October 2006 Archives

Update on David Shen Ventures, LLC

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I've been doing David Shen Ventures, LLC for about 4 months now and it's been a truly positive and educational experience.

Coming off the difficulties of raising my own venture fund, Chroma Ventures, which showed me that the current market was just too unfriendly to new fund managers, I leaped into the world of early stage internet startups on my own. With only pocket change, when compared to the mega venture funds out there, I tiptoed into the world of angel investing.

Big Education

Early on, I knew I had to learn everything as fast as possible. All this investor stuff was very new to me. I had learned some of it while trying to raise Chroma Ventures, but I hadn't gotten everything yet. So I enlisted my lawyer to sit down with me for about an hour and a half and just go through a whole bunch of financing docs and talk briefly about all the different ways people could screw you.

Lawyers can definitely be worst case scenario guys. They will scare the crap out of you on how you can be taken by everyone. It sure scared me, hearing all the stories of how people were cheated out of millions of dollars, and what happens if you invest on the wrong terms. I listened to all this and it could have made me run for the hills....but it didn't.

Investing in early stage companies, internet or no, is an inherently risky business. I like to think of it as better than gambling as you can personally affect the odds in early stage investing by making the right bets among other things. So you have to take some risks and be ready to lose that money. And sometimes, the investment terms aren't exactly the way you like them. I've walked away from terms that were just too risky. I've also invested in terms that were still risky to a point, but I thought there was a good chance of my risk being mitigated by other things. Basically, to invest in early stage companies, you have to be willing to lose a lot but hopefully win it all back on one or two big wins. (My advice here: if you're not a risk tolerant person, don't invest in early stage companies; you'll drive yourself and the entrepreneurs crazy.)

Learning about terms was one big education. I think I'm getting better at solo-ing on reading a term sheet, but still like my lawyer to go through it and get his take on it. Finding out what terms were company friendly and what terms were investor friendly was really enlightening. I had wished that it was all standardized, but it's actually the wild west of terms out there. Everything is done to personal taste so you have to read every term sheet carefully.

Huge Positive Response

As I went out there, I had no idea whether people would want my involvement this way or not. I already had met some folks who were doing the same thing I was doing: advising for an equity stake in the company. Many were actually paid as consultants to help their ventures. They also touted their contacts in the venture world so they could help an entrepreneur through the funding process. They seemed to be doing OK and had an active roster of entrepreneurs they were working with. But I had no idea on how to find these entrepreneurs.

I started by going to a Silicon Valley Meetup. I met some folks there but also realized that it was not such a good thing to advertise my status as an angel investor - too many people are out there working on stuff that won't ever make it - or they themselves are not true entrepreneur material. I didn't have time to field every business plan that came across my email, nor did I have time to check up on every person to see if they were on the level.

I also met with some ex-Yahoos who had started their own startups and they were plugged into the entrepreneur "underground" in San Francisco and Silicon Valley. This seemed to be a better route than going to the more public forums. Getting to know these guys personally and by referral was much better.

But then, once word got around to the ex-Yahoos around the valley that I was doing this, the response picked up. They all knew me and I knew all of them and thus I focused on a (thankfully) constant stream of referrals to entrepreneurs working on all sorts of stuff. Filtering by referral is much better; your own personal reputation is at stake when you refer someone to someone else!

I also noticed one other thing about the positive responses - they really needed my expertise in their fledgling businesses. Mostly this was in the areas of:

1. Internet user experience and design
2. Product strategy
3. Online advertising and the media world

I thought back to the people I met who were doing the startup advising thing professionally, and there were no people who were operating these particular areas - only in business strategy and engineering. And in talking to entrepreneurs, they lacked someone with experience to lead them in these areas. This was hard won Yahoo knowledge from the 9 years I spent there working on just about every type of product out there. Over the last few years, it has only been in recent years where Yahoos have started leaving, and the knowledge is starting to get out there. But even then, how would an entrepreneur find an ex-Yahoo if you're not connected?

