I want to start with a
question for, for Mark and Ron which is by far the
number 1 question What made you guys decide to invest in
a founder or a company. Either of you. >> Start.
>> No, no, no, no. >> You first. >> Well we have a slide on
that. We have, we have an app for
that. >> Mark can start while we
try to get your slide up. >> Okay. >> We're running out of AV
guys, so. >> So say the question
again. >> What makes you decide to
invest in a founder or a company? >> So what makes us invest
in a company is based on a whole bunch of
characteristics. I've been doing this since
1994, right before Mark got out of
the University of Illinois. So, SV Angel and it's entities have invested
in over 700 companies. So, to invest in 700
companies that means we've physically talked to
thousands of entrepreneurs. And there's a whole bunch of
things that just go through my head when
I meet an entrepreneur. And I'm just going to talk
about what some of those are. And literally while you're
talking to me in the first minute I'm saying,
is this person a leader? You know, is this person
rifled, focused and obsessed by the product. I'm hoping cuz usually the
first question I ask is what inspired you to invent this
product. I'm hoping that it's based
on a personal problem that, that founder had and this product is the solution
to that personal problem. Then I'm looking for
communication skills. Because if you're gonna be a
leader and hire a team,. Assuming your product is
successful you've gotta be a really good communicator
and you, you have to be a born
leader. Now some of that you might
have to learn those traits of leadership but you
better take charge and be able to be a leader. I'll switch back to slide
but let's let Mark. >> Yeah, I, I agree with all
that, I guess, and there's a lot
of detail to this question that we could
talk about. And we maybe even a little
bit different than Ron, and, well we are different
than Ron, that we actually invested
across stages. So we invested the seed
stage, the interest stage, the growth stage. And then we invest in a
variety of different business models,
consumer enterprise, and a bunch of variations. So, there are kind of fine
grained answers, you know, that we could get into, if there are specific
questions. Two general concepts that I
would share. So one is the venture
capital business is a 100% a game of outliers. It's extreme exceptions. Right?
So the conventional statistics are, you know, on the order,of
4,000 venture fundable. Companies a year that wanna
raise venture capital about, you know, about 200 of those
will get funded by what's considered a top tier
VC. About 15 of those will
someday get to $100 million in revenue and those 15 from
that year will generate something on the order of
97% of all the returns. For the entire category of venture capital in that
year. And so venture capital is
such an extreme feat for family business. You're either in one of the
fifteen or your not. Or you're in one of the two
hundred or your not. And so the big thing that
your looking for no matter you know which
sort of particular kind of criteria
we talk about. They all have the
characteristic of you're looking for the
extreme outlier. The other thing I'd
highlight that we think about a lot internally
is we have this concept invest in strength
versus lack of weakness. And at first that sounds
obvious but it's actually fairly subtle
which is sort of the default way to do venture capital is
to kinda check boxes, right? So you know, really good
founder, really good idea, you know really good, you
know, products, really good initial customers, check
check check check. Okay, if this is reasonable,
I'll put money in it. What you find with those,
those sorta checkbox deals. So they get, they get done
all the time. What you find is they don't
have something that really makes them really
remarkable and special. Right?
They don't have an extreme strength that
makes them an outlier. On the other side of that
the companies that have the really extreme strengths
often have serious flaws. And so one of the cautionary
lessons of venture capital is, if you don't invest on
the basis of serious flaws. You don't invest in most of
the big winners, and we can go through example
after example after example of
that. But that would have ruled
out almost all the big winners over time. And so, at least what we
aspire to do is to invest in the one, the startups that
have a really, really extreme strength, along an
important dimension. And they'd be willing to tolerate some other,you
know, set of weaknesses. >> Ron, we got your slide
up. >> Okay, I don't want to
over dwell on the slide. But when you first meet an
investor, you've got to be able to say
in one compelling sentence that you
should practice like crazy. What your product does, so that the investor that
your talking to, immediately can picture the
product in their own mind. Probably 25% of the
entrepreneurs I talk to today still after
the first sentence, I don't know what they do. And as I get older and less
patient, I say. Back up, I don't even know
what you do yet. But, so try and get that
perfect. And then I wanna skip to the
second column. You have to be decisive. The only way to make
progress is make decisions. Procrastination is the devil
in startups. So no matter what you do, you gotta keep that ship
moving. If it's decisions to hire,
decisions to fire. You've gotta make those
quickly. All about building a great
team. Once you have a great
product, then it's all about execution and building a
great team. >> Parker, could you talk
about your seed ground and how that went, and what you wish you had done
differently as a foundry, raising money? >> Sure, so actually I think that my seed ground most of
the stuff with my current company felt like, from a
fundraising perspective felt like it came together
relatively quickly. But actually one of the
experiences I had, I started a company before
this, that I was at for about six years and my
cofounder and I pitched almost every VC
firm in Silicon Valley, we literally went to like 60
different firms and they all told us no. And we were constantly
trying to figure out. You know, how do we, how
should we adjust our pitch? And how should we do our
slides differently. And how do we Tweet the
story, and that sort of thing. And at one point there was
this sort of key insight that someone
gave me when I was pitching. Actually someone at Coastal
Ventures. And this VC said guys. You know, he was looking for some very particular kind of
analysis that we didn't have on hand. And he was like, guys, you
don't get it. He was like, you know, if you guys were the Twitter
guys, you guys could come in and
you could just be, like, and, like, put
whatever up here. And, like, we would invest
in you. But, like you guys aren't
the Twitter guys so you need to make this really
easy and have like all this stuff
ready for us and all this kind of stuff. And I took like the exactly
opposite lesson of what, he, I think, wanted me to
take away from that, with. Which was like, jeez, like I
should really just figure out a way to be the
Twitter guys. >> I'm, like, that's, that's
the way to do this. And so, actually like one of the reasons I started my
current company. Or one of the things I found
very attractive about Zenefits, is as I was
thinking about it. It seemed like a business. I was so frustrated from
this experience of having tried, you know, for like two years to raise
money from VC's. And then sort of decided
like to hell with it. You can't count on there
being capital available to you. And so this, the business that I started
seemed like one that like, like actually just maybe I
could do it without raising money at all. Like there might be a path
to kind of, you know, there was enough cash flow, it seemed compelling enough
that I could like, do that. And it turns out that those
are exactly the kinds of businesses that investors
love to invest in. And it made it incredibly
easy. So I actually think like, I
mean, Sam's very kind and said I was an expert
fundraiser. The reality is I don't
actually even think I'm very good at fundraising. It's probably something, I'm
like less good at then, you know, sort of other
parts of my jobs. But I think if you can build
a business that's, you know, where everything's like
moving in the right direction. If you can be like the
Twitter guys, like nothing else matters
and if you can't like, you know, be the Twitter
guys it's very hard for anything else to make a
difference. For things to kind of come
together for you. >> Why did that VC say be
like the Twitter guys when the fail wail dominated the
site for two years. >> Cause it worked. >> Yeah.
