Monthly Archives: January 2007

Connections and Networking

This week and the coming week I am bringing some entrepreneurs to meet with some people in my network. And the results of this week’s meetings reinforced to me the importance of connections in my line of work.
I had originally placed more emphasis on my personal skills, ie. product strategy, user experience, etc., in helping early stage internet companies. I had not thought my rolodex was strong enough to contribute in that capacity yet. But I knew as time went on, old colleagues of mine would leave Yahoo! and have ended up in some companies which I knew would prove useful to my companies. This would be a valuable asset to my business and, thus, I began a side project of networking more and getting out there as much as possible.
I also resolved to approach this networking from a slightly different perspective. There are what I would call professional networkers out there. I have found these people only network purely for business reasons. They get out there and have conversations about how they can work together and it rarely goes beyond business type conversations. I thought I would attempt my networking to have a slightly more interpersonal aspect with it. Yes, we would potentially begin with business focused discussions, but I would always leave the door open for making it not-always-business related. Who wants to keep talking about the industry anyways? Combining this with my belief that working together can be enhanced when you geniunely like hanging out with each other makes things a whole lot smoother and easier.
I am finding that as I do things for other people, that I also get some of that in return. For that, I am eternally grateful. Everybody is busy, but as I make time for others, they make time for me and my projects, like when I ask them to help me review their funding presentation.
We did just that late Friday afternoon and it was extremely fruitful. I brought one of my companies into a meeting with two guys who I thought had just amazing sense for putting creative deals together. When we left the meeting, I thought that it generated some real new possibilities that we hadn’t thought of, and now we’re going to talk about how that affects our final rev of the funding deck. If we can get some of these ideas in motion, it would certainly make our funding deck that much more attractive.
Another meeting I had was with a prominent media company exec I knew. First, I think my chances of gaining a meeting through cold calling was pretty slim. In this case, I had some history with this person and he was willing to take the meeting. It also turned out to be very good. While the person didn’t have anything specific for us, he was willing to introduce us to a person in another division who might be interested in our technology and product.
My strategy with these connections is thus:
1. I know the importance of the interpersonal aspect and thus am willing to try build relationships beyond just business.
2. I am willing to help them as much as they help me. And I won’t charge them for doing some presentations or just a meeting or coffee or two with someone they want to meet me and learn about what I do. I have always been willing to make time for any of my connections.
3. I continue to build trust with my connections.
The first area is with not bringing frivolous time-wasting proposals and startups to meet with them. I won’t do it. Everybody is so busy and time is valuable. I don’t want to setup a meeting unless I think they can really benefit from it. Thus, this maximizes the chance someone will take a meeting with me if they know that 99% of the time it will be something really cool and worth their time.
The second area is with investors. This is trickier. The number of people who claim to be fund raisers is staggering. But I think there is a problem with their business; almost all of the time, they are not investing into the companies they bring to investors. They get paid either on a percentage of successful fund raising or get paid hourly for their work. As an investor, you will never know if these are good deals or not; the person bringing them to you is getting paid no matter what! For me, I don’t want to work that way. I won’t open up my investor network unless I have put money into a company. It is the ultimate sign of confidence in a deal; you have put your own skin in the game.
Unfortunately, my investor network is the smallest out of all my networks. It’s definitely an area I’m working on now.
The third area is with introductions. There are some people who are willing to make introductions quickly. Almost too quickly. Perhaps that is a sign of trust for me. Perhaps not. But sometimes, I think it’s a bit too quick. I think they should think beyond the fact that it’s me and they know me. I think they should get to know why I want the intro, as well as the mind of the person they would be introducing me to, and then think hard on whether there should be an intro or not. Sometimes, there shouldn’t be. Or you might need to wait a while until conditions are better to ensure that there will be a successful response. Or maybe there should be an introduction yesterday.
This is in an effort to maximize value to both parties and minimize time wasted. It also helps the person who is the receiver of the introduction know that you, the introducer, aren’t making frivilous introductions and they just sit in an email inbox forever not read or responded to. My goal is to have 100% of introductions returned and matched up. If an introduction email is not responded to, I know I’m doing something wrong.
Build trust and keep building.
4. Lastly, I intend to be honest, clear, and straight-up about everything. If I can’t do something, I’ll say so. I won’t beat around the bush on that. I want people to know I mean what I say and where I stand no matter what.

