The Tao of Brad

Last week I was on a long mountain bike ride and wound up spending a few hours grinding away on a particular difficult situation one of the CEOs I work with was going through, when some advice Brad Feld gave me years ago popped into my head and I knew it was just what my friend needed to hear. I pulled off the trail, sat down in the dirt and called the CEO. As you’d expect, the idea was well received and I got a call the next day saying he’d already implemented it and how helpful it was.

It struck me how many often I’ve used something I’ve learned from Brad and I began to imagine how many times others have done the same; call it the Brad multiplier effect. I decided to reach out to folks I know who have benefited from a relationship with Brad and see what the most valuable insights they’ve gained from knowing him. What you’ll see here are the responses from a broad spectrum of entrepreneurs, CEOs, angel investors, venture capitalists and friends who’ve spent time with him. I can’t imagine how many more people have similar anecdotes and hope anyone who does will share them in the comments below. 

I’ll start with my own. Years ago, I was wrestling with a significant life decision that while incredibly important to me, didn’t have a sense of urgency attached to it. I reached out to Brad and the next time I saw him we went for a walk (another jewel I’ve learned from him; deep conversations seem to always have more value when away from desks, conference rooms, and other distractions). He listened carefully and when I was finished, he took a deep breath and said “You can’t process when you’re processing.” What he was telling me was that you can’t force a big decision and that the more you let go of it, the clearer it will become to you over time. Of course he was spot on and sure enough, when I stopped squeezing the decision, I ultimately arrived at (in hindsight) one of the best decisions I’ve made in my life. I’ve shared this wisdom with so many others over the years and it’s had as big an impact on them as it did for me.

Below, you’ll find all of the responses I received. Instead of giving attribution, I thought it would be more impactful if they were anonymous. Knowing Brad, he’ll have fun trying to connect the dots.

 

As an investor, I’ve learned from Brad that just as you can’t time the public markets, you can’t time the private markets either. I learned from him to invest the same amount of capital year in, year out, in roughly the same number of investments. Ignore the macros. Sometimes you’ll pay too much, sometimes you’ll get a deal and sometimes your investments will be priced fairly. If you do this over a couple of decades, it will all smooth out.

Don’t optimize on price. It never, ever pays off if you’re playing the long game.

Do or do not. There is no try.

I was talking with Brad about angel investing and he shared with me the importance of a portfolio approach and how anyone angel investing should plan for a minimum of 10 investments. “Take the money you have allocated to this asset class and divide by a number 10 or larger.  If you are not going to make at least 10 investments you should make zero.” I took it to heart, made 28 angel investments and have given that same advice dozens of times.

The long game is the only game worth playing

“Give First” — obvious? Yes, but you asked.  This is not something that he has ever said directly to me, but rather it has been my personal true north as it relates to giving first being one of life’s greatest journeys. Brad’s generosity of giving first is fundamental to his personal and professional ethos.  He gives first of himself as a friend, as a mentor, and with his wisdom. He gives first one the most special level philanthropically, not just in dollars, but with time and most tremendous impact.   Brad also gives first by “going first”— in one example, his openness of his own challenges makes him such a special friend in his empathy and understanding. Giving first has become a personal mantra — and it’s through Brad that I’ve fully understood that it’s not a business lesson nor a personal lesson, but a way of being that has created such a fulfilling life. This lesson has had the greatest impact on me in literally every aspect of my life.

Don’t ask me what I’d do. Do what you’d do.

To respond to everyone, no matter who it is or how big or small the ask is because you never know when you may encounter that person again. After 15+ years of working for Brad’s companies, I still don’t know how he does it!

The best advice and insights I’ve received from him came through his use of the Socratic method in our discussions. Two questions he asked me a long time ago still inform my journey in life: “Is this what you want to be doing 5 to 10 years from now?” and “Are you having fun?”

The best advice I have gotten is from simply watching him and I’m lucky to have had so much time with him.

