Sunday, June 28, 2015

Getting The Most From Your #Startup Board

Getting The Most From Your #Startup Board

The formal “fiduciary” board comes to all successful startups sooner or later.Maybe a small 3 person Board at the seed stage. A five person Board when you close out an A round. It’s part and parcel of the price you pay as a founder for taking external capital from investor types like me. But also can and should be a key source of support, guidance, value creation and yes discipline and oversight too.
The thoughts that follow are my suggestions as to how a CEO can make her startup board meetings do what they are supposed to do. Meaning get the most value add for the CEO and the company from the Board members - not just meeting your governance obligations. Hopefully what I have to say is helpful. But there are many great resources available on this topic from other more experienced investors and entrepreneurs. A small selection is included at the end of this post.
Here goes with seven Board topics ... in (roughly) chronological order:
1. Before the meeting(s)
  • Set a meeting schedule for 12 months at a time and stick to it. You are coordinating the calendars of multiple busy people. So lock the dates in and save everyone the stress of scheduling ping pong.
  • Before each individual meeting send out your agenda and board deck (or write up if you prefer that format) no less than three days in advance of the meeting. Unless you give your Board members the time to get prepped then the meeting is ... a total and utter waste of everyone’s time.
 2. Meeting Hygiene and materials
  • Keep you meeting to no more than four hours max, ideally no more than three, otherwise you all lose focus and productivity collapses.
  • Smartphones checked in at the door and turned off. Yes, this is a tough one. People can’t be offline for more than a few hours without withdrawal symptoms, another reason to keep meetings short!
  • Minimize report out, maximize discussion. Limit the slides and keep them visual (charts/tables not verbal vomit). And, because your board members will have diligently reviewed the materials over the 3+ days you gave them (!), you don’t need to talk the slides to death, rather summarize and then ask for questions.
  • Don’t worry about fancy. Fancy is a waste of time. So simple text bullets. Drop tables and charts straight in from excel. And keep the format standard so each meeting requires a simple update not a rework.
  • Avoid confusion over multiple docs. Ideally have everything set up and sent out  in a single pdf.
  • Keep meeting minutes brief and send them out asap after the meeting.What was discussed (not a blow by blow of who said what) and crucially action points with assigned ownership.
  • If some anyone is remote, use video. There is simply no way a person participating in a lengthy meeting by phone will stay fully engaged for more than a (really) short period. It’s trivial these days to have the person live in the room on a screen. 
  • Consider having your law firm sit in on meetings and take the minutes.Good to have an third party in the room sometimes and often law firms see this as part of their job and don’t charge (extra) for it.
3. Meeting flow
  • Put the housekeeping issues upfront on your agenda and deal with them quickly. So things like approval of prior meeting minutes, approval of option grants.
  • Create high level “dashboards” that summarize your key business.These should be metrics that you actually track for business, not purely Board purposes. A few slides (the Nextview templates referred to below have some examples) can cover key financial, technology, product, sales, marketing and human capital details.
  • Some topics can merit more detail and individual slides. For example: an update of your YTD income statement with variance analysis and you 12 month budget; your cash flow and projected burn, hence timeline for your next fund raising; Sales goals and depending on business you pipeline with a probability weighted average rolling 12 month projection; planned key hires over the next few quarters; your product/technology roadmap with key releases over the next few quarters.
