Wednesday, March 23, 2016

Your 3 Point Unconscious Bias Action Plan


I had the honor of speaking at SXSW 2016 with Shari Slate the Chief Inclusion and Collaboration at CISCO. We took on the subject of unconcious bias from the perspective of big tech and startup tech, layering in our own personal perspectives.
Our overarching message was about the need to get "comfortable with being uncomfortable" when discussing and acting on unconscious bias issues.
In closing we offered three recommendations that we hoped would be useful to pretty much anyone who was opening to learning more and taking personal action.
The start point was these observations:
  1. We all have mental shortcuts, heuristics that help us function as human beings in a very complex world. But they can and do represent dangerous unconscious biases when what is embedded in the "automatic" part of our brains is inconsistent with the intentional views and opinions expressed by our "reflective" side.
  2. We can engage our reflective/conscious brain to interrupt those biases. That means we need to question ourselves -  and others - knowing that tackling our unconscious biases takes all of “intention, attention and time”.
  3. As a result we can all, at an individual and collective level, take steps to be more inclusive colleagues and leaders, to make better decisions and built better, fairer more innovative businesses
From there we set out three sets of recommendations for all of the folks in the room that flowed from those three start points:
1. Knowledge is power. And that includes self knowledge. 
  • Become a student of yourself and more self aware of your ownbiases.
  • Take the Harvard Implicit Association Test. (Just go to Project Implicit. Warning ... be prepared to find out things about yourself that might be surprising, perplexing even shocking.)
  • Consciously think about how you judge people and situations. For example, did I really make an objective decision with that hire recommendation or was I too eager to vote up someone I "liked" ... especially because they are "like" me?
  • Make yourself ask questions rather than making assumptions that may reflect your biases. So don’t assume a pregnant team member wants to work part time and hence not give her the big project or assignment in the offing. Or assume that a guy who is about to be a father will come into work regardless as if nothing had happened. Ask her, or him - have the uncomfortable conversation.
2. Be the unconscious bias change that you want to see in the world.
  • At an individual level each of us can engage our conscious brains more often and call out/question (politely and constructively) what seems like unconscious bias when we observe it. Celebrate those that do the same.
  • Give credit where it is due and always take the positive perspective - if your objective is to help others make the best and fairest decisions and to allow people to be their authentic selves at work then acting collegially not critically is a key part of that.
  • Obviously it is important to practice what you preach: make your own behaviors inclusive … and be aware that your own unconscious bias can kick in more when you are time pressure, working with incomplete information and overloaded. (So ... for many of us most all of the time!?)
  • And anyone who has the ability to influence processes and organizational design can contribute by taking steps to disrupt bias for example in hiring processes (including job description construction, resume screening and interview questions) or the way meetings are conducted (so things like who speaks, who gets credit, who takes the minutes, who sits where.)
3. Mentor someone different from you. 
  • You can give back, learn more and get out of your personal comfort zone (and into that of stereotypically different folks) by mentoring (and being mentored by) someone different from you. 
  • Ideally aim for two or more degrees different across dimensions like age/race/gender/educational background/politics/class etc.