While not advice, I think of the “Dairy Queen Lesson” a lot — one of my favorite things about Brad is how much emphasis he puts on meaningful time and deep dedication to his loved ones.  Meaningful doesn’t equate to big events, hallmark holidays, or occasions, but rather simply investing time with those who are the most important to us, even on the most simple level of sharing an ice cream.  The way he talks about his partnership with Amy and the tremendous respect and love he has for her.  This has helped shaped my own view of marriage and communication with my wife.  I call it the Dairy Queen lesson because of the photos of Brad and his dad through the years, each and always with tremendous smiles and ice cream 1, ice cream 2, and on even ice cream 3 in a day. Those smiles and that mutual love and admiration know no bounds.  This lesson has had a powerful impact on me and have informed my own approach to life as a husband, a father, and a son, a brother, and of course, a friend.

Be intellectually honest with yourself.

So much. However the one that sticks out is right before I became CEO of (xxxxx). I was struggling with maybe it was time to move out of Boulder. I just had my second failure as a CEO and I felt like I needed radical change – and he said “You can move, but that isn’t going to fix your issues – they are inside of you and they will travel with you wherever you go. Stay where you are, get super involved with Techstars and become the most engaged mentor ever and maybe something good will happen when you give more.” Of course I don’t recall his exact words and this is more like my recollection of an entire conversation is summed up in that one quote – but the essence is the same. So far it’s turned out pretty good 🙂

Strangely the best piece of advice I ever got from Brad didn’t actually come from him telling me something.  It came from watching him.  Brad’s willingness to help people without ever expecting anything in return really impacted the way that I think about giving my time to people I don’t know.

I owe my morning routine to advice I got from Brad and it’s had a major impact on me. I’ve found having a routine for getting yourself out of bed is a key part of being able to wake up early. Other wisdom he’s shared with me that I value include establishing a cadence to your life (weekly, quarterly, yearly) and his matrix on cultural fit.

Spend your time with A players if you want to become an A player. Watch them, study them, learn from them.

Doing something for myself on a regular basis. Not my company. Not my wife. Not my kids. Do something that nourishes me or I’ll be useless to everyone else. Took that to heart. Changed my life.  

That’s a hard one Mark – so much good advice from Brad over the years. The best may be something he actually said to someone else, which was the way to best help your community is to do what you’re awesome at (he was responding to someone asking him: “what can I do for you?”).

The good thing about venture capital is you can only lose 1x your money!

So much of the advice that I get from Brad is situation specific. I can’t say that I actually recall him ever giving broad advice vs highly specific advice. One generalization that I will make that I’ve noticed him do often though – when someone will come to him and ask about a tough decision where they are torn between various paths for all these intricate and complex reasons, he’ll cut through the fog and ask some incredibly simple question like “what do you actually want to do?” and then the rest of the discussion is about what if you just did that. He naturally challenges the assumption that these sorts of decisions have to feel heavy, and that’s been a valuable perspective for me to absorb.

To believe in myself.

Hmmmm. I think it’s the concept of taking care of yourself and being healthy; being true to yourself, as well. He’s always been a great supporter of doing what’s best for me even when it’s wicked hard.

Back when I was leaving (xxxxx), I barely knew him, but he took the time to go back and forth with me over email to help me think through some of the things in front of me and I think that email exchange was a big reason I didn’t go do another big corporate exec job. He talked with me about an offer I had at (xxxxx) to move to (xxxxx) and run (xxxxx) and their (xxxxx) business and how I’d spend my time dealing with their legacy tech and fixing old shit that other people broke and how depressing that probably would be, which really resonated with me.  It was the last time I ever considered any sort of bigco exec role.  We talked about viewing opportunities on a disruptive scale. I ended up choosing the “middle path” with that decision and joined (xxxxx), eschewing xxxxx which was on the more disruptive path. Of course, I ultimately joined (xxxxx) to be on the much more disruptive path 🙂

Guilt is a worthless feeling.

The importance of unplugging and being present.  In a fast-paced and sometimes frenetic world, the lesson of unplugging for a digital Sabbath, for time off the grid, and for time with family has been advice Brad has imparted on me.  In one instance, I shared with Brad that I was using social media more than I had wanted to, that I didn’t feel good about it, and I then riffed on a million excuses of why I still did it when I didn’t feel good about being “always on.”  Brad simply said, “why don’t you just stop? Take a break from it for a few months — honestly, what’s going to happen?”  Simple, to the point, and spot on.  The bigger lesson here was being present for our loved ones and for ourselves.  To enjoy life’s special moments. He was right. Stepping away helped me gain an entirely new perspective about letting technology be a tool and not a master.