>> The other point I want to make is, bootstrap as long
as you possibly can. I met with one of the best
founders in tech. Who's starting a new company
and I said to her when when are
you going to raise money? I might not. And I go that is awesome. You know never forget the
bootstrap. >> So I was actually going
to close on this but i'm just going to accelerate
it cause Parker I think just gave you the most important
thing you'll ever hear. Which is also what I was
going to say. Which is, so, the number one
piece of advice that I've ever read and that I tell people on these
kinds of topics is always. It's from the comedian Steve
Martin, who I think is an absolute genius, wrote a
great book on his startup career which obviously was
very successful. The book is called, Born
Standing Up, and he, literally, it's a short
little book and it describes how he became
Steve Martin. And the part of the book is,
he says, you know, what is the key to success, he says the key to success
is be so good they can't ignore you. Right, and so in a sense,
like all this, we're gonna have this entire
conversation though, which I'm sure we'll keep having
about how to raise money, but in a sense it's all kind
of beside the point. Because if you do what
Parker's done and you build a business that is
going to be a gigantic success then investors are
throwing money at you. And if you come in, you
know, with a theory and a plan and no data and
you're just one of, you know, the next thousand. It's gonna be far, far
harder to raise money. The other, so that's the
positive way to put it, is kind of be so good they
can't ignore you. In other words, you're
almost always better off making your business better
than you are making your pitch
better. The other thing, that's the positive way of
looking at it. The negative way of looking
at it, or the cautionary lesson, is
that this gets me in trouble every single time I
say it but I'm on a ton of flu
medications so I'm going to go ahead,. And just let it rip. Raising venture capital is the easiest thing a startup
founder is ever going to do. As compared to recruiting,
right? As compared to recruiting
engineers. In particular as compared to recruiting engineer number
20. It's far harder than raising
venture capital. Selling to enterprise
customers is harder. Getting viral growth going
on a consumer business is harder, getting advertising
revenue is harder, almost everything you'll
ever do is harder than raising venture
capital. And so, I think Parker is
exactly right. If you get in a situation in
which raising the money is hard, it's probably not hard
compared to all the other stuff that's
about to follow. And it's very important to
bear that in mind. You know, it's often said
that raising money is not actually a success, it's not
actually a milestone. For a company and I think
that's true and I think that's the
underlying reason. It just, it puts you in a
position to be able to do all the other, harder
things. >> Related to that, what do
you guys wish foundry's did differently, when raising
the money and. You know, you mentioned this
relationship between money and and how that applies
here so maybe we could start with
that. >> Yeah, so the single
biggest thing that people are just missingand I think
it's all of our faults. We're all not talking about
it enough but I think the single biggest thing
entrepreneurs are missing both on fundraising and how
they run their companies is the relationship between
risk and cash. So the relationship between
risk and raising cash and then the relationship with
risk and spending cash. So I've always been a fan of
something that Andy Radcliffe taught me years
ago which he called the, it's called the Onion Theory
of Risk which basically is you can think about a
startup like on day one as having every conceivable
kind of risk right? And you can basically just
make a list of the risks. So you've got, you know, founding team risk, you
know, do the founders, are the founders gonna be
able to work together? Do you have the right
founders? You're gonna have product
risk, you know, can you build a product? You'll have technical risk,
right? Which is maybe you need a
machine learning breakthrough or
something to make it work. How are you going to be able
to do that? You'll have you know, launch
risk. Will the launch go well? You'll have, you know,
market acceptance risk. You'll have revenue risk. A big risk you get into in a
lot of businesses that have a sales force is can you
actually sell the product for enough money to actually
pay for the cost of sale. So you have cost of sale
risk. If your consumer product
you'll have viral growth risk. Well you get the thinner
viral growth. And so, I'll start up at the
very beginning. Is basically just this long,
this long list of risks. Right, and then, the way I
always think about running a start up is also the way I
think about raising money, which is a process of peeling away layers of risk
as you go, right. And so you raise seed money, in order to peel away the
first two or three risks, right. The founding team risk, the
product risk. Maybe the initial watch
risk. You raise the a round to
peel away the next level of product risk. Maybe you appeal away some
recruiting risk, 'cuz you get your full
engineering team built. And maybe you peel away some
customer risk, cuz you get your first phi
beta customers, right? And so, basically, the way
to think about it, is, you're peeling away
risk, as you go. You're peeling away risk by
achieving milestones. And then, as you achieve
milestones, you're both making progress
in your business. And you're justifying
raising more capital, right? And so you come in and you
pitch somebody like us. And you say you're raising
your B round. You know, the best way to do
that with us is you say okay, I raised the seed
round. I achieved these milestones,
I eliminated these risks. I raised the A round, I achieved these milestones,
I eliminated these risks. Now I'm gonna raise a B
round. Here are milestones. Here are my risks. And then by the time a go to
raise the seed round, here's the, here's the state
that I'll be in. And then you calibrate the
amount of money that you've raised to
spend to the risks that you're
pulling out of the business. And I go through all this, in a sense this sounds kind
of obvious, but I go through all this cuz