  • These business updates and your dashboards should repeat in the same format meeting to meeting. And because they are provided in advance and covered at the front of your meeting you can then  ...
  • ... allocate a significant proportion of your meeting time to one or two “deep dive” topics. These should be areas of significant importance where you want the Board to understand the issues and crucially get their advice on your plan action, and ultimately their buy in.
  • Include some senior staff for parts of the meeting as you get bigger. This can mean having a section of the meeting where you are joined by some or even all senior staff. Or this could include bringing in a few folks relevant to a deep dive topic. Erika Trautman CEO of Rapt Media points out that exposing more of her team to the Board can be very effective in helping keep senior staff on their toes and in touch with the big picture. As to when to do this Erika notes: “... it starts mattering when your leadership team has direct reports and you need to start streamlining communication across departments. We started when the team whole was about 15 people.”
  • Close the meeting with an “executive session”. This is where the Board members talk without the CEO present. Any concerns? How is the CEO doing? In this case is is important that a Director gives the CEO prompt and honest feedback about what the group discussed.
4. AOB
  • Most meeting agendas end with a catch all “Any Other Business” item. Around the time of the meeting that could be food (and drink)! By way of AOB for this post worth I note that many experienced Board members strongly recommend adding a purely social component to your Board meeting. Not at the time of the formal meeting itself but rather by combining the day of the meeting with a purely social dinner (night of, night before) or perhaps a group lunch.
5. About those Board votes … and surprises
  • Boards don’t make decisions based on dramatic votes cast around the table on the day of. In fact smart CEOs work out quickly that all key decisions are made BEFORE the meeting! That is because she takes the time to check in with each Board member before each meeting socializing any contentious issues. Hence making sure she knows where they stand and just as important they know where she is coming from and what her bright lines are.
  • As Ellie Wheeler of Greycroft pointed out to me: Surprises are bad. Bad surprises are the worst. The pre-meeting check in (and regular ongoing dialog) avoids the surprise bomb going off in the meeting. As Ellie noted this also a) erodes trust and can b) derail meetings. Not what you want.
6. Next steps after the meeting
  • Your Board members are not dispassionate observers. They need to be in the tank (your tank) with their scuba gear on. The CEO should have asks for them prepared plus be ready to assign homework tasks for after the Board meeting to Board members. These should be documented in the meeting minutes, so no one can claim ignorance later!
  • For the transparency minded consider minded consider cleaning up the Board deck (so taking out comp, option and other sensitive references) and circulating to the entire company and then commenting on them at the next all team standup. Board meetings are mysterious and scary things for your staff so make it an opportunity to reinforce your regular update on how things are going and where they are headed.
  • Save time and make your Board materials into an investor update. Don’t duplicate effort! Once you have a regular Board meeting schedule underway consider using your Board materials, again suitably edited and maybe with a short text discussion to go along with them, as the basis for you regular investor update.
7. And finally: Boards are not just about the meetings
  • As Ute Rother CEO of QSensei as a CEO “you run into problems on a daily basis and you should receive advice and feedback to solve them asap”. ie the best Boards operate as a resource in real time, not just for three hours every six to eight weeks.
You can also find me at @adamquinton 
PS Some additional Startup Board resources:

A Philosophy for Early Stage #Startup Due Diligence

A Philosophy for Early Stage #Startup Due Diligence

When early stage investors conduct their due diligence we all have our own set of criteria and benchmarks, some objective. Many not!  This can be rather frustrating for founders because a lot of the dialog with investors, as a result, is an inefficient one on one dialog.
But before getting to the details of due diligence that matter to "us" what is the appropriate stance for investors to adopt as they undertake due diligence? What you might call a philosophy of due diligence. As you will see for me that means treating the real risks takers with respect. (Hint: investor risks are, in the round, pretty modest.)
Personally I frame this by thinking about the different situations of the players on each side of the table. Those players being:
  • The buyer of the equity – that would be the angel or VC investor (e.g. me)
  • The seller of the equity – technically that would be the company although it amounts pretty much to the entrepreneur/founder
As I see it these two participants are engaged in activities with very different risk profiles: 

A. What does investing mean for the buyer? 

We know that any individual angel investment is very "risky" due to the power law of highly asymmetric returns involved in early stage investing. i.e. each individual investment has, other things being equal a high probability of total loss (maybe 40%), a high probability of only modest positive returns on cash invested (maybe another 40%) and that the outcomes that generate that attractive average annual returns come from the outsized gains on less than 20% of all investments. Indeed there is a power law within the power law. For example approx. the majority of ALL VC returns in 2012 came from one single investment, Facebook!
Across large sample sizes angel investing is an activity that generates returns in the +/-20%/year range. Indeed a Kauffman Foundation study pointed to 27%/year returns for angels investing in groups. That equates to returns that are pretty reasonably commensurate with the risk assumed ... on average. The Capital Asset Pricing Model gets it right!
Of course the finance 101 tells us that idiosyncratic/unsystematic risk can be mitigated by diversification. Admittedly the degree of diversification required that would reduce risk exposure largely to systematic (market) risk is impractical for all but a very few angels - as David S Rose, CEO of Gust and Chairman Emeritus of The New York Angels, noted in one of posts that make up his prolific Quora record.
Several studies and mathematical simulations have shown that it takes investing the same amount of money consistently into at least 20-25 companies before your returns begin to approach the typical return of over 20% for professional, active angel investors. 
This means that early stage investing is pretty damn risky in terms of your likely return profile. And, mathematically, we can see that with anything less than well into a double digit number of investments the most likely outcome for an angel investor is the loss of most all of your (could be my) capital! Ouch.
But this creates a paradox. Armed with that knowledge, any rational angel (VCs are somewhat different here because they are investing other people's money for the most part) should only invest money she/he can afford to lose – and lose totally. i.e. it can "all go to zero" but the angel's lifestyle is unchanged
Bottom Line: For the rational angel, while their is evident investment risk in this "asset class", there should be zero lifestyle risk ... assuming they only put money to work they can afford to say goodbye to without pain. (i.e. no need to cancel your next vacation, cut down on your restaurant visits or whatever!)

B. What does founding and taking outside investment mean for the seller?

The sellers, the entrepreneurs, are of course on the other side of these extremely asymmetric returns. For them the most likely outcome is … they lose "everything". So maybe all the savings they put in to bootstrap the company, maybe the money from the sale of their house, the years of sweat equity not to mention regular earnings from more mundane salaried employment forgone. So a big direct financial cost, indeed a big financial and life style opportunity cost.
Indeed, as Noam Wasserman points out in his excellent book The Founders Dilemmas, rational founders ... will not found! Because the evidence suggests they will be better off getting a salaried job somewhere.
Bottom Line: A pretty meaningful (and adverse) asymmetry for founders/entrepreneurs in terms of their most likely financial and lifestyle outcome.

The Take Away 

So given A+B what is the implication for all us investors as it relates to due diligence?

I think of it like this: 
As the investor you need to recognize who is taking the real risk here and treat them with commensurate RESPECT. And that is NOT you the investor. It is the amazing founder(s) you are backing.
That does not mean that you leave the entrepreneurs alone and don't impose on their time to conduct due diligence. Indeed the Kauffman study I cited above makes it clear that, for the investor, due diligence improves outcomes. Investors experienced better returns in the deals where they exercised more due diligence. Sixty-five percent of the exits with below-average time spent on due diligence reported a return that was less than their original investment. Losses occurred in only 45 percent of the deals where investors did above-average due diligence.
Rather, as a practical matter, RESPECT to me in this context means undertaking your investment due diligence with the following three thoughts top of mind: 
  • Being super sensitive to the entrepreneurs time and not sucking them into your own time wasting analysis paralysis that might be an interesting intellectual exercise for YOU but might kill their ability to execute their business. Founders have no staff, no admins to hunt stuff down for them; they have incomplete data; heck they probably aren’t drawing a salary.
  • Getting to YES on NO as quickly as you can. Set a deadline to get them an answer and stick to it. I am a firm believer in the Pareto Rule here. Namely that 20% of the time you spend gets you 80% of the answer. You can spend the other 80% of the time to get the final 20% of the answer. But it probably won't change.
  • Communication directly and honestly why your answer is NO, if that is where you end up. 
A key issue you face as an early stage investor doing due diligence is a question of balance. There is no right answer to that, but in my view a little (no, in this case a large amount of) RESPECT goes a long way.
You can also find me at @adamquinton 

Monday, June 1, 2015

Startup Pitch Deck Advice

Startup Pitch Deck Advice

I have been working with several founders recently on their fund raising decks. Having had to do some intense thinking around the subject, what investor side advice to I have to share? For founders on this journey, here are three general sets of resources I have found helpful and seven personal observations.