Don’t get in over your head.  Figure out what you don’t know, and find someone that knows. Don’t fuck it up. Do the thing you love. The simple ones are my favorite.

Nobody stays here by faking reality in any manner whatsoever.

Gosh.  I feel like in so many ways he is another father figure for me. Our interactions over the years have been laden with advice and perspective that I have completely woven into my life. The introduction of the Socratic method into my life is probably the most significant impact he has had. It has changed how I process the world and how I interact with others. He has really shown me how my black/white tendencies can get in the way. Living with buffer around the edges makes things so much better. If you think you can sell something at $10 per unit, yet someone is offering 9.5, stop and think about whether or not a bunch more effort is worth the 0.5; 99% of the time it isn’t, and it’s ego that’s driving you to do silly things just to get exactly what you want. I find his advice is hidden… it rarely comes out as “advice.”

Give first with no expectation for anything in return. Good things always happen.

I have to pick just one? Brad and I went for a walk years ago. I asked him for advice/feedback on trusting myself as an investor. The gist of the advice was “figure out if you even like being an investor before you worry about your performance as one.”

“You would really enjoy mentoring at Techstars.” Brad gave me this advice during the first time we spent time together, on a walk with smoothies through Boulder Creek Park, many years ago.  This suggestion has changed my life in some of the most powerful ways possible. Many programs of mentorship later, I’m so lucky to be part of the Techstars family; from the people, to the companies, to the incredible friendships across the board. For that suggestion, I will be forever grateful to Brad, who plugged me into the Techstars ecosystem.

He told me I was lonely and didn’t seem to realize it. First time it occurred to me that you could be married and lonely.

I actually don’t think it’s anything specific he says but rather how he thinks about the world. He can look at situations intellectually, acknowledging the emotional charge, but not impacted by it. And he can tackle difficult subjects in non-confrontational ways. That’s pure art. He can, more rapidly than anyone I ever met, identify a situation’s biggest asset and also biggest liability, and reorient a path forward around its asset and minimize the liability.  I’ve seen him do this so many times in so many different situations in under 10 minutes. It’s mind blowing. He comes from a place of love and acceptance and generosity. Which is huge given the demands on his time and resources.  He’s probably the least religious person I know who most successfully embodies the teachings of most religions. He’s a philosopher stuck in a VC’s body. He is always asking why, about everything, helping to easily identify what’s important and what’s not. He’s curious about the world, and the space he puts between stimulus and reaction is what enables this curiosity and philosophy. It’s powerful and something I try hard (and often fail at) emulating. He inherently trusts people, which cause them to trust him, which leads to the attainment of their individual highest potential self.  Brad trusts the PERSON, not the outcome. So because he gives them that power of “I’ve got your back” they try risky things, and when combined with his ability to identify the assets and minimize liabilities rapidly, he and a founder is often a winning team. He lives his values. Most people I know speak their value, but act so differently. The hypocrisy has made me so negative on so many levels. But Brad is a breath of fresh air there and gives me faith that people in positions of influence, leadership, and wealth can and do act in the best interests of others. To sum it up, from my perspective, he has transcended the elusive barrier between knowledge and wisdom. I know a lot of smart people. Brad might be the only wise one I know. Wise, but still human. This email was fun to write and think about. If he ever decided to run for office or start a religion, or even start a country, I’d drop everything and support him. And I’m not the groupie type.

 

 

 

 

 

 

 

Financing Round Nomenclature Revisited

When I started investing in startups a long time ago, the labeling of financing rounds was as simple as the Sesame Street alphabet song – A is for Abbey, B is for Bert, C is for Cookie Monster; ok, you get it. The rounds were named for the purpose of identifying shareholder rights in a particular class of stock. The names weren’t used as a tool to avoid pigeonholing a startup into a particular stage of growth the way they are today.

The labeling of financing rounds has become silly: Seed. Pre-Seed. Early Seed. Gap. I’ve even seen a round classified as “Genesis” recently. To compound things, if you ask a dozen entrepreneurs or investors what each of these rounds mean, I guarantee you’ll get a dozen different answers.

