Parsing Advice as an Entrepreneur

Understanding what’s true and what’s not in startup land is one of the most difficult challenges that I’ve dealt with as an entrepreneur. I’m not saying there is a lot of purposely false information being disseminated. More, I’m saying that a lot of advice, stories, etc that you hear are just wrong.

In fact, your better advisors will tell you that “90% of what I say is wrong, and it’s your job to understand the 10% that is relevant and should be acted upon.” Of course, your BEST advisors will tell you things that are 80% true as they understand you and your business. That makes your job a lot easier.

It takes a village

It’s very true that without the help of those in your business community, your company simply won’t get off the ground. Some help comes in the form of early customers willing to take a risk. Other help is in the form of capital from angels. And, much of this help is in the form of advice and connections from leaders in the community – or someone who just happens to know something specialized and useful.

One of the things that makes Silicon Valley an amazingly fertile place to start a company is that it has these groups of people in spades. And, they’re willing to help.

However, while advice can be helpful, there is so much bad advice out there! And, it truly is your job as an entrepreneur to figure out what is right (as best you can).

Here is some of my advice (hehe) on how to parse this information, and warning signs to look out for.

Incentives matter

As Charlie Munger likes to point out, personal incentives matter, a lot. If someone has an equity stake in your business, they may be pushing you to go big or go home, even if it’s too early to pour gas on the fire. If someone owns a blog/conference/whatever they may want you to advertise there. Be careful if they’re getting money out of that, even if it seems like a good idea and you trust the person.

Don’t believe the hype

Once in a while you get connected to someone who’s a real startup luminary. They sold their last company for a lot of money, or work at some big VC fund. Many times these people have insane degrees, and you’ve read about them in the latest Forbes list of XX under XX.

Be careful. Just because someone has the right credential, doesn’t mean that they understand your space, your tactics, the problems you’re dealing with right now, or the way you want to build a company. Besides, most people who have large personal brands got that way by working on them, not necessarily by doing anything impressive.

People learn the wrong lessons

Many times entrepreneurs or VCs share the tactic that they believe helped their last company get off the ground and relate it to your business. They know this is a proven method that works, and so you should do it too (I’m totally guilty of telling everyone I know to go to bschool, btw).

The problem is that what worked for a B2C business 3 years ago doesn’t work for a B2B business today, or even a B2C business. It COULD, but be very weary of people who tell you to do what they did simply because that’s what they know. Pick apart why this time may be different, and try to have an intellectual conversation with them.

Ego

Many people who give advice just like to give advice for their own sense of self worth. I have a running joke with my co-founder about this one guy who always says he’ll do me a favor and make time on his calendar for us. He never does, and we really don’t want the time anyways. He simply wants to give advice for the sake of being heard, which is another problem with personal brand builder types.

This is the type of person who won’t listen to you, and who’ll just talk about themselves for an hour and then expect a thank you for wasting your time.

You’re always wrong and you’re always right

In these conversations, you’ll get told you’re wrong and right by different impressive people for the same conclusion or tactic. That’s part of the problem here. This advice stuff is all just another datapoint in your way forward.

My advice: trust your gut, and don’t be afraid to go against the grain. If someone says you’re wrong, understand why. Same with someone who thinks you’re right. Are they really hearing you? Do they understand the details of what you’re saying? What assumptions are they making and what information are they missing?

For example, I might tell someone I’m going to use inside sales to sell my product. Some people don’t know what inside sales means, some people will remember a blog post they read where you have to have a certain ACV to do inside sales, and some will build out a strategy in their head around what their inside sales strategy for your company would look like. All three of these people will tell you “you’re right” or “you’re wrong” based on what’s in their head. Figure out what they’re thinking, why, if you can add more to the big picture, and get more useful data.

You can learn from the wrong people too

It’s worth noting that you can learn A LOT from wrong people. First off, if you tell 5 people what you’re doing and no one gets it – then you’re doing a terrible job explaining it.

On the other hand, you may find out that your go to market is a bit cutting edge and no one intuitively understands it simply because you’re doing something other people haven’t thought of. That’s a valuable learning too.

Vetting the people you trust

What I like to do to understand whether I should listen to someone is to logically deconstruct what they’ve said. Are there gaps? Are they willing to get into the details of what they’re saying to understand if they’re right/wrong? Are they saying things that are simply logically inconsistent?

