Buzz Pressure

…but not too few to mention. Over the past 7 years I’ve been directly involved with 5 startups. My track record is thanks to a combination of what some refer to as a general “lack of patience” and what I refer to as “mistakes”.

Clearly I can’t help people with patience or whatever euphemism you prefer but I’m more then happy to share what I’ve learned and what I won’t do again.

Founders and/or Early Team

I believe the founding team is the most controllable factor of success for a startup. I’m not alone - VCs talk about investing in the team. Your initial team will set the tone and vision for things to come so you better get the people right.

With ParkVu we’re poking conventional wisdom in the eye and building a company where the founders were friends before the startup. Isn’t that a risk? Of course it is, I said we were poking wisdom in the eye didn’t I? However, I think it’s actually less risk then building a team from scratch.

Starting a company is pretty much a marriage in the corporate world - and you probably wouldn’t marry someone you didn’t like. My theory is that by working with someone you already trust and respect you stand much better odds then ‘finding’ a founding team and hoping that the chemistry comes together or can somehow be facilitated. Trust me, it is extremely rare when that happens, if at all.

When you’re building a high performing team you need a level of candor that isn’t easy nor comfortable if you’re starting from scratch on day zero. Plus, you’ll spend as much, if not more time with your founding team then you will with your family so it doesn’t hurt if you don’t dread spending time together.

To be clear, don’t just fire up a company with your friends because they’re your friends. I’ve done that and won’t repeat that one either. What you need are people that both challenge you and keep you balanced which is an equally rare and elusive as good chemistry. It’s even rarer to get challenge, balance, and chemistry all together but that’s exactly what you need.

Effectively, you’re looking for a founding team that is exponentially better together then separate. Aristotle got it right when he said “the whole is more then the sum of its parts”. OK, he got other stuff right too but if his Holism theory doesn’t apply to your founding team, fix it and fix it fast.

++Beer

A few times I’ve seen teams that just don’t click. People are polite and superficially get along but there’s no spark. There are a few, fractured social outings, mostly by a rogue group who sneak away and meet clandestinely. Typically management wakes up to this being an issue and tries to engineer “fun” but everyone still dreads the holiday/Christmas party. Surely this just can’t be due to just a lack of beer? I agree, there were corporate culture issues but let me just say, there will always be beer at ParkVu.

A founding team needs some regular down time together because everyone likes each other and occasionally you’ll need to remind yourselves of that. It’s not just about pondering your collective navels but also some social non-startup time. There’s a reason Friday afternoon keg parties became rituals in the valley. And it doesn’t just have to be beer; it should be but doesn’t have to be. Your team can bond in other ways too but beer helps. A lot. At Covarity, playing Call of Duty + beer is/was the norm. Nothing breaks down barriers like trench gunning your colleagues into oblivion.

Startup teams don’t seem to ‘gel’ without this ritual, regardless if it is a formal or informal ritual. No gelling, no high performance team - and working in that kind of environment just sucks.

- - Jackasses

We’ve all worked with them but we shouldn’t have. The Jackass is the person on the team that everyone dreads will open his mouth during meetings. They sow dissent, play politics and like to think of themselves as being provocative/big picture. They’re not. They simply suck ass.

Jackasses either have some serious character flaws, were toilet trained early or for whatever reason are not finding their stride in your startup. Either way they shouldn’t be working with you. That’s not to say that you turf anyone who challenges or argues. Absolutely not - I love a good whiteboard fight. What you don’t want are people who are high maintenance “just because” and serve as a value vortex for the team.

My ‘favorite’ jackass move is when the jackass positions themselves so not only are they completely blameless, they, of course, knew that the decision in question will end in failure and they’re not about to go down for it.

Most startups experience sinusoidal waves of kicking ass and having their collective ass kicked. You don’t need more crap. Kick your jackass(es) to the curb like yesterday’s trash and find someone who makes Aristotle (sum of the parts) and the team happy.

VCs — Sure Just Not Right Now

I’ve been through a number of investment rounds both angel and VC. I’ll leave angels alone for now because frankly I haven’t seen how they behave through both good and bad. However I have seen VCs brought in too early which results in the company ramping up too early prior to markets and product being solidified. The company runs itself in circles and hires the wrong talent while it focuses on placating investors instead of building product(s) for their market.

But VCs aren’t the bad guys. Sure there are some bad ones but there are just as many, if not more, bad founders out there. Things go bad with VCs when the deals become uneconomic. Shareholder and Subscription Agreements are VC protectionary measures i.e. they’re typically anti-founder. This is because of collective past misdeeds i.e. we only have ourselves to blame. And let’s not forget that your VC has investors too. They’ve sold they’re abilities and investment potential too and they’re now looking at you as the goose to lay that golden 10x egg.

So know the rules of the game, understand the power and more importantly, understand the motivations behind the rules and the power. Interestingly, the degree you de-risk your startup is (should be) directly proportionate to the investment risk and thus power and protectionary measures. The longer you can put off taking investment while hitting your milestones, the better off you should be from the perspective of equity and ability to affect the outcome of your startup. Naturally you have to balance - if you don’t take investment will your opportunity still exists and to what magnitude will it exist?

