Getting the Co-Founder Decision Right

In my recent list of #ifiwereafounder tweets, I started with the assertion that "I would aggressively seek out one, but no more than one, co-founder to complement my deficiencies".  This generated a number of questions from founders about the ideal composition of a founding team.  This post will expand on what I was thinking with the original tweet in a way that can not be captured in 140 characters.  

At face value, the first question is why have a co-founder, and if you do, why only one?  First, it is worth recognizing that founders form the soul of any start-up.  It is their conviction, passion and unrelenting desire to succeed that powers the company forward and through all the tough spots.  It is hard to hire this skill set, so starting a company with a co-founder means that this does not rest solely on the shoulders of one person.  Further, start-ups are all about developing hypothesis, testing these assumptions and moving forward in an unrelenting manner.  This is more effective if you have someone to run these ideas by in a high-bandwidth manner and to parallel process on tasks, especially in the early days.  Finally, no one founder has all the requisite skills to execute on their vision and bringing in a co-founder that complements areas of relative weakness and potential blind-spots results in a far stronger team operating right out of the gates.

So if these statements are true, wouldn't more co-founders be better than fewer?  In my experience, unless the founding team has all worked together before, the answer is no. The worked together comment is a big caveat as our founding teams with more than 2 co-founders that have worked together before are performing quite well, in large part because the issues discussed below are less applicable for teams that have learned over the years how to work together.  I believe there are three reasons for two co-founders being the magic number.  First, if you think of all the requisite characteristics of a co-founder – a shared vision, complementary personalities, similar work ethics, aligned goals – it is incredibly hard to find the right co-founder.  Looking for a third or fourth such person exponentially increases the time and difficulty of this task as you not only need to find additional people that fit you, they also need to fit each other.  More often that not this results in making compromises and sub-optimal choices.  Second, while having one co-founder results in faster and better execution as two people can be incredibly aligned and efficient, more than two cooks in the kitchen tends to slow decision making down as consensus is sought and the trade-off of perhaps better decisions by having a third or fourth opinion does not compensate for all the advantages start-ups get by executing faster than incumbents or their competitors.  (A related note is that some critical decisions really do require multiple viewpoints and differing perspectives and this can be an ideal role for your outside advisors and supporters).  A final point is economics: founding equity is incredibly valuable and if you are dividing the initial pie by 3 or 4 and the incremental 3rd or 4th co-founder is higher risk and likely to slow things down, you own less of a less productive and potentially more contentious company.  Not a good trade.

So what makes for a great co-founding team? Noted above are the first critical points: a shared vision, complementary personalities, similar work ethics, and aligned goals.  In particular, alignment on vision and goals is critical as they are the hardest to reconcile and most likely to lead to major blow-ups.  To find the best fit on the personality front, it helps to understand your own biases, strengths and weaknesses and to find a co-founder to fill in those gaps.  If you are extremely intuitive and high concept, find a co-founder that is analytical and more considered in their actions.  If you are naturally wildly optimistic and a throw caution to the wind type, find a co-founder who considers what can go wrong and how to plan accordingly.  These personality differences, while at times likely to infuriate, will result in better decisions but as you will spend more time with a co-founder than anyone else in your life, make darn sure you enjoy each other's company.  Last, from a functional skills perspective, our best co-founding teams of two tend to have one co-founder who is awesome on product and technology vision and the other who is always thinking about market opportunity, positioning, growth and how to best bring the product vision to the market.  In today's parlance a Product person and a Growth Hacker.  If you look at successful companies across the tech landscape, this pattern emerges over and over again.  

Good luck in finding the right partner with whom to launch your company.  Don't rush to the altar and take the time to get the decision right and it will pay of down the road.

If I were a Founder

Inspired by a tweet stream of consciousness by Danielle Morrill, the Founder of Mattermark, on what she would do if she was a VC, a jotted down a few notes on what I would do if I was a founder.  These first went out as tweets on @chazard, but here is the full list in one place:

  • I would aggressively seek out one, but no more than one, co-founder to complement my deficiencies #ifIwereafounder
  • My early hires would be people right on the fine line between crazy good and crazy crazy #ifiwereafounder
  • I would meet with or speak with more than 100 potential customers in my first 30 days #ifiwereafounder
  • We would design a product experience to surprise and delight customers in unexpected ways #ifiwereafounder cc:@wayne @jeffseibert
  • I would be scared shitless almost every day, but would translate this into being action-oriented around things in our control #ifiwereafounder
  • I would have one person to share my deepest fears and worries with #ifiwereafounder 
  • We would focus on driving adoption before driving revenue #ifiwereafounder
  • I would avoid strategies that rely on other companies or organizations for our success, at least for the first couple of years #ifiwereafounder
  • Our company colors would be a little unusual #ifiwereafounder
  • I would have Friday afternoon happy hours and use them to celebrate successes #ifiwereafounder
  • We would have regular internal hackathons to spur creativity #ifiwereafounder
  • A recruiter would be one of my first hires after raising a Series A #ifiwereafounder
  • I would track 3 key metrics daily and 5 on a weekly basis #ifiwereafounder
  • I would have a vision for world domination, but very achievable first steps #ifiwereafounder
  • I would be wildly optimistic, but not delusional #ifiwereafounder
  • I would take extra time to simplify and shorten key messages #ifiwereafounder
  • I would be able to give my own demos #ifiwereafounder
  • Our company name would not have capital letters in any place other than the first letter #ifiwereafounder 
  • Creating shareholder value would be a by product of building something great, not a primary goal #ifiwereafounder
  • I would seek advice when outside my depth and not feel like I need to know everything #ifiwereafounder
  • If my board pushed back on critical decisions, I would tell them they are at risk of "breaking the bronco" #ifiwereafounder cc:@bijan
  • Bad news would travel as fast as good news and it would be accompanied by a plan to fix, or at least a plan to get to a plan #ifiwereafounder
  • If I disagree with my Board's advice, I would drive the differences to ground rather than pocket vetoing their suggestions #ifiwereafounder
  • i would never let any one person in the company become irreplaceable #ifiwereafounder
  • i would force my board to provide me feedback on my performance and seek out advice on how my role should change as the company grows #ifiwereafounder
  • If a room of smart people don't understand my business, i would consider revising the message instead of assuming they just don't get it #ifiwereafounder
  • I would understand my competitors deeply, but not obsessively.  I would obsess about customers.  #ifiwereafounder
  • i would read Reed Hasting's piece on culture and leadership, but not much else in this category #ifiwereafounder

Based on Retweets, Favorites and offline feedback, the comments that resonated most with people were being scared shitless; seeking advice; obsessing about customers, not competitors; having a few key metrics to track; and dominating the world, one step at a time.

I also added a few more to the list, and have included these below:

  • The person I share all my fears with would ideally be my co-founder #ifiwereafounder
  • I would start my company in an area with big macro trends in my favor.  Always easier to sail with the wind at your back #ifiwereafounder
  • I would recognize that no amount of marketing $ spend from our start-up is going to make our market develop significantly more quickly than it wants #ifiwereafounder 
  • My board would have no more than 5 members #ifiwereafounder
  • We would have weekly staff meetings, but they would be short #ifiwereafounder
  • If I was based outside of CA, i would open an office there as quickly as possible with as senior a person to run it as possible #ifiwereafounder 
  • My California office would be the only exception to my rule of having everyone in a single location #ifiwereafounder
  • The response to the first inbound M&A offer would always be NO #ifiwereafounder
  • I would compensate my team more than fairly and accept all resignations from anyone who threatens to quit because they are not paid enough #ifiwereafounder
  • All my financial projections would be conservative, but I would never say that as no one would believe me #ifiwereafounder
  • I would recognize that the first equity I sell is the most expensive equity and I would plan accordingly #ifiwereafounder
  • I would stay up late trying to close the deal and wake up early to figure out how to deliver #ifiwereafounder

  •  

    I would infuse design excellence into everything we do, but struggle to find excellent design talent like everyone else #ifiwereafounder

  • I would drive an '07 Toyota Prius but lust after a '14 Tesla #ifiwereafounder #truestatementevenasaVC

  •  

    Our office would have a branded corn hole game #ifiwereafounder

  • I would not wait for a prospective investor to follow up with me. Otherwise would worry they think I am not a closer #ifiwereafounder
  • After seed round, I would communicate with investors monthly on metrics, accomplishments, forward plans & how they can help #ifiwereafounder
  • If I was building a SaaS business, I would know my Magic Number better than my phone number #ifiwereafounder cc: @joshjames

  •  

    As a smallish private company, I would not count on M&A to fill in product gaps.  Too many variables outside of my control #ifiwereafounder

  • I would publish a rolling 6 month product road map for my customers #ifiwereafounder
  • Annually, I would do a facilitated offsite entirely focused on our management team's ability to communicate and work together #ifiwereafounder

  •  

    I would have at least one quant jock on my team #ifiwereafounder

  • I would hire people who have a proven ability to communicate well in writing #ifiwereafounder
  • i would not let my urgency to fill open positions on our team lead me to lower the bar on quality #ifiwereafounder
  • If I unexpectedly got my ass kicked on an issue in a Board meeting, I would digest for 24 hours and come back to them with a response and plan #ifiwereafounder
  • I may fail, but I would never quit #ifiwereafounder

Let me know what I missed!