Developing Criteria

It's nice to be wanted. Now how do I work with the companies? I had to develop a strategy for picking the right entrepreneur, company, and business to work on. I did not want to work on everything that came by and I wanted to see if I could do better than that.

First, I said to myself that my knowledge and experience could increase a company's probability for success than without. So if I was going to invest money, then they would have to involve me. I figured an advisorship was the best way to formalize that (rather than being a bothersome investor). No involvement, no cash. (NOTE: I don't invest in everything I work on. A lot of things have to fall into place correctly for me to put money in, and not all of those are in my control.)

Second, I had to develop a set of criteria to base my decision on whether or not to get involved. These are:

1. The team must consist of quality people. They must be trustworthy and I must like to hang out with them. I want to have a good connection with them, and I want them to want me to be around. If I don't like hanging out with these people, then I would be less inclined to keep bugging them on their product and company. The moment something doesn't feel right, I don't do it. (NOTE: Honing one's intuition is paramount.)

2. I wanted to work with people who geniunely wanted my knowledge and participation, and not just my money. I am trying to be super sensitive of any sign that someone is looking only to get my money and don't really care about my participation. That participation needs to work from both sides; a team needs to pursue my knowledge just as much as I want to help them with it. It's too easy for a startup team to get caught up in the day to day and not leverage their advisors. I am trying to avoid it as much as possible but know I will not be 100% perfect in reading entrepreneurs on this matter.

3. I need to resonate with the product. See my Resonance post.

4. I need to believe in it and see a future for it. If I can't see the future for it or don't believe in it, I don't think I should work on it. That doesn't mean that someone else couldn't take it to success; it just means I'm not the right guy.

5. I like certain types of projects more than others. See my What Do I Think is the Next Wave of Business for the Web? post.

6. The team number must be between 1 and 10. I have found that it works best when there are not people in place with skills similar to mine. See my The Sweet Spot Number post. If there is a number on the team greater than 10, a red flag automatically goes up in my head.

7. Generally, I like teams with track records than without. And I also like teams with very strong people in them. If you don't have smart, experienced, motivated people from the beginning, you'll be severely hampered very soon. Let's not start the project with sub-standard people, shall we?

8. I am starting to be a bigger believer in the distance rule for investing. I have increased that to encompass San Francisco from Silicon Valley, so instead of the 20 minute rule is more like a 50 minute rule. (Hey, I've got a Prius with carpool lane stickers so driving ain't so bad - heh). Right now, I am concentrating on companies in Silicon Valley/SF, Los Angeles, and NYC. While that may seem like the distance rule is a bit stretched with this list, I count the distance rule from my place of dwelling in each of those places, which I am in a lot for a variety of reasons.

My message to entrepreneurs is this:

1. You shouldn't put me on critical path. We'll both be frustrated as I don't have the time to take projects to completion on my own.

2. By the end of my advisor term, my goal is to find replacements for all the skills and knowledge I bring to your table. This can be either by the hiring of individuals or by the actual teaching of knowledge to you.

3. Use me to the fullest. I am available to bring along to meetings, evaluate vendors, evaluate products and services, etc. Just schedule me ahead of time and if I have time, I 'll make best efforts to come along and help you.

4. I only take equity as payment. I do not want to charge hourly and drain an early stage firm's bank account. Save that money for operations and product. Let's build the damn thing together and win big later.

That last message expresses my philosophy in working with entrepreneurs. I am not in it to make money in the primary sense. If I were, I would have continued trying to raise money for Chroma Ventures or tried to join up with another venture fund. I get the most kick out of seeing a company grow from nothing to something big, and hanging out with a bunch of really cool, determined, smart individuals to do it. It was what it was like back in the old days of Yahoo; just a bunch of buddies hanging out doing great stuff. I truly believe it is the formula for great success.

Focus on the "Why" and Not the "How"

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As I talk to entrepreneurs, I find there is almost always a focus on the "How".

By "How" I mean that entrepreneurs are very feature driven. The notion that the entrepreneur can build a better product or service is a primary driver for wanting to enter into a market. Whenever I talk to them, the conversation is always down the path of "users can do this and that on my site and they can also do this and that, and oh by the way they can also do this" with the underlying reason being that I should be totally impressed, think this is totally the greatest thing in the world, and thus it can succeed wildly in the marketplace.

