Monday, September 29, 2014

Reverse Due Diligence - Founders on Investors

Reverse Due Diligence - Founders on Investors

Due diligence ... from the investors view point

This time last year I wrote three posts on due diligence - what early stage investors do when they are working out whether to put money into an early stage company. All good arguments have three points so there were three posts!
I feel more strongly than ever about the opinion I expressed in the "Philosophy" post. Namely that we need to recognize who is taking the real risk when, as early stage investors, we put our money behind an entrepreneur. And hence treat them with commensurate respect.

As a practical matter, RESPECT to me in this context means undertaking your investment due diligence with the following thoughts top of mind:

1. Being super sensitive to the entrepreneur's time and not sucking them into your own time wasting analysis paralysis. This might be an interesting intellectual exercise for YOU but might kill their ability to execute their business. Early stage entrepreneurs have no staff, no admins to hunt stuff down for them; they have incomplete data; heck they probably aren’t drawing a salary.

2. Getting to YES or NO as quickly as you can.

3. Communication directly and honestly why your answer is NO, if that is where you end up.

A key issue we all face as an early stage investors doing due diligence is the question of balance.  Asking questions that matter but not being that time sink. There is no right answer here, but in my view a little (no, in this case a large amount of) respect goes a long way.

What I didn't dive into at that point was the reverse - so the due diligence entrepreneurs can and should do on investors. That said I do often mention to entrepreneurs that they have as much right, and self interest, to do due diligence on us as we do on them. So I was delighted to see Bo Peabody from Greycroft flesh that out in a recent Techcrunch post.

Due diligence ... from the founders viewpoint

Bo provided a menu of 10 questions for founders to put to VCs, many of which can be tweaked and applied to the friendly angel who comes knocking. The questions are set out below and Bo's post has some commentary around each.

Is it legit to ask questions like this? I often get asked that question especially by first time entrepreneurs. As you go through the fund raising dance there is a natural sensitivity around the people with the money - that you want pretty badly. How far can you go to ask questions about them

Absolutely you can! Is my answer. This is YOUR company and YOUR future so of course it is legit. You need to make sure that you are doing the right thing for you and the business when enter into what will likely be a long term (maybe very long term) investor relationship. Also I am am pretty sure that investors think more highly of the entrepreneurs that ask these questions than those that do not. I certainly do. It is another window on entrepreneur's thoroughness and thoughtfulness as well as a manifestation of their desire to bring together an A team that will drive success. 

And investor insights can also allow you, the entrepreneur, to focus your appeal. Knowing more about an investor also allows an entrepreneur to go beyond just assessing if there will be a good "fit" They can increase the chances of making that fit happen. As the entrepreneur building your A team if you identify that you want a specific investor on board for specific reasons - things like their focus, their expertise, the way they operate - then pitch that to them. Call it flattery if you like, but you need to do what you need to do to build that A team! (Although, as one founder pointed out to me, bottom line you should "only take investors that you actually like and respect".)

Bo's Top Ten Questions 

For the record here is Bo's list:

1. How big is the particular fund that your startup will be part of and where is that fund in its lifecycle?

2. What is the investment strategy of the firm? What are the sizes of its investments and average ownership percentages? What is the firm’s reserves strategy?

3. What is the decision-making structure of the firm and where does your deal sponsor fit into that structure?

4. Who are the LP’s in the fund?

5. What is the compensation structure of the fund and how does your sponsor fit into that?

6. What is the firm’s policy and culture around corporate governance? Do they seek board seats or not? If so, what is their in-person attendance record at board meetings.

7. What is the firm’s own view of the returns likely to be generated from your deal? How does it all break out?

8. How have previous funds performed and how will that affect future fundraising?

9. How does the firm handle re-caps and private-to-private mergers?

10. How many repeat entrepreneurs does the firm have?

Tuesday, September 9, 2014

Blinkered and lacking ambition - Silicon Valley? Yes - when it comes to sexism in tech.

Blinkered and lacking ambition - Silicon Valley? Yes - when it comes to sexism in tech.

