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  • 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.

I want to start with a question for, for Mark and

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