Three general resources

Pitch deck contents
There are plenty of amazing posts on the slides and info to include in a good pitch deck from the likes of PolarisCooley and Sequoia. Go to slideshare to find many more. And don't forget that if an investor is kind enough to give you advice on what they want to hear/see, then it probably makes sense to follow their advice. For example, ffVentures provides a handy list of what they expect to see, and The New York Angels sets out at length the list of "examination questions" to which a pitch is the de facto answer.
Sample pitch desks
Check out Pitchenvy to review a wide variety of pitch decks. For example, see theSquare pitch deck - 10 slides only! And in my view Reid Hoffman's description and commentary on Linkedin's Series B pitch deck as presented to Greylock is a true classic.
Pitch deck templates
Among others, the team at Nextview helpfully provides a pitch deck template. In fact they offer two: one a conversational format suitable for one or two people across the table and the other for a show  before a larger group.

Seven Personal Observations

Sorry folks, there is no right answer
OK, so as a founder this is the last thing you want to hear, but there are as many perspectives on what makes a good pitch as there are other battle hardened founders, pitch coaches and investors. In other words, there is no single "correct"answer to the question: "How do I make my pitch deck perfect?". For the founder I think this is another case of "take advice, don't follow advice." Or, for history buffs, as Napoleon put it: "I do not allow myself to be governed by advice". So my own advice about advice in this context is:  Don't blindly do what some so-called pitch expert says. Absorb inputs yes, calibrate what makes sense, yes, but  ultimately, do what feels right for and that you are comfortable delivering. 
Think about what the audience needs to know, not what you want to say
"Know your audience" is presenting 101. Always frame a pitch from the perspective of the investor. At its most basic, that means not spending too much time extolling your product and doing a demo. Demos are usually a bad idea, btw. The investor is not buying your product or service, the investor is (maybe!) buying your equity. That is not the same thing. And further to the "no right answer' point, there is no optimal deck because different investors need to know different things. So the more intel you have in advance about an investor's perspective or biases, the better. Then modify your delivery and move or add slides accordingly, tailoring the content to the audience.
Don't forget:  you are pitching you, too
In my experience, investing is more emotional than most people realize or for that matter want to believe. As Kathleen Utecht, now at Core Innovation Capital, noted at an About Astia event in New York, getting to the next stage - "Great pitch, let's set up a follow-up meeting to dig into the details” - requires the investor to cross some psychological barriers in order to believe in you and trust you. This depends as much or more on the energy and conviction of your delivery as the content of your slides. Don't get me wrong, the slides do have to convince investors there there is abig market out there for your killer solution to an urgent problem and you can execute like heck to get there. It’s about achieving a balance of substance and self.
Think story and narrative arc
Humans react to stories, so make the presentation less a procession of facts and more a story. The most powerful piece can be your creation story. Tell why you are doing what you are doing, how your rock star founding team came together around a shared vision, and why you are so passionate about your company. It can be risky, but opening a pitch - after the one-liner intro that encapsulates what you are doing - with your creation story can be very impactful. It allows you to share why you care, the strength of your domain expertise, your team's complementary skills, and more. The creation story demonstrates the differentiated passion and energy that investors look for and helps you grab and keep their attention. Crucially, it can make you much more memorable. Memorable matters.
Pitch decks are always a work in progress, not static
Maybe there is no perfect pitch deck for all time, but there can be a better one than the last time. I think smart founders keep tweaking their decks, evolving them based on feedback and also a sense of what did and didn't resonate with investors at the last meeting.
Most decks are too busy
A slideshare I like that captures this idea and takes on the issue of "verbal vomit" among other things is: You Suck at PowerPoint.
When pitching to a large angel group or at a pitch competition, treat the event as a business development meeting
You likely wouldn't make a non-investment ask if pitching one on one to a VC. But to a big group, in my view you can make an ask beyond money, "Does anyone here have a good contact on the XYZ team at ABC Corp?" On any first pitch, an angel group is statistically pretty unlikely to vote to continue to pursue an investment; they see so many. But individuals in the meeting may have great leads that they are willing to open up for you - the startup community is typically open to sharing contacts, even when an investor's wallet stays closed! So don't be totally tied to your deck and the single ask about money in this context!