You can find us on twitter at:
@adamquinton @s_slate90

Saturday, January 9, 2016

The Coming Angel Ice Age



The Coming Angel Ice Age

In a provocative post last fall, Caterina Fake called out the coming Age of the Cockroach. A period in which only the toughest, meanest unicorn startups would survive as funding oxygen at the highest high altitudes of start up land got more scarce.
Now, based on a my own experience and an admittedly unrepresentative survey of angel investors,  I am increasingly worried about a coming Angel Ice Age: extending Caterina's thesis in terms of a pulling back beyond late stage Venture Capital tourists and others right to the entry level of the capital formation process. Namely angel investors. What makes me (and my sample group) think that?
1. Excess tech startup supply relative to investor bandwidth: The movement to the gig economy (and hence growth in entrepreneurship in many forms), the explosion of accelerators (both horizontal and vertical) and the fact that startups are so cool on campus (hence a massive expansion of entrepreneurship classes and no school feeling complete without its own incubator, accelerator etc) has generated an exploding tech startup volume but with, in my view, questionable quality. I am not alone as an early stage investor in finding it harder and harder to sift through so many opportunities. I, and I am finding many other angels investors, are simply over whelmed by deal volume and "velocity". (Personally one of my NY resolutions is to stop going to big accelerator program Demo Days. I increasingly find them to be way over rehearsed and a poor use of my time.)
2. More angels, but investment activity per capita seems lower: The expansion of long standing angel groups, the creation of a myriad of new angel groups (again horizontal and vertical), the success of new angel training programs and crucially the post financial crisis search for investment returns in an ultra low interest rate environment have served to pull many new angels into the startup funding market. Pretty good news for the broader economy and startup world, yes. One manifestation of the increased interest, even with hundreds and hundreds of seats, big accelerator demo days are crammed in deed over subscribed. But how many of these "new" individual angels are really active "writing checks"!? Feels to me like check volume/value per angel is on the decline. And as interest rates rise, which they have finally started to do, the marginal angel dollars might well revert to other asset classes. Asset reallocation remains to be seen. But perhaps the biggest issue is ...
3. More active investors are showing increasing symptoms of  "angel exhaustion".  From what I can see, many of the more active angels who got engaged in this exciting world in the 2010-12 timeframe have started to run out of "juice". The core problem: There just haven't been enough liquidity events to provide money for these investors to allow them to recycle dollars back into the current generation of startups. And their bank balances (and where relevant partners/spouses etc) are not endlessly supportive, neither is individual patience. The deferral of IPOs doesn't help and many angels are getting wise to, and wary, of the way their own economics get hurt by the terms enjoyed by later stage investors. Crucially, in my view, these more established but still recent angels are realizing quite how long angel investor holding periods are (i.e. much longer than they thought or hoped.) Also, as they grow weary of writing checks, a growing proportion of the dollars they do invest get committed to their current portfolio as successful investees come back for follow ons. (OMG - seems like every 12-18 months, because it typically is!). Hence even if they sustain their dollar pace, the capacity these angels have for first time commitments to the newest startups is increasingly constrained.
Sounds grim. But maybe it could be worse!? If angel funding gets tougher then a corollary will likely be a higher and more visible proportion of early stage company failures than in recent years. (Q. The primary reason for startup demise? A. Running out of money.) If that plays out too then those angels in exhaustion mode are going to become further disenchanted. As the saying goes, your lemons ripen before your oranges. As a result these angels could be even more put off new investments and focus even more on the winners they have in hand.
While all this might be too apocalyptic I am sure early stage tech companies that could have got angel funding "easily" in the past few years are going to be held to a considerably higher standard for funding in the next year and more.
So what is a founder to do? My two point advice from October on what to do "When The Tide Goes Out" still stands:
a) If you are raising money now do so as quickly as you can. Accept standard deal terms without a fight and definitely don't be greedy on valuation. Other than at the very early stage, consider pursuing a "priced round" (ie equity) as opposed to raising capital on a convertible note. Professional early stage investors really do not like notes (other than for a first small pre-seed round maybe) and typically only do them because they "have to". When they don't have to ... they won't. (In that context founders should think hard before using very investor unfriendly documents such as SAFEs.)
AND/OR
b) Hope is not a strategy. Have a Plan B for an immediate future where the external financing environment is irrelevant to your company because you can manage to a very long runway or, better, get to cash flow break even so your runway becomes infinite. I met a founder last year who had done exactly that. Shifted her business model somewhat to increase revenues near term and get to cash flow break even sooner than originally planned. Now the founder tells me people saying "you are running a lifestyle business". This because the company is no longer obsessively maximizing growth (and taking in capital repeatedly to achieve that). But the founder has taken back control of her future ... and is OK with that!

Tuesday, December 8, 2015

Startup Markups and Markdowns: What the heck is going on!?