In some cases that would be true. These cases would be in:

1. Current competitors have not innovated for years, and that the marketplace has become totally stagnant OR commoditized, where the competition is on things like price and not features.

2. Current competitors are non-existent or very few in number.

3. Current products/services do not exist that enable the task to be done in other ways, sometimes totally awkward or cobbled together ways.

In today's world, with Web 2.0 companies sprouting like weeds, it is hard to find an area where those 3 cases exist with the exception of Case number 1. The unfortunate thing about Case number 1 is that many others have also seen opportunities there and are working, many times in stealth, on projects in the area of Case number 1.

When I talk to an entrepreneur, often the conversation goes like this. They tell me what a great idea they have. But then, I think a bit, and reply that here are X companies which are touching on or allowing people to do what you are providing. They then reply that these guys are totally not competitors.

In every case, this is strictly true. It is not the company's mission to compete directly against what the entrepreneur has come up with. The aggravating factor is that consumers don't care necessarily care about what the company wants them to do; they are creative enough to use the company's tools in ways which cause an unintentional competitor to emerge to the entrepreneur's product or service.

This leads up to the "Why" aspect.

I tell entrepreneurs that "How" is not the problem. They have thought up great features, coded up great technology. They are smart, resourceful, and can build the best of the best of the best. But in a world where there are companies out there muddying the marketplace with actual competitive, near-competitive or unintentionally competitive products to the entrepreneur's product, it can't be about the "How"; it's not enough. They need to focus on building a strong "Why", which is the answer to the question "Why yours versus someone elses?" in the mind of the consumer.

Why is a consumer going to use my product instead of someone elses?

It's the essential question that must be answered and then hammered into a consumer's mind so that they will steer in your direction when trying to get something done. Because if there is not a good "Why", consumers will always go back to the other ways of doing things, even if they are harder.

This is because it is more familiar, it is safe, and they don't need to learn something new. Something works, so why change? If it ain't broke, don't fix it. They've already invested tons of time and effort in the old thing so why bother with something new.

It is why I push on the "Why" aspect with entrepreneurs so much. I don't need to be impressed by the technology; I get it. I can see why it is (or isn't) better than other things out there. Others will see it too. But they need to know why they should come over to your product and leave all that familiar, safe, conservative legacy behind. They need reasons to use your service.

Anybody can build great stuff - the "How" is taken care of. My argument is to build a phenomenal "Why" and you may yet compete sucessfully in a place as crowded as today's Web 2.0 world.

An Unexpected Source of Inspiration

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Sitting at a coffee house this morning eating my breakfast, I brought a pile of magazines to read. One of them was PC Magazine, Nov 7 '06 issue which featured 99 surprising new websites. Between articles like this and TechCrunch, I always like to look at what else people are working on.

But as I read through this website list, I thought about a web application that I discussed with a friend yesterday. It was a very early conversation where an entrepreneur has an interesting idea, but I felt it needed more work to take it beyond just a tool to something bigger. As I read through the websites in PC Magazine, I encountered one that was a content website. But it also sparked an idea related to the one that an entrepreneur had. So the area in which the content website played created a possible improvement to the entrepreneur's idea. I had not expected PC Magazine to help me with this entrepreneur's idea, but then isn't that how creativity works sometimes?

I find that expanding one's view, as well as experiences, increases the chance for creativity. Our brains have more information to link and cross link together in new and unique ways. It is why I consume tons of reading material from all subject areas. Magazines like The Economist, Popular Science, PC Magazine, WIRED, BusinessWeek, Discover, DWELL, Time, Runner's World, Newsweek, Triathlete, Esquire. Books from science fiction to novels to non-fiction in all areas. It is also why I have traveled a lot; experiencing other places, cultures, and people also helps to expand my creativity.

A long time ago, my art professor told me about traveling and its relationship to creating art and design. I did not fully understand what he was talking about until the broadening of my experiences happened. It made me my creativity more powerful simply because I had more to draw from than just from my imagination.