Friday, May 22, 2015

Startup KPIs: Words From The Wise

Startup KPIs: Words From The Wise

I recently attended a great panel discussion on Startup Key Performance Indicators (KPIs) run by The CFO Leadership Council. Chris Hering from Netsuite moderated and the speakers were Melissa Stepanis from Silicon Valley BankChristina Calvanesco from Eyeview and Kim Armor from Comcast Ventures.
These were my four key takeaways:
  • Keep your list of KPIs short and relevant
  • For the growing number of SaaS models KPIs are clear
  • Investors and lenders focus on the key growth drivers a startup reports to its Board
  • Data quality is key

  1. Keep your list of KPIs short and relevant. So three to five that the leadership team and the whole organization can focus on. Any more and there is no focus. Relevant means making them part of a firm’s culture. This means they need to be visible. (So reiterate them face to face in a weekly standup … not via emails.) One suggestion form Kim Armor that I particularly liked was rebranding “KPIs” (= buzzword and meaningless) to “Measures of Success” (= direct and meaningful). Chris Hering noted that Netsuite has “Company Musts” and, another neat idea, has them printed on t-shirts!
  2. For the growing number of SaaS models KPIs are clear = Monthly/Annual Recurring Revenue (MRR/ARR); Churn (which comes in many forms) ; Customer Acquisition Cost (CAC); Customer Life time Value (CLTV or just LTV) but as the business evolves so do they. Specifically you need to look at KPIs in more sophisticated ways - so churn by revenue and by logo; cohort analysis etc. Also they change in importance. So as a SaaS business grows churn becomes important (so once trends become more established) and upsell/cross sell metrics come in to play too. As to the importance of metrics is SaaS the panel agreed: “MRR trumps everything.” Also that some metrics are more trustworthy than others. Specifically LTV should be “taken with a pinch of salt” give so many definitions and multiple subjective inputs (future churn rate, discount rate)
  3. Investors and lenders focus on the key growth drivers a startup reports to its Board. So keep it simple - what you use internally to run the business, to keep the Board happy and to inform outside stakeholders should be pretty much the same. Outsiders, especially those with large portfolios to track will definitely apply the KISS (Keep It Simple Stupid) principle - at the top of the list revenue/revenue growth; cash and cash burn. Although Christina Calvanesco pointed out that there are some internal “health metrics” that a CFO needs to keep a close eye on that are less relevant for the Board, leadership, for example collections (which feed cash flow).
  4. Data quality is key. Christina noted that the CFO needs to partner closely with operational folks to make sure data is appropriate, so pulled from the right places in the right manner.
And the bonus take away was from Kim Armor who provided a list of 11 “investment metrics” Comcast Ventures uses to assess the merit of potential investees. The top ten are generic and can be applied by any thoughtful investor
  • Product market/fit
  • Market size
  • Team
  • Defensibility
  • Competition
  • Capital required
  • Business model
  • Exit opportunities
  • Deal terms
  • Risk/reward payoff
  • Strategic fit to Comcast/NBC (obviously unique to them)
Finally a shout out for David Skok, a General Partner at Matrix Ventures. David provides a great list of SaaS metric definitions HERE.
For more details on the CFO Leadership Council contact Becky Blackler

And you can also find me @adamquinton

Friday, May 15, 2015

Startup Convertible Notes – Enough Already

Startup Convertible Notes – Enough Already

I have been thinking a lot about convertible notes recently. They may be a primary vehicle to fund early stage startups but they are less straightforward than they appear and contain nasty traps for the unwary – both founders and investors.
Bottom line – notes are not what they seem and can harm a startup's longer term fund raising goals. So Caveat Emptor. And, if you are the Emptor, maybe you should advocate for startups to issue priced equity (i.e. preferred stock) more often. And do so both in your personal interests and frankly in your investee's interests too.
In this post I will cover the big picture of the anti note thesis then cover more specific things to look out for as an investor and then things to be mindful of as a founder.