Startup Markups and Markdowns: What the heck is going on!?


The reassessment of the valuation of startup holdings at a number of mutual funds, notably by Fidelity, has caused a fair amount of comment of late. Notably of the "Unicorn sky is falling" variety when it comes to mark-downs. And the sky isn't falling ... when it comes to mark-ups. Fred Wilson of Union Square Ventures recently addressed the broader topic of the blurring of public and private capital markets of which this issue a component part.
In my experience there are two common sources of confusion many early stage investors and founders have about these mutual fund valuation changes. They are reflected in these two questions:
1. Why are they doing this in the first place?
And related to this:
2. Why do they move the values up and down "so often"?
As a former sell side research analyst here is my attempt to add a little clarity:
1. The Why Do It At All
This one is easy. Mutual funds change the valuations they report for their illiquid startup holdings because ... they have to. And the requirement to reset valuations applies just as much to marking up an appreciated asset as marking down a depreciating one.
The key point is that investors can buy and sell shares in a mutual fund on a daily basis - and they do so at NAV (Net Asset Value), the price reported by the fund. Hence, as "open ended" investment vehicles, mutual funds need to mark their valuations to market on a daily basis to reset that NAV.
With public securities, assessing the contribution to NAV is "easy" in most cases. For illiquid securities (like holdings in a startup) the valuation reflected in overall NAV needs to be "fair value as determined in good faith by the Board of Directors". (The Board of Directors of the mutual fund in question that is.) Hence, by taking in mutual fund money, a private company goes (a little bit) public by proxy ... because the valuation of its equity is open to potentially daily reassessment by a mutual fund. However, unlike the public markets, any revaluation (again up as well as down) is only visible when a fund choses (or more likely is required) to make it public.
Fidelity funds report monthly holdings although the SEC requirementis for mutual funds to report holdings to them (and hence the public) only on a quarterly basis. Even then, funds have up to 60 days after the end of a quarter to do it. And just to make it clear that this reporting needs to be honest and fair ... the SEC requires a fund's principal executive and finance officer to "certify" the holdings report is accurate.
Less obvious (once you know the SEC requirements anyway) is the answer to the second question:
2. The Why So Volatile
In most cases early stage investors, angels and VCs, and the founders they are backing only see startup valuations change infrequently. This "mark to market" happens when a new round is priced (up or down). At that point there is an explicit one time step function change in valuation that prevails until the next financing provides the next step function change. Obviously valuation also changes when a company is acquired and there is a definitive last and final price assessment. 
With very very few angel backed investments making it to the public markets via IPO, and a small proportion of venture backed companies for that matter, the experience of frequent (month to month never mind second by second) valuation changes is in turn uncommon. But that doesn't mean they aren't happening! The point being valuation is a function of many variables and they all (inconveniently!) are themselves changing in real time which is why, of course, public stocks fluctuate real time. So external factors like interest rates, risk premia, the macro economic outlook, market place/competitor developments, media coverage etc as well as internal factors like new product launches, personnel changes, major new investments and earnings reports. Whether visible or not all this stuff happens to start ups too.
"We" just don't revalue them second by second because: a) it would fry our brains and b) circling back to point 1 above ... we don't have to. But, as I laid out above, once you add a mutual fund to the cap table the game changes and in comes that quarterly (or monthly) requirement to revalue. Blame the SEC for that if you will ... and the real world for the volatility!