New Startup in the Works

This week in NYC, I met up with a person I had gotten to know over the last few months. Originally when we met, I thought that he had some really great ideas for products and services and proposed to him that we should work together on something. The initial proposal was to start small; we would start an LLC and begin working together on one of his projects.
Working together with someone on a startup is a bit like marriage. I learned this with a startup I began with another person. I had known this person for a while and considered him a friend. You think you know someone until you start working with them and spending time on a startup with minimal people; then you REALLY get to know them because when there is only two of you, every success or failure is amplified exponentially. There is nowhere to hide in a company with only 2 people in it. In this case, I had to close down the company after going through this learning process and finding out that we could not function together as partners in an entrepreneurial venture.
Suffice to say that money and commitment changes people, and finding people you can really work together and solve problems with is a real job.
Having learned the hard way that partnerships require a deeper learning about each other, I gingerly approached this other person about working together, leading with my enthusiasm for building something really cool and tempering that with a still-needing-to-know-each-other-better mentality. I thought that starting small would be really great way to enhance the get-to-know process, while minimizing the impact on each of us in case we needed to part ways.
So we began meeting more and working for a few weeks on one of his projects. In parallel with us getting more comfortable with each others’ working styles and abilities, he was driving forward a larger vision with another startup proposal. As that developed, we did become more comfortable with each other decided to roll the smaller project into the bigger one instead of taking an interim step of forming the smaller LLC.

I am very excited about the larger vision. It still can take one of two directions and each one has its own interesting elements. I am loath to discuss it at this early juncture, but within the year we’ll be able to talk about it in some capacity.
The involved team members are all colleagues and friends of this person and we all bring different strengths to the table, ranging from product to engineering to vision to business development. But on top of that, I find that I genuinely like these guys. I got to spend some time with them this week and am glad to see that we can have fun together as well as working together. Over the years of hanging out with Yahoo! sales folks, I have come to really know the benefits and importance of the interpersonal aspects of business. That doesn’t mean that successful companies couldn’t form without the interpersonal aspect. I am now a firm believer that it can definitely multiply chances for success if we all like to hang out and party together as much as we’re dedicated to the company’s operations and projects.
Meetings in NYC this week are for planning and moving forward on a product basis and also on a company formation and funding basis. We needed some minor seed capital to get to our first milestone, and amazing to me, I have managed to become lead investor for this early round at the small amount I was able to put in! How interesting to be in a position to affect the terms! So I gave my preferences and now we’re researching if those preferences can be met.
Still much work to do, getting to product beta launches and getting company operations started. But this is where I like to work best; being with one or more entrepreneurs and advising them, getting the company and product off the ground to a point where it can grow and flourish, and before any kind of money has even shown up.