SXSW 2014 Takeaways

My ears have stopped ringing, my voice is still hoarse and my thoughts are with the victims of last night's drunk driving tragedy at the Mohawk, so I wanted to share some quick takeaways coming out of several days at SXSW in Austin with 30,000 fellow tech and start-up junkies.  I left encourage by the energy, the diversity of ideas and the abundance creativity.

  • Diversity is increasing and this is good.  The diversity of the attendees on all dimensions  – gender, race, cultural – is increasing.  This is needed in the tech industry and will lead to greater creativity and a broader perspective on opportunities.  There is a still a ways to go, but when I compare to tech conferences from 5 – 10+ years ago, we are moving in a encouraging direction.
  • The world really is increasingly flat.  Not a new observation, but I was really struck by how the start-up and innovation culture has infiltrated all corners of the globe.  As one simple example, I judged the enterprise track of the SXSW Accelerator program and of the 8 companies that presented, we had a Finnish company, an Irish company, a San Francisco based company started by a Frenchman, a Boston based company that recently relocated from Slovenia and another Boston-based company with an Australian founder.  This global phenomena only increases the pool of talent and again the diversity of ideas.
  • APIs will dominate and change how applications are built.  Every company I met with was either producing APIs through which others will interface with their applications or consuming APIs to more rapidly solve the problems they are attacking.  For the application builders, this means far more resources are going to building and solving problems and far less resources to basic plumbing and infrastructure. For the API producers, this means larger market opportunities and easier ways to on-board and serve customers.
  • Bitcoin as a platform is here to stay.  Having survived a rocky few months, I am incredibly encouraged by the opportunities offered up by the Bitcoin platform and how it can be leveraged to solve a range of security and payments issues.  More people are seeing it in this light as compared to some of the early days when it was the realm of illicit activities, libertarians and gold-bugs and this move to the mainstream will spur further adoption.
  • Privacy is not a mainstream consumer issue.  The press loves the topic, but in my conversations I did not find privacy to be a top of mind consumer issue.  It should be, so in this I agree with Edward Snowden's recommendation that application and service providers need to do a better job of embedding security and privacy into their solutions.
  • The Best VCs care deeply about founders, the problems they are solving and how best to support them.  The worst are focused only on finding the next hot deal.  Who is which becomes clear in a two minute conversation, especially if they have had a drink or two.
  • Everyone is starting a seed fund.  Ok, not quite everyone, but I met dozens of people who had started a seed fund in the last 12 months.  A few were super-talented and supremely well connected and should be wildly successful, but most struck me as a little naive and only attracted to the bright lights and perceived glamour of finding the next WhatsApp or Uber.  This will not end well for most.
  • Youth dominates.  We can wring our hands that a new social app is not curing cancer, but the influx of young talent into the innovation world is awesome and I would far prefer to see the best and brightest building things than banking things or consulting on things.  Today's 20 something founder building and a somewhat frivolous app will be tomorrow's founder solving important problems as once you get the start-up bug, it is tough to shake.

if you were there, let me know what I missed!

Stackdriver

Stackdriver vector on dark (3)
Today our portfolio company Stackdriver announced the GA version of its intelligent monitoring solution for cloud-based infrastructure, systems & applications.  They concurrently announced that Flybridge, alongside the company's Series A investor Bain Capital Ventures, led the company's $10M Series B financing and that I will be joining the company's Board.

Flybridge does not commonly lead Series B investments, but Stackdriver is not a common company.  A few things stood out for us as we got to know the team and the company over the last several months.

First, the company hits squarely on two themes – the cloud, in particular the public cloud, is the dominant platform for new application deployments and that building a passionate base of Developers and DevOps professionals is key to driving adoption in this environment.  We previously wrote about the cloud here and developer adoption here.   In particular, Stackdriver has nailed the first two points from the developer post: rapid time to value through a two minute setup process and a fully functioning free version of the product to drive widespread adoption.