I’ve come up with an idea to simplify this practice and ran it by a few friends. They all liked the logic and simplicity, so I’m throwing it out there. I propose that we start labeling rounds by the size & post-money valuation of the financing. Here’s a hypothetical financing history of a company using this method:

  • $500K/20% Discount Note round.
  • $750K/6.5M round.
  • $3.2M/17.8 round.
  • So on and so forth.

Using this process, when I look at the cap table as an investor, it tells me in an instant just about everything I need to know about a company’s financing history and eliminates all the nonsense about trying to properly name a financing round.

Whaddya think?

Hacking Reference Checking 

We all acknowledge the critical nature of thorough reference checking as it relates to hiring or investing in someone. However, given that most people are reticent to offer a negative reference, most of us struggle with extracting the type of valuable feedback we’re seeking in order to make better decisions. 

Many years ago, a mentor of mine shared a hack for reference checking that I still use today. For me, it still delivers more signal than any other method I’ve come across. Here’s how it works:

Dear Samantha,

I’ve discovered that you worked with Daniel Jones at DKR a few years ago. I’m evaluating an investment in Daniel’s new startup and I’d be grateful if you’d be willing to share some insight with me about your experience working with him. However to be respectful of your time, I’m only asking you to follow up and reply to this email if your experience with him was exceptional. 

Thank you, Mark

We all want to hire or invest in exceptional people. Well, anyone who’s had a terrific experience working with someone will be happy to reply to an email like this, right? Mediocre or less though and they’d probably rather go to the dentist. As you can see, this method allows people to gracefully opt out of those uncomfortable calls while at the same time, delivering the signal you’re looking for. The most important aspect of this approach though is to send at least 10 emails like this, even more if possible. The more data points, the better.

I’m always thrilled when I get a bunch of responses with people telling me that they’d be more than happy to tell me how great someone is and how I’d be foolish not to work with them. On the other hand, a handful of non-responses is a sure sign that I’ve got some more diligence to do. 

Give it a try and let me know how it goes. I’d also love to hear about any other methods people use to make better human capital decisions. 

Some Gray Haired Insights For New Investors

There’s been a flurry of posts so far in this new year advising startups how to deal with what certainly appears to be the beginning of an inevitable market correction (based upon your point of view, feel free to substitute your flavor of panicked adjectives for “correction”). It seems that every VC who blogs is warning that winter is coming and cautioning CEOs to store their acorns and cut back on their burn rates. All good advice.

I haven’t read much though about how to prepare for this if I’m a relatively new investor in startups. There’s a whole new breed of investors (both angel and new VCs) who have been actively investing in startups since 2010 (when we emerged from the last major recession) who have never been through a downturn as an investor. I’m writing this specifically for their benefit as I’ve been around long enough now that I’ve experienced multiple full economic cycles as an investor and started my career working on Wall Street during the crash of 1987. I’ve got a few more gray hairs today than I did then and I know some of these insights would have helped me better weather those.

To begin with, what does the trajectory look like? At the outset, term sheet valuations start contracting up and down the venture capital food chain and then they start drying up from the growth investors (except for the most compelling opportunities) as they decide to sit on their hands for a while and figure out how bad things really are. Most of the early-stage investors are still investing at this point as by nature, they’re generally a more optimistic group. I think it’s fair to say that we’re somewhere in the middle of this stage today. If the downward momentum continues, startups begin losing lower tier customers  and missing their numbers. After the early stage investors start seeing this across their portfolio, they too get spooked and begin to and begin to slow their investment pace. The slide continues and soon portfolio companies are losing some of their best customers. This is when even the most optimistic investors start putting their wallets away for new investments and start asking themselves “what do our reserves look like?”

A few more months pass and eventually, large corporations begin laying off thousands of people at a time. Each time investors step on the treadmill at their health clubs, they’re greeted with flat screens showing clips describing another massive layoff. That’s when folks realize that shit’s gotten real and fear sets in. Not only are very few new venture investments getting done, but the partners at VC firms are now spending the bulk of their time working with their portfolio companies figuring out how far back to yank on the expense lever. Eventually things get bad enough that one of the top venture firms decides that we’re on the path to hell and there’s no turning back. That’s what happened on October 10, 2008 when Sequoia published this infamous deck. Pay particular attention starting on slide 41. At this point, vc partner meetings are spent discussing among themselves which of their portfolio companies they should allocate dwindling reserves to (“live”) or not (“die”).