Terry and I are building ParkVu with the idea of bootstrapping until we prove out the market and the technology. If we don’t take investment, the business should still stand on its own. We’re in full control to set strategic direction, markets, business models and make overall decisions while the business is still squishy. Early investors are a patient lot but they’re not immersed in the business to the same degree you are, it’s difficult if not impossible to have the same strategic fluidity with external parties at the squishy table.

I’d highly recommend you seriously explore ways to get as much built and tested/validated before involving professional investors. That might mean selling a kidney, working on your startup outside of your day job, etc… And if you do take investment make sure the amount you’re raising realistically fits with a 10x exit opportunity. Otherwise you’re in for a miserable, bumpy ride.

Community

You may think you’re alone in this battle but you’re not. Too often founders and founding teams schlog it out on their own when there are a lot of people out there with startup bumps and bruises. You also need to connect with your marketplace. Reach out to your community and yes even <gasp> your competitors.

Find out where people hang out, attend bar/startupcamps, check out a local tech association and connect with external people in which you can confide. These are not long term board of directors/advisers relationships, just people who you don’t have to explain what you’re going through after every sentence or why you don’t get a “real job”. Look for people who have done what you’re trying to do, who will support you when you need it but also are equally willing to deliver a reality bitch slap when it’s needed.

Sale People

I have more horror stories in this category then probably any other. I’ve seen bad and really, really bad salespeople. Sadly I’m not alone. I had a sales team allegedly selling their own competitive product to our prospects, seen some pretty dubious if not illegal expense claims and once while using a salesperson’s laptop for a demo to about 200 people managed to stumble upon the salesperson’s porn stash and blasted it across two giant screens. Yeah try to recover that demo.

The worst I think was the “parking meter” who while very expensive sat at his desk and waited for people to come feed him money. Developers spent less time at their desks then this supposed “big game hunter”. Fortunately I’ve also had the pleasure of working with some very decent (yet demanding) salespeople too.

The overall value of your product is going to be a source of friction between development and sales. Development, especially founders naturally think the product is richer and more mature then the salesperson who has to put their ego, self-esteem and social capital on the line to sell it. Typically salespeople aren’t excited about selling the product for the top dollar founders think they should. They’re much more interested in giving the product away in a quest for reference customers. No these aren’t the good sales people I’m talking about but rather the norm.

Of course, if you get out there and do the first few sales yourself (if applicable) you’ll have both the credibility to call BS on the salesperson who wants to give your product away but also an appreciation for what it takes to get a deal done. Yeah realistic sales compensation plans help too but they’re not the be-all, end-all. Again most of theses problems can go away with trust, candor and respect.

You need to have honest discussions with your salespeople. Go on calls with them, listen to their advice, make sure they have a hand in prioritizing features and work with them from initial contact through to implementation and ultimately customer retention to understand the issues. You’re in this together but often both parties forget this and salespeople end up only concerned with their next kill while the rest of the company curses them for selling something that really doesn’t exist.

Phew

There you have it, 5 startups distilled into one list of things I’ve learned. So take a hard look at your founding team, crack open a beer, fire your jackass(es), remember it ain’t 1999, talk amongst your community, hire a salesperson you trust and respect and get out there and kick ass before someone kicks yours.

Is it 1998 all over again? Some moron(s) recently tried to snow Rick Segal with their biz plan (Biz plan? really you sent a biz plan!?!?) but were st00pid enough to leave in their changes and edits much to Rick’s delight. It reads like a car crash in the making and should kick your weekend off in style!

Don’t try this at home kids…

There are still seats available for ExperienceTech!2008 hosted by MaRS & IDC. I’m doing a panel moderated by Stuart MacDonald of Expedia.ca and now TripHarbor fame, Leila Boujnane of Idee and the venerable David Crow.

We did a little pre-conf/pre-panel meeting Friday evening. Stuart, Leila and David were all gathered at MaRS and I phoned in while I chased my son on his bike around our neighbourhood until my BlackBerry ran out of juice and forced me to be confined to our porch.  In any case, if our conversation is any indicator of our panel, I think you won’t want to miss it. We’re going pretty much unscripted and hope to rely on the audience to drive the conversation with Stuart playing ring master keeping Leila, David and myself in line.

Even if we suck, there’s lots of other interesting speakers at ExperienceTech. Grover Righter is sharing tips on growing and exiting with less capital. Grover is rumoured to be a kick-ass speaker and a general force to be reckoned with . Tom Kelley of IDEO is talking about innovation and there are even other panels if you dare risk missing ours.

Like I said, not too late to register.

Suzanne Dingwall Williams has a nice post on her thoughts on the future of Canadian VC that is worth a read.

To be clear, my “fear mongering” (if you must call it that) was equally as inquisitive (a term I prefer) about the state of US VC.