Broaden your experiences. I am sure it will work for you as it did for me.

Virtual Office: Drinking Way Too Much Coffee

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Last year, a friend of mine working on environmentally aware chocolate, Sweetriot, invited me to visit them at their offices. She says, "Come on over to the Starbucks on 1st and 54th where we have our offices."

"Offices? Starbucks?" I thought, "this is peculiar!"

I got up there to find that their whole complement of 4 employees (1 CEO/founder, 3 interns) had been staking out a corner at this Starbucks for months now.

How funny to see them conducting marketing surveys with people in one corner, while others were checking email and planning at another table, and all of them had DHL envelopes propped up against their laptops because one of them had called DHL to pickup a package at this Starbucks. I'm sure the DHL guy probably did a doubletake when he showed up!

Office Away From Home

Also last year, I met up with some guys over at Blinkx and they recounted to me on how, in their travels around the U.S., that Starbucks has become their office away from home of choice. They just open up their laptops, grab a latte, set their mobile phones on the table and start working. All their calls are routed to their mobile phones so nobody even knows they aren't in the building. Messenger is up and running as well as emails - their virtual office is complete and great coffee and eats are just a step away.

As I work on David Shen Ventures, LLC thing, I find that cafes have become my virtual office. I joke that I am in some coffee shops so much that I should post office hours on the door, ie. Dave Shen at Coupa Cafe between 1pm and 4pm - sign up for time here.

It's actually pretty nice. There is WIFI, good ambiance, and a never ending stream of people. The best coffee shops don't have a lot of ambient noise and just have a low level of music playing in the background. Most annoying is the shriek of the espresso machine milk frother as they heat up milk for the drinks.

But I find that being not in the same place, like an office, sparks a lot of creativity and I get a lot done by not being in the same place all the time.

It's also a helluva lot cheaper than having a real office. Someday perhaps (sigh)....

Privacy is sometimes a bother. Trying to have a conference call or meeting about confidential stuff is tough, whether VC financing terms or new top secret product plans.

Passing the Social Test

Occasionally I bump into people I know especially in places such as Palo Alto. Socially, it's been great - when working as a one-man show, you don't have a big company campus to go to and interact with people. After seeing one person that I'm working for now, he remarked to me that I had passed the Guy Kawasaki's Stanford Mall test:

How to determine whether or not you should work with a given VC - If you see your VC across the plaza in the Stanford Shopping Mall, you have three choices.

1. Go over and say hello.
2. Say hello if he or she notices you.
3. Avoid him or her at all costs.

Kawasaki recommends to only work with a VC that you would choose option 1 for.

It's nice to know that this applies to cafes as well...! Well, I'm not really a VC either....

Postscript

Hanging out in cafes means you probably are drinking way too much coffee. I started getting into 4-5 cups a day. Way too much and ruins my pearly white smile. Next drink of choice: Pelligrino or equivalent with lemon or lime, or Green Tea sweetened, either cold or hot.

By the way, free WIFI sucks unless the cafe is providing it. I bought a Verizon Broadband card in case the cafe doesn't have WIFI and that works great.

Up and coming - launch Meetro and maybe you'll meet someone new...!

FanLib Office, Circa Oct 2006

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Circa Oct 2006, FanLib in their West Hollywood office:

Our first major operations meeting at my apartment building's conference room:

Thank god for the Polycom USB Speakerphone and Skype to allow us to connect with remote team members!

Already outgrown their one man office plus reception area, they are set to move by the end of the year.

Meetro Office in Palo Alto, Circa Sept 2006

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Circa Sept 2006, Meetro at their Cowper St., Palo Alto office where all the guys were piled into an apartment:

Some of them lived there as well! Imagine doing job interviews in one of the bedrooms...!

I've encountered this many times already in silicon valley. Often companies will start in someone's apartment in an attempt to save money, and eventually we see a whole full blown office show up there courtesy of IKEA furniture. They're now in a cool office in SF - pictures coming up soon...!

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