 

Admittedly, nothing I’ve shared yet is particularly enlightening or helpful. Anyone who’s lived through it is probably nodding their head in agreement. Here’s where some valuable insight for new investors can be gleaned. Did we continue on the road to hell after Sequoia pronounced that we were at the gates? No, of course not. In fact, it was only three weeks later on Halloween 2008 that we reached the market bottom in the NASDAQ.

 

ripgood

Anyone reading this who’s remotely familiar with the public markets has learned that it’s impossible to time market tops and bottoms, but you’ll be amazed at how many smart and sophisticated private investors were so spooked by Sequoia’s pronouncement, that they didn’t invest in any new companies for a very long time afterwards. I’ve even heard conspiracy theories that Sequoia intentionally sensationalized the deck to clear out investors so that they had to pick of the litter for a while. Unfortunately, those investors who throttled back missed the best pricing of startups in the last fifteen years. Even more importantly from my perspective, the “wantrepreneurs” had all gone home and none other than the most steadfast, determined entrepreneurs were starting companies at that time. In other words, the founders we as investors all dream of working with were the only ones starting companies! What I’ve learned through experience is that the very best entrepreneurs don’t pay much attention to the gloom and doom everyone else is paralyzed by. They see a pain point, they envision a solution, and they set out to execute against it. Sure, how they go about it changes, but they generally ignore what’s going on at the macro level. Finally, because they’re solving real problems, they let customers finance their early growth.

A great example of this is Isaac Saldana, the founder of SendGrid which he started in November 2008, just weeks after “RIP Good Times” was published, at the very bottom of the trough when things looked their bleakest. Isaac knew deep down that he had figured out a solution to an important enterprise problem and he didn’t wait for the lifeguards to say it was safe to get back in the water to start his company. He left his job and founded SendGrid when everybody else was running for cover. Today, Sendgrid is arguably the most important email infrastructure company in the world.

I remember a series of conversations I had with Brad Feld in 2008 about his perspective on investing through various parts of economic cycles. Brad was (and is) resolute in his belief that creating outsized returns in the venture industry demands ignoring the macro environment as it relates to investment pace. I vividly recall those conversations which helped give me the courage to lead financings in companies like SendGrid, Purch and Cradlepoint in 2009 when most venture investors were sitting on the sidelines. All three of those companies are worth hundreds of millions of dollars today.

Are we entering a minor correction? A downturn? A sustained recession? Truth is, no one really knows. One immutable truth of investing though, is that you can’t time the markets, be they public or private. What’s the biggest lesson to be learned here? Invest the same amount of capital at the same pace, year in, year out. That means don’t get greedy when prices are low, and don’t sit on the sidelines when prices are high. Investing in startups sits on the riskiest edge of the investment scale. By investing the same amount of capital in the same number of companies year in and year out, you prevent yourself from being whipsawed and having too much money invested at market tops and not enough money at the bottom.

One last piece of advice for those who have only been investing in startups since 2010. If this slide continues, it’s not going to be fun. It simply sucks coming to work every day for months or even a couple of years and deal with shitty news. Whatever you do, remember to keep this one thing in mind though. Never forget that you’ve got a portfolio of investments and that despite the degree of carnage, many are going to survive and ultimately thrive again. Now put yourself in a startup CEO’s shoes. They’ve got one egg and no basket. They’re all scared and other than the most experienced, they really don’t know what to do. You may not know either, but having somebody else in the foxhole goes a long way. Practice empathy. Spend more time with the CEOs you’ve backed and do everything you can to make their lives easier. You’ll both survive the winter and emerge with a bond that lasts a lifetime, well beyond the inevitable thaw.