it's a systematic way to think about how the money
gets raised and deployed. As compared to so much of what's happening
especially these days. Which is just oh my god let
me go raise as much money as I can, let me
go build the fancy offices, let me go hire as many
people as I can and just kind of hope for the
best. >> I'm gonna be tactical. For sure don't ask people to
sign an NDA. We rarely get asked anymore
because most founders have figured out. That if you ask somebody for an NDA at the front end of
the relationship, your basically saying, I
don't trust you. So the relationship between
investors and founders involves lots of
trust. The biggest mistake that I
see by far. Is not getting things in
writing. You know the, my advice on
the fund raising process is do it as quickly and as efficiently as you
possibly can, don't obsess over it. For some reason, founders
get their ego involved in fundraising, where it's a
personal victory. It is the tiniest step on
the way, as Mark said. And it's, it's the most
fundamental. Hurry up and get it over
with. But in the process when somebody makes a commitment
to you. You get in your car and you
type an email to them that confirms what they
just said to you. Because investors have, a
lot of investors have very short memories and they
forget that they committed to you that they were going
to finance. Or they forget what the
valuation was, or that they were going to find
a co-investor. You can get rid of all that
controversy just by putting it in writing, and when they
try and get out of it you just
resend the email and say, excuse me and hopefully they've replied to
that email anyway. So get it in writing. In meetings take notes and,
and follow up on what's
important. >> I want to talk a little
bit more about tactics here. Just how does the process
go? Can people email you guys
directly? Do they need to get an
introduction? How many meetings does it
take for you to make a decision? How do you figure out what
the right terms are? When can a founder ask you
for a check? >> Do you wanna? That was about it. That was like six questions. >> That's a lot of things. >> Yeah, okay, good. >> It's the process. >> Why don't you describe,
why don't you describe, cuz you'll describe seed
then I'll describe. >> Yeah, yeah.
So yeah. So, SV Angel, you know, invests in seed stages
start-ups. So we like to be the very
first investor. We normally invest today at
around that's a million to two million. It used to only be a
million. So if we invest 250k that
means there's five or six other investors in that
syndicate. SV Angel has now a staff of
13 people. I do no due diligence
anymore. I am not a picker anymore. I just help on major
projects for the portfolio companies that
are starting to mature. But we have a whole team
that processes. We at SV Angel end up
investing in one company for every 30 that we look at,
and we end up investing in about
one a week. I think what's interesting
is we don't really take anything over the transom. Our network is so huge now
that we basically just take leads from our own network. We evaluate the opportunity
which means you have to send in a really great short
executive summary. And if we like that we
actually vote, although I'm not in this
meeting anymore, but the group actually votes on
do we make a phone call. That's how important time is
in this process. And if enough of the team at
SV thinks it's interesting, then they
appoint a person to make a phone call to that
founder, usually somebody on our team
who has domain experience. If the phone call goes well,
bingo, we want to meet you. If SV Angel asks you for a meeting we are well on our
way to investing. If that meeting goes well, we'll do some background
checks. Backdoor background checks. Get a good feeling about the
company. The market that they're
going after. And then, and then make the
commitment to invest. And then start, start
helping get other value add investors to be part of the
syndicate. Because if we're gonna have an equal workload we want
the other investors in this company to be great
angel investors as well. >> So I'll talk a little bit
about the venture stage and the series A stage, you
know, the problems. So to start with, I think
it's fair to say at the point that all that top
tier venture capitalist pretty much only invest in
two kinds of companies. At the series A stage. One is if they have previously raised
a seed round. And so, it's, it's almost
always case when were doing a series A investment and
the company has a million or $2 million in seed
financing. You know from, from Ron and,
and folks that he likes to work
with. Almost always by the way Ron
just to be clear. And folks he likes to work
with. So first either they have a
seed round. So if you're going to raise
serious aid the first thing to do is
raise seed. Cuz that's generally the way
the progression works at this, at this point. Every once in a while we'll
go straight to a on a on a company that hasn't
raised the seed rounds. Really the only times though
that, that happens are when it's a
founder who has been a successful founder in
the past, and is almost certainly somebody we've
worked with in the past. So actually we have an
announcement we just, we just one of these we'll
announce in a few weeks. Where it's founder who I was
an angel investor, actually I think Ryan was
also in the team's company in 2006. And then the company did its
thing and ultimately was acquired
another big company. And then that team now is,
is starting their new thing. So, in that case, we're just
gonna jump straight to an A cuz they're so, they're
so well-known and they have have a plan all
lined up for it. But, you know, that, that's
the exception. It's almost always
proceeded, proceeded by a seed round. The other thing is yeah I guess I mentioned this
already, but we, we, get, similar to what Ron
said, we get 2000 referrals a year through our referral
network. A very large percentage of those are referrals through
the seed investors. And so, by far, the best way
to get to, the, the, by far the best way to get
investor introductions to the A stage investor firms
is to be able, is to work through the seed
investors. Or to work through something
like >> Speaking about terms. what, what terms should
founders care most about? And how should founders
negotiate? Maybe Parker, we'll start
with you on this one. >> Sure.