Friday, October 16, 2015

When The Tide Goes Out - Bad Stuff Version




When The Tide Goes Out - Bad Stuff Version



The "is there or isn't there a bubble in venture" discussion has mostly focused on whether the momentum behind venture financing is showing signs of weakness, whether valuations are (way?) over extended and when, how and why this might unravel. Some say yes, some say no. But most bubbles are only evident after the fact so time will tell on this one. (If it is one ...)
Much of the the debate been couched in terms of the fate of the 150 or so $1bn+ unicorns. (Unicorpses to come?) As I noted recently, whatever the size of business, if you are a startup founder this is the time to make sure you are wearing swimwear.
Some unicorns are definitely getting sick, and not just for lack of revenues. Caroline Fairchild wrote on Linkedin that "Theranos, the Silicon Valley startup known for its blood-testing technology, is now in the spotlight in the wake of a deeply damning report out by the Wall Street Journal ..." Neatly she called it a "wounded unicorn".
As we digest the troubling news about Theranos here is something else to worry about: extended periods of loose money and exuberant investment are typically associated with some high profile incidents not just of mis-valuation but misrepresentation, or worse. (I am not commenting specifically on Theranos in that regard, but the allegations there have set alarm bells ringing.)
10 years ago I was the second witness for the US Government in the trail of Worldcom CEO Bernie Ebbers. Worldcom was a darling company that rode the 90s/early 2000s "TMT" bubble to huge success but ultimately to ignominy. Mr Ebbers was convicted and sentenced to 25 years in goal for an accounting fraud in which costs were understated and thus profits overstated ... and which led to the bankruptcy of the company. Worldcom went bust in July 2002 with $107bn of assets making it the biggest in history up to that point. (It ranks #3 now, behind Lehman and Washington Mutual, taken down by the 2007/08 financial crisis after an epic housing bubble burst.) 
So, for anyone concerned about the more extreme things that become visible when the loose money tide goes out, what did I learn from the last tech/telecom bubble? What are the warning signs that, with the benefit of hindsight, folks should have payed more attention to ahead of the biggest failures of the last tech bubble?
While nothing more than my own anecdotal observations, here are some red flags today's tech investors might care to look out for:
1. A very controlling CEO (and likely CFO too in a public company context) who has close oversight of all operations to the extent that only a very few people at the heart of the company have a full picture of what is going on. (That was the story at Worldcom.)
2. A CEO with massive ego (and paranoia) - although of course this goes with the territory in many cases so not very distinguishing. But taking aversion to criticism to extremes points to someone who can go to extremes in other ways - in their own self defined reality.
3. Sycophantic media coverage - which dulls sensitivity to any adverse issues and results in self censorship. That is ... until someone does the work and calls the company out ... and gets heard.
4. Opaque "trust us" business models that "just work" ... where mere mortals on the outside are not to be let in on the secret. (Recall the acclaim for "asset lite" Enron. It took Bethany McLean in Fortune to point out that the Emperor seemed to be lacking clothes.)
5. Vanity Board i.e. a Board of directors populated with "very important people" ... but who lack and domain expertise in the area of activity of the company and hence can't provide effective oversight, and likely don't have the time to commit either.