UPDATE: it wasn’t Ali that I was referring to with the “fear mongering”, he called me “chatter”. Also I’m not convinced Canadian or US VCs are dead.

Sweet jeebus will someone please put an end to Dragon’s Den and put us all out of our misery. Dragon’s Den has to be the most destructive force to startups’ view of venture capitalists. In fact I think the show gives Ivan Boesky a run for the title of “most embarrassing moments in the capital markets”. It is even worse for those of us who live/work in the Accelerator Centre where we saw the masses pitchin’ it for all it’s worth, clamoring for a spot on the show. Oh the humanity (or lack thereof)

I’m hearing a lot of rumblings from local Waterloo startups (I loathe the term entrepreneur) about the sorry state of Canadian VC. Originally I brushed it off as mass hysteria and felt good about it. Supporting my theory, at a recent WatStart event, Marc Gingras of Tungle took issue with the idea that funding was drying up and suggested startups just weren’t talking to the right people.

Yet I hear rumblings that some VCs are having trouble raising new funds. Also in the fear mongering camp is Bob Ford, a former CEO of mine. He was quoted recently in the Ottawa Business Journal with this happy news:

“There’s just no big money in venture capital in Canada anymore. There are really very few funds that are doing well at all, and although there are exceptions, overall it’s pretty tough right now,” said Bob Ford, a partner in Gowlings’ business law department working from its Kanata technology law office.

From my experience, Bob was never really what you’d call an optimist but he’s not a pessimist either. His law experience makes him pretty factual though he does know how to deliver a message. So what’s going on people?

This week, the Q3 2007 stats (pdf) were out by the NVCA, PwC and Thomson Financial. VentureBeat did a great job summarizing the stats in their post. But I’ll take a crack at the numbers from my perspective.

First the good news, investment continues to be steady and according to a statement in August by the NVCA, investment is at the highest level since 2001. Average deal size is looking good too. So why all the hub bub, bub?

As you can see, all is well from an activity basis and I bet the lawyers and accountants are doing very well thanks to transaction volume. However it would appear that perhaps at least some of the rumblings from startups that I’m hearing is substantiated by the fact that money is flowing to follow-on investments and seed isn’t getting the dollars those deals are chasing.

More good news, at least for me, a software guy, is that VCs remain focussed on Software and BioTech pouring over a billion into each of those categories.

The news is even better if you’re an Internet company where Q3 saw an investment of $1.1 billion, an impressive 17% climb over Q2. Clean Tech is also alive and kickin’ it hard, thanks Al Gore!

So not too shabby but all is not well for the venture funds themselves. The NVCA reports that fund raising by the VCs has slowed to only 79% of the volumes for the same period last year.

Seems consistent with what the rumors that VCs are having trouble raising follow-up funds. So everything is ok then? But then I get this funny smell from the NVCA press release:

“We expect the number of venture capital firms raising funds to remain very stable and perhaps even decline during the next year as these venture capitalists focus on deploying the dollars that have recently been raised,” said Mark Heesen, president of the NVCA. “The high percentage of early and balanced stage funds raised suggests a continued venture capital focus on growing young, start-up companies from the ground up.”

Hmmmn, that’s not what your own stats seem to be showing — early stage investment growth is slowing. Are VCs retrenching on early stage investment? Ruh-oh that is a pretty steep downward curve forming there in Q3

I’ll toss another interesting nugget into this little conspiracy theory that’s forming. In the same post Venture Beat reports that mediocre results have stalled Sequel Venture Partners of Boulder, Colorado new fund raising as “yet another” example of the pain VCs are feeling. So no returns, no investment? Seems like we’ll all feel that one and probably rightly so.

So what’s wrong in the crazy world of venture capital and startups? I’ve heard and participated in a couple of discussions/theories. Obviously the drying up of labor sponsored funds in Canada can account for at least some of the hardship non-obvious/riskier startup deals are facing. But that seems too easy and doesn’t account for the MoneyTree data which is US only.

Are yesterday’s methods and models to blame? Things like Amazon’s EC2 and S3 utility computing infrastructure just didn’t exist in the mainstream 12 months ago and obviously are game changing. Five years ago I started a SaaS company in the finance space. It was tough, if not impossible to stretch the VC Excel due-dili jock’s enterprise software model to fit and allow for the infrastructure spend and recurring revenue models associated with launching a SaaS operation. Facebook’s API/platform (and now LinkedIn and mySpace) though unproven from a revenue perspective is also equally difficult to cram into a spreadsheet.

If startups and developers are flocking towards Web 2.0, 3.0 and heaven help us 4.0 plays, do they fit effectively into financial models and investment criteria established as recently as last year? Are entrepreneurs (there I said it) to blame? Are we too optimistic (that’s code for unrealistic) clinging to valuations like Geni’s $100MM?

So do we need to start fresh yet again? Have things changed that much? Is sub-prime hysteria and the specter of a US recession causing VCs to retrench for the long haul?

We’re in this together people, we better figure it out.