Well I think probably precisely because
of what Mark said. The most important thing at
the seed stage is picking the right seed investors,
because they're gonna sort of lay the foundation for
future fundraising events. You know, they're gonna make
the right introductions. And I think there's a, an enormous difference in
the quality of, of an introduction. So if you can get a really
good introduction from someone who a venture
capitalist really trusts and respects, you know, the
likelihood that, that's gonna go well is so much
higher than sort of like a, you know, a much, kind of a
much, a much more lukewarm introduction from someone
they don't know as well. So the seed stage, probably
the best thing you can do is find the right
investors. And then
>> How, how does the founder know
who the right investors are? Well I think it's really
hard. I mean so one of the best
ways, I mean, you know, not to give a plug for YC
but you know, YC does a really good job
telling you exactly who they think those people are. And and can really direct
you towards a, and I've actually have found
it to be like pretty accurate
in terms of like who you guys said were going to be
the best people like. They ended up being the most
helpful as we were raising subsequent rounds. Sort of, you know, really providing the best
introductions. And the people who maybe I
thought were, you know, seemed okay, but were not,
you know, like, we're not as, sort of,
highly rated by YC. Like, they, that ended up
being the case that they were, kind of, like, real
duds, in the seed round. >> Someday we're gonna
publish our list of these people. >> Oh my god there are going
to be a lot of upset people
when you do. >> So, how, how do you think
about negotiation? How do you figure out what
the right evaluation for a company is and what are
the terms? >> Well so I started out. I mean like when I was
raising my seed around I really didn't know. And, and I mean we had
conversations about this. I probably started a little
too high on the valuation side. And the, so as you guys
know, like Y company sort of culminates in this thing
called demo day, where you can get sort of
all of these investors at once, who are looking at the
company. And I started out trying to
raise money at like a $12 or a $15 million dollar. Which is like not quite the
same thing as a valuation, but sort of rough, rough,
roughly equivalent. And everyone was like,
that's crazy. You know, that's, that's
completely nuts. They're, like, you're, like,
too big for your britches, like, that, that's completely,
just wouldn't work. And so I ended up sort of
walking it down a little bit and, and within, sort of the
space of a couple days said okay, well I'm
gonna raise at nine. And then suddenly, for
whatever reason that had sort of hit some magical
threshold on the seed, seed stage, that it was
below 10. It seemed like there was
like, almost infinite demand, for
the round at a, at a like, at a 9 million
cap. So no-one would pay 12 but
at a $9 million cap it felt like I probably could have
raised like, ten million dollars. And the, the round came
together you know, in, in, in roughly about a
week. At that point once I kind a
hit that threshold. And so there seemed to be, and they probably fluctuate
over time, but there seem to be these sort
of, like, thresholds, particularly for seed-stage
companies, that, that, that investors will think of
as, like, this is what, you know, like, above this
level is like, crazy. That, like, doesn't matter. And there's sort of like a
rough kinda range that that people are willing to
pay. And so, you just kinda like,
you, you, you just have to kinda
figure out what that is. Get the money that you need. Don't, don't raise any more
than you need and, and, and just kinda get it
done. And you know, at the end of
the day like, whether, whether you raise a 12 or
nine or like six, it's not, it's not a huge deal for the
rest of the company. >> Is there a maximum amount
of the company you think the founders should sell in
their seed round era? Beyond which, problems for
any of you. >> I feel like that's a
better question for you. >> Well, gosh, I don't know. I mean, you know? I think, On, on, I mean, I
don't, I don't know the rules on
this stuff. I think the, the tricky
thing, is, is, I mean, it seems like they were kind
of rough. Particularly for, like, a
series A you're probably gonna sell somewhere
between, you know, 20 and 30% of the company because
you know, below, venture capitalists
tend to be a lot more ownership-focused than
price-focused. So you might find that it's
actually, sometimes when companies
raise really big rounds. It's because, you know, the
investor basically said listen I'm not gonna go
below 20% ownership but I'll pay more for it. And so, and, and above 30%
probably sort of weird things happen to the
cap table. Like it gets hard, you know,
down the line to sort of, you know, for there to be enough room on
the cap table for everyone. And so everything seems to
come in at that range. So that probably just is
what it is, in most cases. So, at, you know, at the
seed stage. I mean, what I've heard. There doesn't seem to me any
magic to it. But it seems like ten to
15%, is what, what people say. But what, that's mostly just
what I've heard. I'm curious at your guy's
thoughts. >> Yeah, I, I agree with all
that. I think it's important to
get the process over with. But I think it's important
for the founder to say to themselves in the beginning,
at, at what point does my ownership start to
de-motivate me? Because it there's like a
40% dilution in an angel round. I've actually said to the
founder, do you realize you've
already doomed yourself. You know, you, you're gonna
own less than 5% of this company if you're a
normal company. And so, these guidelines are