Friday, October 9, 2015

WHEN THE TIDE GOES OUT - HAVE YOUR SWIMWEAR ON


WHEN THE TIDE GOES OUT - HAVE YOUR SWIMWEAR ON

I was chatting with a founder recently and mentioned my trip to SF end September. OK my sample size is very small, but from VC to startups there was no avoiding the pervasive sense the startup funding environment was tightening, or going to tighten soon. I noted to my friend that this definitely seems like a time to raise early stage money quickly if you have good metrics and momentum, rather than wait for a better valuation or when you feel you really "need" the money further down the road ... because if and when the window shuts, or at least gets tougher to get through, valuations will surely come down and terms will become more investor friendly. (The "it's there, so take it" rationale was the one the Slack founder Stewart Butterfield gave back in April as to why they have raised much more money than they appear to need. Smart guy.)
Four points of angst as I think about this some more:
1. Investor side angst: Since my SF trip at an anecdotal level I keep hearing the same "its' getting tougher out there" vibe from people I speak to back in NYC and there have been some forceful public comments on the matter. e.g. Mark Suster calling out the obsession with unicorns and Caterina Fake melodramatically heralding the Age of the Cockroach. Obviously related to this mood music is the fact that the stock market has stalled (S&P is basically where it was a year ago despite a few good days recently) in no small part pending the Federal Reserve finally raising interest rates for the first time in nearly a decade. Plus we have global economic issues to content with, especially the China deceleration and related commodity price and hence broader Emerging Markets collapse. All that means a less buoyant IPO, read VC exit, outlook. Current data point: Pure Storage IPOed and closed 6% below issue price on its first day - so slightly below the last private market raise valuation. Importantly this is the first VC backed unicorn to IPO since Box in January, according to Dan Primark at Fortune. Also on the exit issue, many unicorns (150 now and counting according to Crunchbase) are simply too big to be acquired and there has definitely been a dearth of hope into reality cash exits for VCs. So VCs get more anxious. Are they holding back? Well Pitchbook just reported that VC Deal volume fell in Q2 (albeit with strong $bn invested, but that is biased up by larger late stage rounds and "VC tourists" like the big mutual funds). The Q2 numbers make for three quarters of consecutive VC deal volume declines ... for the first time since 2009
2. Corporate side angst: Brad Feld did an interesting post recently pointing out that a couple of M&A deals his fund has been involved with fell apart recently at short notice. This is the flip side of investors starting to get more cautious - corporate acquirers do to. Brad says:"In both cases, the explanation was vague." My hunch is that is because the reasons are indeed vague ... because they are typically emotional: "Do we really want to do this now?", "Is this a risk we want to take?" And crucially ... "Seems likes prices are high, so maybe we can buy this company later ... at a lower valuation." So all to do with confidence in the general environment and conviction in a specific deal. Those two things ebb together.
3. Startup business model angst: Also there have been some pretty specular high profile startup implosions (Zirtual, Quirky) or partial implosions (Evernote) recently that serve to dampen the mood too.Not all rocket ships get to the moon. All these cases have elements of individual corporate shortcomings, they always do. But in my view Evernote is especially interesting because it signals a point where investors start to worry more about business model/revenues relative to user metrics (which can be "monetized later, we just haven't worked out how yet".) When the little boy calls out that the Emperor has no business model clothes on ... and people listen ... then you are in big trouble if you are a company that needs sustained and substantial external capital to survive. 
4. Media angst: Regardless of more sophisticated considerations, you know a story is well baked when it hits totally mainstream media for general consumption. Nick Bilton's Vanity Fair piece "Is Silicon Valley in a Bubble ... and what could burst it?" answers its own question, the first one anyway. That was before the end of the summer. (When I was in SF another journalist I met dismissed it as ... "old news that could have been written months ago.") And NPR just covered the skyscraper bubble prediction hypothesis on the Marketwatch morning show with Exhibit A being ... the Salesforce Tower. (The thesis being that market peaks are correlated with building of "mine is bigger than yours" office towers thanks to cheap money and a lot of hubris.)

My bottom line advice to founders based on all of the above is to ignore the noise for the most part. Great companies are founded and grow in good times and bad. Compelling solutions to big pain points that encompass big markets will get funded if the team is awesome and the traction is there. So stay focused on what you are building. But for CEOs, one of whose three key roles is to make sure their company never runs out of money, then financing strategy does matter. Hence this CEO advice:
a) If you are raising money now do so as quickly as you can. Accept standard deal terms without a fight and definitely don't be greedy on valuation. And at the early stage consider a priced round as opposed to a note. Professional early stage investors really do not like notes (other than for a first small pre-seed round maybe) and only do them because they "have to". When they don't have to ... they won't. (Don't use very investor unfriendly docs like SAFEs for example.)
AND/OR
b) Hope is not a strategy. Have a Plan B for an immediate future where the external financing environment is irrelevant to you because you can manage to a very long runway or, better, get to cash flow break even so your runway becomes infinite! I met a founder recently who had done exactly that. Shifted the model somewhat to increase revenues near term and get to cash flow break even sooner. Now the founder has people saying "you are running a lifestyle business" because the company is no longer insanely maximizing growth (and taking in capital to achieve that). But the founder has taken back control of her future ... and is OK with that!