Leaping into the Angel Funding Process

Three of the companies I’m working with are now approaching the fund raising process. Often with these entrepreneurs, there is a lack of exposure and experience to how the investor process works. Here is an (edited) excerpt from an email exchange regarding some details and expectations from the fund raising process, and about an upcoming meeting with a prominent angel investor:
I’m glad I broached the subject. Thanks for the detailed and insightful response, Dave.
DSHEN: I consider it my job as advisor to teach you as much as possible and get you up the curve as fast as possible to set your expectations correctly, to prepare you for the best and the worst, but also to have a really fun time at all this ;-).
What’s a likely scenario in your mind?
* Send term sheet and 1-pager immediately
DSHEN: I think this is a good idea. It will help keep the mtg shorter and you and he can focus on his real questions.
* Meeting on Thursday
DSHEN: Present your deck, field his questions, pray for positivity.
* How many more meetings until we close a deal?
DSHEN: No idea. It will vary from investor to investor. Generally if you have a group of investors, you’ll get a general “I’m in” and you should add them to your list. You’ll always have to check back with people to make sure they are still “in”. Sometimes they may drop out. This motivates you to close funding as soon as possible.
By close funding, I mean:
– accelerate as much as possible meetings with investors. Do not sit around not fund raising, even if you have a lot to do. I suspect that the burden will fall on your US person to do the fund raising since she is here in the US. It will be really tough. You’ll have other commitments and try to field them, but if you don’t go as fast as possible, this will drag on for months. The longer you wait to close, the higher the possibility that somebody might drop out, thereby lengthening the process even further.
– set a date for yourself to close by. Set a monetary minimum and maximum goal. Setting a minimum both mentally and financially will mean you will be faster in deciding whether you want to stop fund raising, close the funding and collect the funds and finish the massive amount of paperwork, and get back to work. BTW, in a good scenario, you may actually have more investors wanting to give you money than your maximum and may want to decide to take that. This is actually a harder decision than it looks, as it affects valuation and how much of the company is sold to investors.
– the closing process is one of document preparation. You’ll get your lawyer to expand upon the term sheet into the relevant docs. Since you’re doing a preferred angel round, you’ll need a stock purchase agreement, an investor rights agreement, and some others. You’ll also need to change the articles of incorporation.
– the closing process is one of gathering signatures. Like herding cats, you’ll need to help get all the signatures back to Monty. I would recommend getting an eFax account. It will help you electronically pass around faxed signature pages versus shuffling paper. I have one and love it as all incoming faxes get emailed to me as PDFs. (by the way, it works great also as a document scanner; you just throw the doc into a fax machine and fax it to yourself).
– the closing process is one of collecting money. You’ll be surprised at how hard this process can be. Usually, your law firm will setup an escrow account where the money will go to first. This is to prevent you for going to the Cayman Islands with our money if we were to send it directly to your bank account (haha). Once the money is collected, he’ll run all the docs, get all the signatures, get everything filed, and then the money goes into your bank account.
– after all this is done, you’ll send back to everyone their copy of the signature pages. Your law firm might prepare a nice notebook with all the docs in it, or not. You may want to pay for that or maybe it’s part of the package.
And lastly, we get our nice Preferred Stock certificate in the mail from your law firm a few weeks later.

* Dave, it is my understanding that if this investor is in, you’re likely to close as well?
DSHEN: Actually my commitment to you is not dependent on that. I have already said that I would invest and now it’s a question of exactly how much I will put in, and a final review of terms. Also, I will need the advisor agreement signed with you since that’s how I operate, which is I require that I be an active participant (advisor) with any firm that I invest in, on the assumption that my help will raise your chances of success than without my help, thereby somewhat protecting my investment.
BTW, you’ll find that some investors won’t invest unless somebody else goes in too. A lot of people go on the opinions of others, especially those who aren’t as good at evaluating companies in the internet space. Some won’t go in unless you reach a certain threshold of dollars committed, also as a way to gauge others’ confidence in you. Be prepared to deal with this in your fund raising travels.