Second, this product excellence and value has led to rapid adoption with the company growing to over 400 customers since its beta launch earlier this year.  At Flybridge, we track key adoption metrics for our portfolio and prospective investments closely and Stackdriver is showing month over month growth on all relevant metrics that is in the top echelon of its peers.  Further, customers love the product and are increasing the breadth and depth of its usage well ahead of expectations.  If you are so inclined (blatant plug), the company's product can be found here.

Third, and most importantly, we love the team at Stackdriver.  The company's two co-founder, Izzy Azeri and Dan Belcher, embody entrepreneurial leadership with their smarts, a history of success at companies such as VMWare, EMC, Acronis and Sonian, an ability to surround themselves with talented resources and an unbelievable work ethic (including regularly doing demos with prospective European customers long before the sun rises). 

We are thrilled to be in business with this talented team going after a large and exciting market and look forward to being part of their success.

Firebase

Earlier today Firebase announced that we and Union Square Ventures led a $5.6M Series A investment in the company.  We first led the company's seed round in the middle of 2012 and were thrilled to help fuel the company's continued growth with this financing.

When we committed to the seed we did so for four reasons: 1) we loved the two founders, James Tamplin and Andrew Lee and their vision for their market, 2) we had a hunch that real time features were going to be increasingly important for a broad range of applications, 3) the Firebase platform, which allows developers to implement real time apps with no back-end server code, was going to be an attractive way to do this and 4) the early signs of grassroots developer adoption were quite positive.  

Over the course of the seed investment the company proved out many of these assumptions and in a nut shell, that is why we are leaning into the Series A financing.  The two founders have hired an extremely impressive group of developers, this team has knocked down all the items on their roadmap in a very efficient and rapid manner, developer adoption has exceeded by a large margin all of our expectations and compares very favorably to what we have seen in the early days of other companies with similar business models such as mongoDB and Crashlytics and the company's customers are passionate advocates for the service (including one of my favorite diligence quotes of all time – "it is indistinguishable from magic, I feel like an alchemist").  

We often get asked what causes us to lead a Series A after a Seed investment.  Based on the above I would say the answer is hire well, meet or exceed your goals, add lots of users and make them incredibly happy!  Easier said then done, so hats off to James, Andrew and team on their success to date.

Gear up your business (at the right time)

[Two posts in one day.  When it rains, it pours.  If you are bored, check out today's earlier post here]

One thing we as venture investors focus on, both at a theoretical level when we are making new investments and at at practical level when we as board members are helping our (particularly later stage) companies think through growth and investment strategies, is the concept of operating leverage.  Operating leverage, or as it is sometimes called, marginal profitability or gearing, is, at a simple level, the percent of incremental revenue dollars that flow to the bottom line.  This is important because most investors, especially public equity investors, and acquirers value companies based on earnings growth and a company with higher operating leverage will over time be more highly valued than a company with similar top line growth but lower operating leverage.

At a theoretical level, operating leverage is a sign of the health of your business model.  To the extent you make expensive widgets with limited ability to premium price, less will fall to the bottom line.  If you can sell the same high value, low cost product over and over again, more will flow.  If you have real network effects at work in terms of customer acquisition, sales and marketing costs as a percent of revenue will decrease.  If your R&D team can stay the same size, while revenues increase significantly, you will have high operating leverage.  Most venture investors are attracted to models with high leverage as it allows company to grow profitably very quickly, thus decreasing capital intensity (unless there are high capital expenses or financing costs, which i have ignored for purposes of simplicity).  As a result, as an entrepreneur thinking through your long term business model and the points of leverage becomes an important strategic planning exercise.

To bring this to life with some examples, I looked at Apple – the current gold standard among tech stocks -  and compared the P&L for Q1 2011 to Q1 2010.  In this time period, revenues grew 83%, or $11.2B, while operating earnings grew 98%, or $3.9B (taxes and below the line items have also been excluded for simplicity and comparison across companies).  This means that for every incremental dollar of revenue, 35% fell to the bottom line [$3.9/$11.2].  Pretty impressive.  I also looked at results for some recent IPOs and found that Zillow had operating leverage of 38%, Financial Engines 31%, Zynga 17% and Linkedin 9%.  The all time high I found in a quick scan through public filings was Microsoft, which in 1997 dropped an astounding 67% of their revenue growth to the bottom line.  Not surprisingly, other high fliers with fabulous business models have seen significant operating leverage in their business such as Google, which in 2006 dropped 47% of each revenue dollar to the bottom line, and eBay which had marginal profitability of 56% in 2002.