1. The Big Picture

Standardized? In your dreams! This is what got me started: I have seen a slew of convertible note term sheets recently both ones I have been looking at on my own account and ones I have been asked opinions on by other angel investors. As I compared more and more I was stuck by something I didn’t expect – but shouldn’t have been surprised by really. Namely how very different they all are. Which is odd because “we” the investors (well, this investor anyway) usually say that notes might have disadvantages but “at least they are easy, quick and standardized and hence cheap relative to a priced round.” Mmmm - I take that back!
The more I looked the more I realized each and every note has its own quirks. OK - so I did actually read notes before now. But still, when you review a lot of them back to back, it’s more obvious: tweaks on the various scenarios at note expiry (in some cases unclear and ambiguous); on follow on rights or most favored nation (MFN) provisions (although not enough have either of those); interest rates; and also around the fundamental issue of pricing via the cap – so caps, no caps, varieties of discount and indeed maybe a scaling discount.
Besides these complexities (memo to self - note terms need very careful attention) notes have more fundamental problems. Smart and active investors like Mark Suster and Brian Cohen have written about (see Marks’s BLOG) and talked about (see Brian on SCREEN) the delusions and risks that surround convertible notes. Most obvious is that investors in a note have minimal rights. Duh - It is a debt instrument after all so not too surprising but can still be shocking when the reality hits. Less obvious that on conversion you do not get adequately compensated for the risk you took. (The most extreme is the case with a no cap note when the business takes off and the Qualified Financing is struck at a much higher pre-money than the investor thought going in.)
Notes can also have an adverse impact on future financings too. As Nnamdi Okike from 645 Ventures notes seed stage companies need to aim for a "competitive Series A" given the low (and declining) conversion rate from A to follow on B rounds. As Nnamdi points out an obstacle to that competitive A can include an overhang of too many notes or a over priced seed round (which would include, in my book, a note with an overly aggressive cap).
Another issue is the fact that notes typically don't impose any governance framework on founders. Good for them in a sense that they maintain full freedom of action but also bad because it can a) mean there is no accountability, no one holding the founder's feet to the fire and also b) no period of "training wheels" with say a three person Board before they get hit with a full on Board that will inevitably accompany a larger priced round. As Brian Cohen points out this is about being professional - and professional early stage investors want to see and be engaged with professional investees. Good governance is a key part of that.
Now some more specific things to watch for, first on the investor side. then the founder side:

2. Look out below - Investors

Vincent Jacobs at Kima Ventures lists seven issues that can arise to confound investors and thoughtfully provides steps that note investors can try and take to remove or mitigate them. The concerns Vincent dissects are set out below … investors please do READ his post because he offers suggested remedies in each case:
1)    Receiving worse terms than other investors
2)    Converting into preferred stock without the desired rights
3)    Not receiving the same rights as other investors when the debt converts
4)    Converting into common stock instead of preferred stock
5)    Having the loan repaid despite a successful exit
6)    Having the loan repaid despite the company doing well
7)    Having other investors force an unfavorable decision
On the subject of not receiving the same rights as other investors, I would add look out for for side notes. (Or rather ask for them, the point is you can't "see" them.) Coming from a career in the public markets my going in assumption in startupland was that my term sheet is your term sheet is her term sheet. i.e. all investors in a note have the same terms good or bad. The point being that in the public markets investor rights are simple and highly transparent. Not so, I discovered in private markets.
One thing I have learnt to ask founders is: "Have you agreed any "side notes". In other words made specific contractual commitments to one investor that are not given to, or made transparent to, other investors. A common example would be giving one specific investor some form of follow on investment right into the next round. There is nothing "wrong" (legally) with this although the transparency/Reg FD bone in my body doesn't really like it - and I do like to know what others are getting that I am not. 

3. Look out below - Entrepreneurs

Coming from entrepreneur's direction James Geshwiler MD at CommonAngels Ventures has offered seven surprises on convertible notes that founders should know about. (Am guessing the number seven on both sides of the table here is just a coincidence!) Again founders read James's post for the full details but the seven are things that could hit you unawares or could deny you benefits that might accrue from a priced round in his view are:
1)    Little Value Add from Investors
2)    Reduced Incentives to Help
3)    More Preference
4)    Less Discipline
5)    Two Words: “Full Ratchet” 
6)    Deceptive Dilution
7)    Lost Allies