* Would we close with just you two, or would we have to wait for other investors to come on board as well?
DSHEN: Most likely with a dollar amount of $1MM, you’ll have to have other investors at the angel level. Unless you find someone who LOVES you and what you’re working on, AND they are richer than you or I can imagine (there are a few people like that in the valley). You already have a small list of people who have verbally committed; ask your partner about that and I believe I am already in that list.
I understand that these things are not entirely predictable, but we still need to have a clear plan, with milestones and tasks, so we know what we’re aiming a and so we can track progress and change our strategy when things don’t go as expected, and so we can plan for our finances in the meantime.
DSHEN: Yes, hence my comment on setting a closing date. You should be doing regular check-ins, on progress and keeping a list of investors (ie. Contact info and contact progress (ie. Sent term sheet, no response, got warm response, referred me to his buddy, etc.), amount committed or not, did they refer you to someone else so you can thank them later, how did the mtg go?, were they assholes or not :-), etc.)
The fund raising process is going to double your workload, maybe even more.
Be prepared for sleepless nights for a long time, a lot of frustration at not returned calls/emails, watching the process go super slow, etc. And then be pleasantly surprised if you are able to close early :-).
Last word on this fine cold NYC morning: find investors who are going to help you if you can. Taking non-helpful money is OK, but not as nice as getting someone involved in your company who has skin in your game and can also help your business, like leveraging their list of contacts. Sort of like when I invest, I am doubly motivated to help you than if I’m just an advisor.

Some other notes about investors:
We’re dealing with a large sum of money. $10K, $50K, etc. are especially large sums of money for angel investors. You’ll find that money changes people and there will be some people that will say they will give it to you and then pull out at the last moment. It’s frustrating and you’ll wish that people mean what they say, but be prepared to encounter some who won’t be able to part with their cash, even if they insist that it will show up tomorrow.
If a few pull out, this could mean that you won’t be able to close and you’ll have to go back out and raise more money.
Keep the number of investors as low as possible. There will be people who can’t stop bugging you about how their money is doing. This is also related to the previous point; this sum of money is a large amount of money and there will be people who will be overly paranoid about losing it. Experienced angels won’t act like this since they’ve done this before, but the likelihood of it happening with unexperienced angels is fairly high. So keep the number of investors low; it will reduce the chance of this happening and reduce the chance of added distractions in keeping investors happy.
The fund raising process can be filled with frustration, consumer incredible amounts of time, and be extremely rewarding building your confidence and your rolodex with each meeting. Have a positive attitude through the whole process, don’t give up, and have a great time with it.

American Airlines Qualification Complexity

As I crossed into the new year, and now in planning for 2007, one area where I have to really put some effort into is with American Airlines.
Following my time at Yahoo!, I remained with Yahoo’s preferred air carrier, American Airlines so that I could continue accruing miles and status on the airline where I had the most miles. After I left Yahoo!, I proceeded to try to redefine my life and went to NYC quite a bit, which elevated me to Executive Platinum status. The best perk about Executive Platinum is automatic upgrades to Business Class when they are available. Oh man! What a perk!
I usually take the redeye on my way to NYC so as not to lose a day there. If you’ve ever tried to sleep in coach, it sucks so bad. The airlines are never going to have enough money to remodel their planes. They’re just going to leave them the way they are, to the detriment of all air travelers and their bodies. Add to that my triathlon training regimen and now it’s doubly worse. Upgrading to Business Class and their much better seats – recline further, better cushions – means I am much more comfortable on those overnight flights.
Have you looked at how much they charge for Business Class? For the cheapest coach from LAX to JFK, it is about $350. For Business Class, it is a whopping $3300! Way too much!
Executive Platinum status has become a necessity not only for my body but for my wallet.
Last year, December rolled around and I realized…I WOULD FALL SHORT OF THE 100K MILES to qualify! I panicked! But I also found out one crucial thing. That was certain flght classes would only get 50% of the mileage applied to Executive Platinum qualification! I spent a whole year traveling not knowing this. By the way, the classes that do give 100% of the miles applied to Executive Platinum qualification are K, L, M, V, H, and W. Every other one is a discounted class and gives you only 50%.
First I go to the website and I realize the website doesn’t give you the ability to have that fine a control over what classes you can buy into. You can only get the cheapest fare, or by major flight class, Coach, Business, or First. If you go ask for Business Class, you’ll get the $3000+ fare. If you ask for Coach, you get the cheapest fare but only 50% applied to Executive Platinum qualification. You hit the “with restrictions” radio button, and you get ridiculous fare quotes of $1000+.
Calling up the Executive Platinum is better. I ask them to change all my flights to 100% mile qualification classes and we sit there for about 30 minutes going through my remaining 2006 flights and switching classes. I gladly pay the extra fees, and in some cases, I actually get money back! But setting all of them to the full mileage qualification classes means I squeak into qualification at approximately 105,000 miles by December 31.
This year, I looked at my travel and realized that I wouldn’t make it on miles alone. Now I have to book flights through the Executive Platinum desk and ask specifically for those flight classes. This is tricky because I need to keep pushing them on lower prices. The first time I did it the person came back with a $1500 fare; I asked for a lower fare and it dropped to $560. I also stopped flying Southwest and fly American Eagle on short hops to attempt to qualify on the 100 segments flown in a year.
I don’t think I could do this travel without Executive Platinum status. It’s too taxing without the automatic upgrade. I may pay a little more for fares, but the automatic upgrades to Business Class make it worth the extra bucks I pay over the cheapest coach fares.