Apart from working to improve the fundamental attractiveness of your company's business model, as you grow one of the tradeoffs that a CEO (and their Board) of a high growth company faces is how to balance the trade off between investing for growth and showing leverage.  Some the examples above show the these trade-offs.  Linkedin, which actually showed 27% marginal profitability in 2010 versus 2009, is obviously now investing pretty significantly for growth.  Microsoft, on the other hand, may have under invested in 1997 when many competitors were emerging around them.  Conversely, if Linked in continues to invest heavily forever and only drop 9% of each incremental revenue dollar to the bottom line, and if they were to trade at Google's current 14x EBITDA multiple, they would need to grow their revenues a staggering 32 times to $7.7B from the 2010 level of $243M to merely meet their current value of $9.6B.   Zillow, on the other hand, at the same multiples, would only need to grow 6 times from their 2010 revenues to justify their current valuation given they have vastly higher marginal profitability.

So as your business moves out of survival mode and into significant growth mode, managing these tradeoffs should be a regular part of the conversations you have with your team and Board.

 

When to reach for the stars

Reach_for_Stars
As anyone who follow the start-up world knows, valuations for high potential young companies as of late have been trending upward (how's that for an understatement) and are fairly divorced from underlying traditional (ie revenues and earnings) metrics.  This is currently true with both "later" stage companies such as Foursquare's $600M valuation and earlier stage companies that are seeing pre-money valuations that are 1.5-2 times what one would expect to see in "normal" markets.  As an entrepreneur this naturally sounds like good news, and it largely is, although I thought it might be helpful to share some of the perspectives from the investor side as well as some potential watch outs.  

As an investor, when to "pay-up" for a compelling opportunity is one of the more difficult decisions we make on the new investment side of our daily lives.  If you do it across the board, you will end up with a portfolio that has sub-par performance, but if you miss out on great companies by being too disciplined, the opportunity cost is exceptionally high.  So when confronted with such situations as an investor, some of the things that cross our mind are as follows:

  1. Is there downside protection in terms of the underlying asset?  The best example of this that I recall is a conversation I had with one of my former partners at Greylock in discussing their investment at $500+M value in Facebook.  At the time he told me that he was unsure about the upside from there, but that he was sure given the company's user growth, early revenues, relatively limited capital raised to date and the company's strategic importance, there was no way way they were going to lose money on the investment.  On Wall Street, they call these asymmetric trades: lots of upside and low downside.  While they may not all pay off, it can be a savvy approach for an investor to take.
  2. Is the amount of capital being raised sufficient to get through important milestones?  Even if they long term upside is high, if the capital being raised at a high valuation is not enough to get the company through enough value creating milestones that allow the next round to be at a higher price, it is unlikely to be worth pursuing as the pain of down rounds,the impact on morale and other issues can be painful.  Interestingly, this thought process often leads to larger rounds, with more dilution for entrepreneurs, and creates a whole host of risks that come along with too much capital such as lack of focus and unrealistic expectations.
  3. The last, and perhaps most obvious point, is that as an investor when you are reaching in terms of valuation, it needs to be for the right reasons.  At Flybridge, we rank our investments on a host of criteria including the strength of the team, the size of the opportunity, how robust the business model is, whether there are real network effects and how disruptive the approach is.  to reach on price, we need to be convinced on all dimensions as the criteria together indicate a strong likelihood of creating a lot of value and that the company can quickly grow into the value being established.  The wrong reasons to reach are competitive pressures or investments that are viewed as strategically important for the venture firm's brand.  Our LPs don't pay us to win all the time nor do they want us to use their capital to create a perceived halo that comes from being involved in high profile companies.

From an entrepreneur's perspective, raising capital at high prices sounds like a great thing.  There are, however, some words of caution that are worth running through having had a first row seat in the last overheated market.  The first is to recognize that a successful fund raise does not equal a successful business, so don't believe your own press and take an eye off running the business lest the next round be more challenging than the one you just closed.  Second, be careful about pushing your investment partners too far.  I remember one company where we were A round investors and they raised a Series B at very high prices and the VC director that came along with that financing was extremely dysfunctional when the business hit the inevitable bump in the road.  I don't think he was a bad apple, but rather was under a lot of pressure with his partners having gone to bat for the high price only to have the company do well, but not well enough to justify the valuation.  Finally, as alluded to above, reaching on valuation too early implicitly raises expectations that you have for yourself and others (employees and investors) have for the business and this can lead to the pursuit of overly aggressive strategies too early.  So the final word is be aggressive, but realistic.