fact a serious problem. So on this topic, there was another question back here? - [Student] So there's some lawyers that are clear value.
- Yes. - [Student] And you've
learned any capital. So you should reference this for sure. - [Student] (unclear speaking) I guess the idea of the
safe sheet has really started to bring these issues up again. Other sheet that people didn't use are the Fenwick Series C Docs. It's more of the middle load. Would you advocate for that? - That's exclusively what
I use in my business. Exclusively. - Just in case it didn't
get on the microphone it's the Fenwick Series - Yeah seriesc.com is
a set of open source, it's also on GitHub. Series of open source equity financing documents created by Ted Wang at Fenwick and West. And it's the only template I use. - [Student] Jason Bateman
put that on GitHub. Who's the partner when you guys were starting out, who's the firm that picked up the phone the most? - Good question. - What do you mean by that? - [Student] I'm not sure
shit ever hit the fan, but when it did who picked up your phone? - So I did my series A with Mark Kvamme who was then at Sequoia and series B with David Zee who's at Graylock. And I put a number of angels into the series A as well because part of the thing was a network distribution and basically nobody got
into that round at all unless they were actually in fact active. Either one. And all of the top tier funds, all of them have an active
participation model. There isn't a top tier fund that doesn't have an active participation model because that's the thing that actually helps build truly great companies. For example one of our mutual friends is a guy named Josh Kopelman at First Round Capital, he was an angel investor at LinkedIn and he helped. But that was before
actually I think he had done First Round Capital. And those are the kind of things. But that's actually when you're actually asking for like you should reference check as John says but when you're actually asking people to participate, you should have explicit conversation about what this alliance looks like. Like what is the thing
that we are doing together and what should I expect
and how should it be. And the person should be straight up and you should call them if they're not holding to what they agreed to. Is there another question back here? - [Student] Yeah I wanna understand better why you like safe documents compared to the C documents they get rid of the convertible that
which I think is great to get rid of that. - So more elaboration on
what the safe documents are. - Well I'm deeply suspicious of anything that's acronym is designed
to make you trust it. (laughter) The Patriot Act comes to my mind. I also don't know what
problem it's solving. I'm watching a very well-developed advanced system in capitalism where I give you money in exchange for a small piece of
ownership in your company. It's not a complicated idea, the math behind it is totally simple. - [Student] Safe works the same way, I'm talking about a cap save of course. - But I'm not a shareholder. - [Student] (unclear response) - Heck yeah I have those freakin' certificates framed behind my desk. The ownership point, look at the difference
between renters and owners and how they treat their homes. Look at the difference
between rent controlled situations and ownership societies. Ownership mechanisms ensure the best long term custodianship of those assets. And we may not like some of the complexity that goes with that like the difficult conversation around well how much are you worth today? (student speaking in background) Oh I'm not yelling at you. Yeah yeah yeah yeah. But you know what I'm saying is it's just a choice. - [Student] But also the safes don't fix the price safes work
just like (inaudible) - Yeah well I don't know, what is that then? - [Reid] Very last
question for the session. - [Student] So you mentioned that it's not in an customer's best interest to do a highly distributed deal and also that you want to have ownership, a stake that gives you ownership. From the investor's standpoint what is the ideal situation (unclear). - Well I was gonna say
that's a Reid question. - So I think your ideal circumstance is you'll actually end up
with two components. One component is a lead investor who is literally getting into the foxhole with you who is gonna be with you through, cause you're gonna have difficult times, especially from this you know, essentially the family's side startup. You'll have multiple times looking forward in the future where you're like why did we ever think
this was a good idea, why did we ever think this was gonna succeed? You want someone who's gonna work through those problems with you. And your lead is really important. The lead is also important as having a good partnership with you, being able to help you navigate some of the challenges, being able to help you do your next round of financing because that's usually the key is the lead is the person who's gonna help do that. And you have to think
about not just the upside circumstances but the down circumstances. You have to think I might be hitting it out of the park, I might be doing okay and I might be in trouble and I want a good partner in all of these circumstances. They might be particularly good at one of them but they'll be good at all of them. Then the question is what's the percentage that motivates them? Most funds that's 20-30% there are circumstances
where they can trade below that but those circumstances usually are like I'd come and my product's already launched I've
got massive traction, okay I can be motivated a lower percentage because I know I'm already
at a higher risk thing. I've got an idea, it's the back of a napkin it's like look if I'm gonna put the
work into this with you and I'm gonna allocate the time and try to make it happen, what's the appropriate percentage? And usually a way of looking at that is kind of it's like a financial cofounder to your percentage. It's like I'm partnering
with you doing this. But then you also want to get some people in the network in terms of who are key other like angel investors, key people who can help
with this business, bring customers, bring talent, bring advice, solve key problems. It's a data business, do you have a great data person who might be an angel investor who could help with that. And it's specific to the business. And your ideal configuration is that lead plus a select few of highly valuable people that you can essentially partner with and that's
your ideal circumstance. So there were a set of very good questions in the LinkedIn group, we will give some props to you, we actually noticed them I actually have them all printed up here. And so thank you for them. But I actually thought the financing thing is so critical during the family one that I actually in fact
it was worth actually going in depth on that and that's part of the
reason I diverted that. - And if it's helpful I'm happy to maybe write up some of the answers to the other questions. - Yeah I'll send them to you. - And so with this, thank Michael for joining us. (applause) - Thank you. Thank you very much. Thank you so much.