Don’t Need to be Lead Investor to Affect Terms?

As I started angel investing into startups, I began realizing that the amount I was investing gave me virtually no leverage to affect terms. The largest investor typically has the most power to affect terms, since the entrepreneur wants their money the most. They are more likely to negotiate and do what that investor wants than other small fry…like me.
One goal I have is to take the cash I set aside now and try to build it over the next few years to a point where I could be lead investor and really affect terms. This usually starts happening at around a $250,000 or more investment.
But I did find one place where I could actually affect terms without requiring large sums of money. First, I asked my lawyer to draft an example Series A term sheet. I also asked him to make the terms balanced towards investor and the company. This was an important point; many times now, I have seen investments go much quicker when the terms were more balanced. This is even true with my advisor agreement, which is neither overly advantageous towards me or the company. It reduces negotiation, and thus legal fees and time – both of which are desirable.
Second, I start advising these companies very early, even pre-incorporation. I help them in the process of defining their fund raising strategy, and give them my sample Series A term sheet. They love that. Otherwise, they would have to get it from their lawyer and that would cost extra cash. Instead, they present that to their lawyer who reviews it and is usually agreeable on basing their actual term sheet off mine. it would cost them extra cash to alter it later to the requests of potential investors, as well as costing money to go over it with their legal help to understand it all.
This is good because now I have a fair, balanced term sheet which I am investing in, rather than something created by the legal support. Given that most entrepreneurs are new to the fund aspect, and the fact that lawyers will most likely default to a company friendly term sheet to protect their client, being aggressive at presenting a sample term sheet which is balanced provides an opportunity to create a situation where I can actually affect terms and not be the lead investor.

The Legends are True! Raising Funds on Powerpoints

Well, I finally saw it myself. Two friends of mine just raised venture capital for their startups on…a POWERPOINT.
Before this time, it was by rumor that I heard people were walking in with ideas and getting funding. No company, no corporation, no IP, no technology…nuthin! But getting $1MM to $4MM committed. And the rest of the world struggled along with their business plans and prototypes…
I tried to quantify what made these two people unique. Here are some thoughts:
1. They are both very persuasive presenters. Very good at pitching their ideas.
2. They were well-known to the venture fund. Both people had fund partners begging them to start something…anything…so they could fund it.
3. They had decent track records.
4. Both had high integrity, so trust is a factor. They were also very realistic about their prospects and didn’t oversell or overcommit.
5. Both could attract talent amazingly well. While everyone else was struggling to hire, these two got committed employees with no company existing! So they were well-known and trusted to the people they got on board.
6. Of course their ideas were pretty damn good too. They were presented as very well thought out ideas and with an answer for all tough questions.
Sorry Microsoft, but I don’t think Powerpoint had anything to do with their success. Too bad if that was all someone needed was advanced presentation software to get funding…!