 

 

 

 

The Case For Priced Seed Rounds

When I was a kid, there were a series of memorable commercials from a company called Fram which made automobile oil filters. The message behind all of their commercials was that you could pay $4 for a quality oil filter today or pay hundreds or more to fix your engine later. If you’re over 45 you’re smiling now. If younger, here’s an example:

These commercials come to mind as I’m witnessing the effects of the proliferation of capped convertible note seed rounds. Mark Suster, Brad Feld, Duncan Davidson and others have written insightful pieces lately about the downstream challenges these notes are causing entrepreneurs when it comes to raising subsequent capital. Click on their names above to read them.

When I started in the venture business, you rarely if ever saw a convertible note. Today, it’s the priced seed round that’s rare. There’s no doubt that a convertible note makes life easier for a founder when raising a seed round. First, most founders believe their seed-stage startup is worth more than they could fetch in a negotiated priced round and the capped or (god-forbid) uncapped note is a great vehicle which allows an entrepreneur to grow their company into a higher valuation. Second, it allows them to delay what they perceive to be an uncomfortable valuation discussion. Solution? Throw a cap on a note and kick the can down the road.

Sadly, I’m watching this strategy come back to haunt so many founders going out to raise their seed extension or Series A rounds because of the inflated post-money valuations their companies are now sitting at as a result of their capped notes. Most entrepreneurs I know haven’t taken the time to fully understand the implications of these notes. Even at Techstars where we teach our founders about this, I still see mostly capped-note seed rounds. I get it. It’s easier.

My advice? Price your seed rounds. It was done for decades and it worked. It leaves no ambiguity and all the investors know exactly where they stand. Most importantly you’ll have no cap table issues when it comes time to raise your next round of capital. Is it a little more work to get this done? Yup, but tell me anything worthwhile that doesn’t cause some discomfort. Most founders I know don’t take the easy route when building their products because they know there’s negative downstream effects of that strategy. Why do it when raising capital?

What’s the cost of doing a priced seed round? Well, you’ll have to find an investor who will A) be willing to price your round (usually your largest investor) and B) you might not get the valuation you were hoping for. The former shouldn’t really be all that difficult and there’s reams of great posts out there supporting that the latter is irrelevant if you build an important, long-lasting company. So like the Fram commercial says, you can pay now, or you can pay later…

Seed Investing Doesn’t Buy You Series A Traction

During my first year at Techstars, I’ve spent a good deal of of time working with founders helping them to prepare for raising their first round of seed capital. I’m sure it’s not lost on anyone reading this that seed investing has been riding a pretty sizable wave over the last couple of years. This wave has provided both positives and negatives for entrepreneurs. On the positive side, there’s more capital targeting seed-stage opportunities and methods to find that capital than I can ever remember in my career. (I’m happy to let the pundits debate the extent to which this has created a “Series A crunch.”)

Seed

However, there’s also a downside to the recent proliferation of angel investors. More and more, I’m observing angel groups acting like VCs as it relates to diligence, terms and valuations. I’ve made dozens of both seed-stage and Series A investments in my career and they’re different animals.

I’ve always look for two things in seed opportunities: 1) a compelling market opportunity and 2) a talented team committed to solving it. That’s it. I never thought I deserved more than that in making an investment at a sub $5 million pre-money valuation. My Series A criteria added one more component, traction. For example, I always look for things like a few significant enterprise contracts or real MRR (for a SaaS business) or evidence of a hyper-engaged customer community.

Unfortunately, I’m seeing more and more angel groups looking for Series A traction at seed-stage pricing. They want to see considerable business momentum but also want pay sub $5 million pre-money valuations. They spend oodles of time doing “due diligence” when what they should be doing is spending time with the founders and determining if they think they’ve got the chops, commitment and experience to make a go at it. At Techstars we always say that we look for six things when evaluating applications: Team, Team, Team, Market, Progress, Idea. If you distill that, it’s the same thing I describe above: team and opportunity.

If you’re relatively new to seed-investing, first let me say thanks. It’s fantastic to see people wanting to support entrepreneurs and startups with their hard-earned money. It’s behavior like this that will foster the next generation of great companies and help keep America on the forefront of global innovation. One suggestion though; keep your expectations in check with regard to what to expect for your seed-stage dollars. From my perspective, it buys you a small team of bright, hardworking entrepreneurs with a vision about how to tackle a significant market opportunity who are willing to work for peanuts for a few years in order to tackle it. It doesn’t buy you more and you shouldn’t settle for less…