A recent techcrunch story on "how investors are trying to change the culture of Silicon Valley" brought this home to me. While no doubt well intentioned, the reported comments to my mind fall far short of what true meritocracy and disruption demand.

Indeed in its attitude to women and diversity more generally this is one area where the lesser land outside the Valley has something useful to say. Namely that even the well meaning folks inside the Valley bubble don't realize how, seen from the broader world outside the bubble, they are out of step with contemporary standards of behavior (heck even the law) and also missing an opportunity to embrace diversity and drive (and invest in) even more powerful innovation.

Disruption and the 10X change

Silicon Valley prides itself on its culture of meritocracy and vigorous embrace of disruption. This is a large part of what makes it  a huge source of dynamism for the US economy and an amazing talent magnet. We are fortunate it exists and long may it continue.

Things change and change fast in the Valley. Andy Grove's pursuit of 10X innovations seems positively pedestrian by modern Valley yardsticks now that the cloud and mobile power megaX disruption on a global scale. 

Yet in this one area the Valley culture seems steeped in the past and unwilling or unable to embrace the disruption it so prizes. Even a modest 1.1X disruption seems a tall order when dealing with sexism be explicit and unconscious, whether it be in the startup culture or on the funding side. Rather the narrative seems blinked and unambitious, indeed unValleylike! 

Before I go to the post here is a nice summary from a (New York based) founder:
"Some of the points being made are plain ridiculous and really they are just giving excuses. Most of the stuff is common knowledge that we are all taught at a very early age, if not from parents then from school."

And when it comes to fixes, there are plenty out there
But I like this one from a (New York based) VC whose response to the story was:
"It starts with the VCs ... we need to have zero tolerance in our own firms and in our portfolio companies."
Well said.

Here are some excerpts for the post ... with my counterpoints attached

1. ... many of these issues crop up because most early-stage startups don’t have a head of HR, and are sometimes being founded by people who haven’t worked in a professional situation before.

AQ: This is too easy a cop out in my view. Yes, there is a case for formal training and yes bigger "professional" firms do this. But do I really have to have a HR person and/or have worked in a "professional situation" so someone can tell me that overt sexist behavior is not appropriate in the 21st century? Especially since some of the people at fault here went to some of the preeminent educational institutions in an advanced country called the USA surely we should expect more of them? Specifically that they are accountable for their own behaviors both within the law and more general social norms.

2. ... in many cases, people don’t realize that things like harassment and the gender pay gap are illegal.

AQ: If this is accurate it is also pretty depressing. Who does not know that harassment is illegal? Who is unaware of equal pay legislation? Please tell what stone can I find these people under?

3. ... his firm does a regular audit of how many companies it has invested in that have women as leaders or founders. That number is currently about 15 percent, which might sound low, but is “surprisingly high for the peer group,”

AQ: Out performing a lousy benchmark is not really a cause for celebration but point taken. Still perhaps it's time there was a recognition that there is not a true meritocracy at work here and that numbers like these simply aren't good enough - for anybody and that wherever you are in the spectrum there is more to do. (Which, by the way, applies beyond gender demographics).

4. ... the portion of women who are founders and CEOs and the portion of women who are VCs are “inextricably linked.”

AQ: This is a pretty sad comment. Inextricably linked? Really? In defense of male VCs for a moment, this point is patronizing to them because it implies that male VCs reflexively invest in men and don't have the capacity to be objective and get past their own biases (albeit unconscious ones) and see opportunity where ever it resides. While there are a lot more female founders, the VC demographic isn't budging ... these sort of "pipeline" arguments really don't work in practice other than at a glacial pace.

5. ... it’s only a matter of time before one investment firm moves to dramatically change its own ratio. “The power move would be a high-profile VC firm announce not just one, but two female GPs”

AQ: While I under stand the sentiment and would applaud the outcome ... one female GP? Maybe even two? Surely we can be bolder, more disruptive than that? This is America! This is Silicon Valley! Time to recall Andy Grove ... and shoot for a 10X outcome.