important. The, the, you know, the, the
10 to 15%, because if you keep giving
away more than that, there's not enough left for
you and the team, and you're the
ones doing all the work. >> Thank you. >> Well actually, we'll
walk, we've, we've seen a, we've seen a series of
interesting companies in the last five years that,
where they just, you, we just walk, oh, simply, we
won't, we won't bid. Sometimes the basis of the cap table's already
destroyed. Outside investors already
own too much. There's a company we really
wanted to invest in but the outside investors
already owned 80% of it when we, when we talked
to them. And it was still a
relatively young company. They had just done two early
rounds that had just sold too much of the
company. And literally we were
worried, and I think accurately so, that it was gonna be
demotivating for that team to have that
structure. >> One more question for you before we open up to the
audience. for, for Ron and Clark. Could you guys both tell the
story of the most successful investment you ever made and
how that came to happen? >> Other than Zenefits of
course. >> Yeah, other than
Zenefits. >> Yeah other than Zenefits. That's gonna be hard. For me clearly it was the investment in Google
in 1999. >> And we got we got Google
return out of it. But funny enough I met Google through a Standford
professor David Cheriton. Who was in the school of
engineering. He's still here. He was actually an angel
investor in Google. And an investor in our fund,
and kind of the quid pro quo we
have with our investors in the fund is you have to tell
us about any interesting
companies that you see. And we loved it the day that
Jared was an investor in our fund because he had
access to the computer science
department's deal flow. And we were at this party at
the of DFA's house in full tuxedo. I hate tuxedos. And day, have you, anyone
here know David Sheraton? Cuz you know for sure he
does not like tuxedos, and he was in a tuxedo. But I went up to him and we complained about our
attire and then I said, hey, what's happening in, at
Stanford? And he says, well there's
this project called Backrub. And it's search, and it's search by page rank and
relevancy. And back in, today page rank
and relevancy, everyone says, oh, you know,
that's so obvious. In 1998, that was not
obvious that engineers were designing a product based on
this thing called page rank. And all it was was a simple
algorithm that said, if a lot of people go to
that website and other websites direct them
there, there must be something good
happening on that website. That was the original
algorithm. And the, the motivation was
relevance. So I said to David, I have
to meet these people. And he said, you can't meet
them till they're ready. Which was the following May
funny enough. >> I waited.
I called them every month for five months. And finally got my audition
with Larry and Sergei. And right away they were
very strategic. They said, we'll let you
invest if you can get sequoia. We don't know sequoia but
they're investors in Yahoo! and because we're late to
market we want to know we have a deal with
Yahoo! And, and so I earned my way into the
investment in Google. How about you?
>> So, I was talking about on the
other side which is, which is Airbnb. Which we actually were not
early investors in. We were, we did an, Airbnb
as growth round. We did the first big growth
round at Airbnb. yeah.
At about a billion dollar valuation in to 2011. And I think that will turn
out to be, I believe that will turn out
to be one of the spectacular growth investments of all
time, we'll see. But I think it's gonna be
one of the big companies. So I tell that story because
it's, it's not a story of pure
genius. It's a we, we passed, we
didn't even met with them, I don't think we met with
them the first time around, or maybe one of our junior
people did. But it was one of these,
it's you know, I said earlier that venture
capital is entirely a game of outliers,
right? One of the key things with
outliers is the ideas often seem
completely nuts up front. And so, of course, the idea
of a website where you can have other people stay in
your house, if you just like made a list of the ideas
that are like, most nuts, that would be like, right
there at the top. And then. >> I have a very nice e-mail
from you >> Good, good. I was hoping I was very
courteous in my stupidity. Well the second most stupid
idea you could possibly think of is a website where you can stay
in other people's houses. And so that the >> Uniquely combines both of
those bad ideas. >> So, of course, it turns
out they've unlocked an entirely new way to
basically, sell real estate. They've unlocked this just
gigantic number of gigantic global phenomenon. It's gonna be an enormously
successful company. So part was just coming to
grips with the fact that we had whiffed on our initial
analysis of the idea. And that the numbers were clearly proving that we were
wrong. And the customer behavior
was clearly proving that we were wrong. So one of our philosophies
at our firm is that we're multistage. A big reason for that is so we can fix our mistakes and
we can pay up to get in later when we screw up early
on. The other thing i'll
highlight though is the other reason why we
pull the trigger at a high evaluation, when we
did was because of our, we had spent time at the
point with the founders. With Brian and with Joe and
Nate and there's a friend of mine in private equity has
this great line, Egon Durban has this great
line. He says when people progress
through their careers, they get bigger and bigger
jobs, and at some point they get the
really big job. And it's, some people, half people
grow into the big job, and about the other half of
people swell into it. Right?
And you can kinda tell the difference. There's a point where people
just lose their minds. And one of the issues with
these companies that are sort of super successful
hyper growth companies is you know, this would be the
sorta the classic case. These super young founders
who haven't run anything before,
so how are they gonna be at running this sorta giant
global operation, and we just were tremendously
impressed and our, today, every time we deal with all
three of those guys. How mature they are, how
much they are progressing. You know, it, it's like they
get more and more mature, they get better
and better adjustment and they get more and more
humble as they grow. And so that made us feel
really good. That not just was this
business gonna grow, but that these were guys who
were gonna be able to build something. And be able to run it in a
really good way. >> You know, people always
ask me. Why do you think Airbnb is
such a great company. It's funny we're obsessing
over Airbnb but and I say to people it's because
all three founders are as good as the other founder. That is very rare. In the case of Google. Two founders, one of them is a little
better than the other one. >> [LAUGHTER} >> Hey, he is the CEO every
company has a CEO. >> I think we just got the
tech crunch headline. >> Every company, every
company has a CEO. Why am I saying this? >> When you start a company, you have to go find somebody
as good or better than you. To be the cofounder. If you do that, your chances of success grow
astronomically. And that's why Airbnb became
so successful, so quickly. The anomaly is Mark
Zuckerberg at Facebook. Yes, he has an awesome team. But the Mark Zuckerberg
phenomenon where it's mainly one person, that is
the outlier. >> Hm-mm. >> So when you start a
company you have got to find phenomenal co-founders. >> All right.
Audience questions. Yes. >> So obviously the
conventional wisdom about why you raise money is
because you need it. But the more I get off
conventional wisdom the more I'm starting to hear another
story about why you raise money and I"m actually
hearing founders say it's more to facilitate the big
exit, or in the worst case to facilitate the acqui hire
that are just fizzling out. What extent is that accurate
thinking or >> Does raising money help you with an exit, or an
acqui hire? >> Well if you, if you pick good investors
who have good Rolodexes and domain expertise in what
your company does. They're gonna add a lot more
value than the money. And those are the types of
investors you should be looking for. >> Yeah.
>> So the answer to the question is clearly yes. But also in a sense it
doesn't matter. Cuz you can't plan these
things according to the downside. And so. I mean, that's the scenario
you are not are obviously not hoping
for. And so while the answer is
yes. Probably that shouldn't
enter into the decision making process. Too much, but it might enter
into which investor to raise money from, it probably doesn't enter
into the whether to raise money question that
much I don't think. >> I intend to start a
business, just grow the capital
investment, I do want to end up with
some equity. Do you guys have any advice
about how to deal with extra amounts,
people are taking so long, not everything is like
software. It's viral. What should congress do for capital investment companies
>> So this is, I would double down on my
previous comments on the onion theory of risk and
the staging of risk in cash which is the more capital
has in the business the more intense and serious you have
to be about exactly what's going to be required to make
the business work and what the staging of
milestones and risks are. Cuz in that case, you wanna
line up, you wanna be very precise of
lining up. Because the risk is so high that it'll all go
sideways right? So, like, you wanna be very
precise what you're gonna accomplish with your A
round. And what's going to be a successful execution of
the A round. Because if you raise too
much money in the A round, that'll seriously screw you
up, right, later on down the road. In the, cuz you know you're
gonna raise the C, D, E rounds. You know, and then the
cumulative, dilution will get to be,
will get to be too much. And so you have to be
precise on every single round. You have to raise as close
to the exact right amount of money as possible and then
you have to be as pure and clean and, and precise with
the investors as you can possibly be about the
risks and the milestones. But, this by the way is a
big thing. This is actually, I'm really
glad you asked the question. It kind of goes back to what
Parker said. Like, look if you walk into
our firm and you've got Twitter, or
you've got Pinterest, you've got something and
it's just viral growth and it's just on fire and it's
just gonna go. Like, those are the easy
ones. Like it's just, like, let's
put money in it. And let's just feed the
beast and off it goes. But if you walk in and you're like, I got this
really great idea. But it's gonna take $300
million, staged out over the next
five years. Probably across five rounds. You know, It has a potentially very big
outcome. But boy, like this is not
Twitter. Like, this is gonna be
serious heavy lifting. To be able to get there. We will still do those but
the operational excellence of the part of the team
matters a lot more. And one of the ways that you
can convey the operational excellence is in the quality
of the plant. And back to the Steve Martin
thing be so good they can't ignore you. The plans should be very
precise. >> And there are ways if
your capital equipment. Intensive. There are ways of borrowing
money in addition to venture capital. >> Yeah.
>> Sorry. >> You, you can kick in. You can kick on a venture
data and then later on lease
financing. But again that underlines
the need for operational excellence because if you're
gonna raise debt, then you really need to be precise in
how you're running the company because it's very
easy to trip the convenance on a loan and it's very easy
to lose the company. And so it's a thread the
needle progress that demands a just sort of a
more advanced level of management then sort of, you
know, the next SnapChat. >> What are some bad sides
for investors that you shouldn't
work with their company? >> Yeah that's a good
question. How do you know with an,
what's a sign that you should avoid a particular
investor? >> Well, it's the inverse of
what I said about a good investor. If it's an investor who has
no domain expertise in your company, does not have a
Rolodex where they can help you with introductions. Both for business
development and in helping you do the
intro's for series a. And you should not take that
person's money, especially if they're in it
just to make money and you can suss those people out,
you know, pretty quickly. >> Yeah I would, glad you
asked that question. Bring up sort of a broader
point which is If your company is
successful. You know, we're talking
about our, you know, I think, generally, or at least as a
company, is we want, our investors are the ones
that wanna build big, independent franchise
companies. So we're talking about a 10
or 15 or 20 year journey. You know, 10 or 15 or 20
years you may notice is longer than the
average American marriage. >> This is significant. The choice of key investors,
of particular investors who are gonna be on the board
for a company, I think, is just as important as who
you get married to, which is extremely
important. These are people you're
gonna be living with, and partnering with and relying on, and dealing with
in position, you know, in conditions of great
stress and anxiety for a long period of
time. And the big argument I
always make is, and ours like make this all the
time, sometimes people believe it
and sometimes they don't. Which is like if everything
just goes great, it kind of doesn't matter
who investors are,. But almost never does
everything just go great. Right?
Even the big successful companies even the big you
know, Facebook and all these big companies that are now
considered very successful. You know, along the way all
kinds of shit went, you know, shit hit the fan
over and over and over and over again. And there are any number of
stressful board meetings and discussions and late night meetings with the
future of the company at stake where everybody really
has to be on the same team. And have the same goals and be pulling in the same
direction and have a shared understanding. That have the right kind of
ethics and the right kind of staying power, you know, to
be able to actually weather the storms that come up. And one of the things that
you'll find that is a big difference between first
time founders versus second time founders is almost
always second time founders take that point
much more seriously. After they've been through
it once, and so it really, really, really
matters. I always thought, and I
believe that it does. It really matters who your
partner is, it really is like getting married, and it
is worth putting the same amount of time, maybe not
quite as much time and effort into picking your
spouse, but it is worth spending
significant time really understanding who you're
about to be partnered with. >> Yeah,
>> Because that's way more important than. You know, did I get another
$5 million in the valuation or did, you
know, did I get another $2 million
in the check? >> The marriage analogy is
great. I know at SV Angel, our
attitude is when we invest in an entrepreneur,
we are investing for life. Because we wanna invest in,
if we made the right decision, we're gonna invest
in every company they start. And, once an entrepreneur,
always an entrepreneur. So we actually do consider
it a marriage. We're, investing for life. >> One thing that I, that, which is another of
saying what Mark just said, is I always look for. In that first meeting, do you feel like you respect
this person? And do you feel like you have a lot to learn from
them? Cuz sometimes you walk in
and they have this like just such an incredible amount of
insight in your business. That you walk out of there
being like, man, I don't, even if these guys didn't
invest, that sort of hour that I spent with them was
such a great use of my time. I felt like I came out with
a much clearer picture of what I need to do and where
I need to go. And that's such a great
microcosm of what the next couple of years are
gonna be like. You know like, don't if you
feel like you would want this person really involved
in the company even if they didn't have like a checkbook
that they brought with them. And if not that's probably a
very bad sign. >> What's the constraint on
the V making accurate use of
angels and VCs? Time, money, or the lack of
company? >> Well what's the
constraint on how many companies you guys
invest in? >> SV Angels has kinda
gotten comfortable with one a week. You certainly can't do more
than that, and that's a staff of 13. So it's, it's really the
number of companies. >> Ron, if you had, if you all worked twice the
number of hours, would you invest in twice
the number of companies? >> I would advise against
that, I would rather just add
value, more value to the existing
companies. >> Maybe you could, I'll take the role of
questioner for a second. >> [LAUGHTER] Maybe you
could, could you talk a little bit
about conflict policy? >> Or not, or not conflict
policy. >> Well SV Angel actually
does have a written conflict
policy. But most, when we end up
with a conflict it's usually because one company has
morphed into another space. We don't normally, invest in companies that
have a direct conflict. If we do we will disclose it
to the other company, to both companies. And keep in mind at our
stage, we don't know the company's
project strategy anyway. We probably don't know
enough to disclose. But our conflict policy also
talks about this really important word,
which is trust. In other words, we're off to a bad start if
we don't trust each other. And, and with SV Angel, the
relationship between the founder and us, is based
on trust. And if somebody doesn't
trust us then they shouldn't, they
shouldn't work with us. >> Mark, would you invest in
companies? >> yeah.
So this is actually- So, let me go back to the
original question. I'll come back to that. So the original question is
this is the thing we talk about most often in our
firm. So this is kind of the, the question is at the heart
of I think how all venture capital operates which is a
question of constraints. So the big constraint on a top tier venture capital
firm the big constraint is the concept of
opportunity cost. So, it's the concept that
basically everything you do means that there are a
whole bunch of other things that you can't
do. And so, it's not so much the
cost. And, and we think about this
all the time. It's not so much the cost
of, we invest five million
dollars in a company, and the company goes wrong and
we lose the money. That's not really the loss
that we're worried about. Because the theory is will
have the winners that'll make up
for that in theory. The cost that we're worried
about, is, every investment we make
has, has two implications for how
we run the firm. Every investment we make, number one rules out
conflicts, and so, for sure our policy for sure on
venture and growth rounds, is that we don't invest in
conflicting companies. And so we only invest in one
company in a category. And, so, if we invest in
MySpace, and then Facebook comes along a
year later. Like, we're out. We can't do it, right? And so we basically lock, every investment we make
locks us out of a category. Right?
And, the nature, that's a very complicated topic
when you're discussing these things internally in these
firms at first because. You only know the companies
that already exist right? You don't know the companies
that haven't even been founded yet right? And God help you had you
invested in you know, an early company that was
not gonna be the winner and you were locked out by the
time you know, the winner emerged three
years later and you just couldn't make the
investment. So that's one issue, is
conflict policy. The other issue is
opportunity cost. The time and bandwidth of
the general partners and so going back to the concept of
adding value, you know we're a firm
typical, typical firm we're fairly typical firm we've
eight general partners, each general partner can
maybe be on 10, 10 to 12 boards in total if they're
completely fully loaded. So it's basically Warren
Buffet talks a lot about investing as you
basically want to think of it as a ticket that you have
a limited amount of holes you can punch and
every time you make an investment you punch
the hole. And when you're out of, when you're out of holes to
punch like you're done, you can't make any new
investments. And that's very much how
venture capital operates and so the way to think about is
every open board slot that one of our GPs has
at any given point in time is an asset of the firm
that can be deployed against an
opportunity. But every time we make an
investment it takes the number of slots that we
can punch down by one. So, it reduces the ability
for the firm to do new deals. And so every investment we make forecloses not just the
competitive set, but other deals where we will
simply run out of time. And so, and this is sort of
a big thing of like well. This goes back to what I
said earlier. Like this company's pretty
good. It seems fairly obvious that
it's going to raise extra funding. Why didn't you fund it? Well, on its own if we had unlimited capacity we
probably would have. Like it'll probably make
money. But relative to getting
blocked out of the competitive set and relative not having that
open seat for a, for an even better opportunity
we pass on that basis a lot. >> It's pretty widely agreed
that, that that's it's easier than ever to build an
MVP launched get traction. Same time we know that there
are CPOs that have been pre-MVP or even pre-launch
and pre-traction. So in those instances where
you do a seed round with a company either doesn't
have a or doesn't have a launch
impressive traction. What do those deals look
like and what do you make that
judgment based on? What convinces you to invest
with product with and no traction? >> What would convince us, which is what usually
convinces us, is the founder and their
team themselves. So we invest in people
first. Not necessarily the product
idea. The product ideas tend to
morph a lot. So we will invest in, in the
team first. If it's, if it's pre-users,
the valuation is gonna tend to be corresponding lower
unless one of the founders, you know, has a, a success
track record. >> Yeah, for us it's almost
always, if there's nothing at the time of investment,
then it's almost, other than a plan it's almost always
the founder who we've worked with before or a founder
who's very well known. By the way the other thing
worth highlighting is, you kind of, in these
conversations, in all these conversations,
you kinda, the default assumptions is that we're
all starter web companies or consumer mobile companies. There are, you know other
categories or companies, capital intensive is one
that's been brought up, but it's I'll just say for example, enterprise software
companies. Or enterprise these days
Saas, you know, application companies or
cloud companies. It's much more common that
there's no MVP right. It's much more common that
they're a cold start. And it's much more common
that they build a product in the A
round. Then there's no point to
have an MVP cuz the customer's not gonna buy
an MVP the customer actually needs the full product when
they first start using it. And so the company actually
needs to raise 5 or 10 million dollars to get
the first product built. But in almost all those
cases that's gonna be a founder who's done it
before. I think we have time for one
more question. Yeah.
>> Could you talk about the ideal Boris
structure and when do you think expect to
publish that? >> Yes, talk about the ideal
Boris structure. >> Gosh, I think So, so in
our board we're fortunate that we have, there's myself
and my cofounder, and a. Partner from Adruse and
Horowitz. Which I think probably
removes the fear. It probably creates a little
more trust cuz it sort of removes the fear that like,
you know, someone's going to come in and just like, fire
you arbitrarily because it's like, time for a big company
CEO. Kind of thing.
But I, in most cases I think if
you, if you trust, if you trust the people that
you're working with it, it shouldn't really be an
issue. Cuz there are so, there are
so few. I mean things almost never
come to like a board vote. And by the time that they do
it's like somethings deeply broken at that point anyway. and, and most of. And most of the power that
VCs have comes outside of the board structure, it's
protective covenants that are build into the financing
round so it's like you can't you know, take on debt, you
can't sell the company. There are certain things
that you can't do without them
agreeing to it anyway. So it's probably like less
of a big deal than people make it out to be. What I found, sort of, is, is that it seems to me
that, as a founder. If things are going well at
the company, you have sort of unlimited
power, vis a vis, your investors. Like, almost unlimited. Like, no matter what the
board structure is, and no matter what the covenants
are in the round. Like, if you say, listen, I
wanna do this, and I think this is what we need
to do. And even if it's, like, a
good investor or a bad investor. Even the bad investors will
be, like, you know? Like, let's, let's, let's
make it happen. Cuz they wanna like ride
this rocket ship with you. And when things are going
badly it does not matter what protections
you've built into the system for yourself. Like, you know, at the end
of the day, like, you need to go back to the
trough to get more money. And you know, if, if, like,
things aren't going well, like they're gonna have all, all of the cards in their
hand. >> And they're gonna get to
renegotiate all the terms. >> And, exactly they'll
change all the terms. >> This is what happens
actually when a company gets in dire
straights. Their it actually doesn't
matter what the terms, but at fire rounds they all get
renegotiated. >> This is I think the fundamental rule of
raising money. Other than never having down
turns is that if things are going well the
founder is in control and this company needs more
money and things going badly, if
investors are in control. >> I've been on boards for
20 years public and private, I have never been a
board vote that mattered. It's always been never,
never a vote. Many discussions, many
controversies, many issues. Never a vote. It's the decision has always
been clear by the end. And it's either by unanimous
or very close to unanimous. And so I think it is almost
all around the intangibles and almost not at all around
the details. >> Okay.
Thank you guys very much for coming in
today. >> Pleasure.