For example, one “luminary” told us how our company is just way too early for him as an investor. Then he went on to brag about this one investment he made that just signed up their first enterprise deal, for $15k. Ok, so we have way more revenue than this company you’re proud of, and we’re too early? That doesn’t make any sense. Of course, I have a high risk of taking something like this personally and so have to be aware of that in my judgment of him as well.

Bottom line: Make sure people you get advice from aren’t ego driven, have aligned incentives, know stuff you don’t, and that you feel on are the same page as you are.

Ok, my video has stopped encoding which means it’s time for me to get back to work. If you have thoughts on this, please leave them in the comments. I’d love to learn from others in this area as there are clearly no black and white ways to operate, but it’s so very important to have a semblance of a framework for this.

One trick to get to inbox zero: respond to cold emails

In this post, I want to share a secret that perhaps many people who’ve never been in a sales role don’t know.

You know all those emails you get to your work account from people you don’t know? They’re from sales people – usually a Business Development Representative, Account Executive, or whatever. They got your email from some database, or because you listed it on a website 3 years ago and it’s still easily findable from a quick Google search.

They think you want/need their product. And, they’re pretty interested in talking to you about it. In fact, most modern sales organizations have a 10+ touch cadence when reaching out to a prospect. This is a combo of emails, calls, voicemails, and social touches.

So, if you don’t respond to this person’s first email, they’re going to reach out to you another 10 times over the next few weeks.

If you’re like most people, you’ll “ignore” these emails. “Ignore” typically means read the email briefly, try to remember what it was about, remember it relates to a product and person you’ve never heard of, and then delete it. That process takes around 90 seconds. So, for each sales person reaching out to you, you are going to spend 900 seconds fending them off. That’s 15 mins of your life (and probably a whole lot more!)

Aren’t they jerks for emailing me out of the blue?!

If I hadn’t cold emailed a few thousand (or more) people in my life, I’d probably think sales people were jerks – and not worth the time of day. But, they aren’t. For worse, the b2b vendor/customer market is just inefficient, and cold outreach is unfortunately one of the best mechanisms our economy has for matching the right company with the right product.

These people aren’t calling you to be a jerk, and they aren’t calling you to scam you either. 90% of sales people are selling something that is worthwhile (sorry other 10%). It may not be worthwhile to you, but it very well could be (PS they are reaching out to you specifically for a reason, they’ve done SOME level of research, as their time is valuable too).  It’s suboptimal at best to turn these people away without taking 60 seconds to triage their request.

A better solution

Here’s what you should actually do: read the email, think through whether or not this product/service is relevant to your business, and reply to the sales person with the appropriate response. Here are some reply examples:

  • “This is something we’ve been thinking about, I’m free next Wednesday morning, shoot me an invite.”
  • “Let’s jump on the phone for 10 mins so I can understand what your product is a bit more, do you have time now?”
  • “This isn’t relevant for us because {reason}, but could be in 3 months, shoot me a note then.”
  • “This isn’t going to be relevant to me because {reason}, but good luck.”

Congratulations, you just saved yourself the next 10+ follow ups and your inbox is all that much closer to zero messages (not to mention your voicemail, Inmails, Twitter mentions, etc).

A really bad response is: “No thanks.” This piques the good sales person’s interest and they want to find out why, especially if they’ve done some discovery beforehand and think that you are actually a good fit.

Here’s the other reason to respond to the initial email

I find that many people get slightly arrogant when they are being chased. It happens to junior VCs when seasoned entrepreneurs want to get time with them. It happens in the world of dating. And, it definitely happens to people who have vendors chasing them.

Here’s my advice: get over yourself!

If you allow yourself to get arrogant, you’ll miss opportunities. You won’t see the person who’s chasing you who is actually super relevant to what you’re doing, and could add value to your business. You’re going to dismiss them with your chin up, and then lose money by not buying their solution.

How do I know this? Because I see it happen all the time in the world of HR. I see it when I talk to HR folks about what ATS/HRIS/etc they are going with, and I see it when I talk to people about our product who I’ve been chasing for months but by chance meet at a networking event and they say “this is what we’ve been searching for!”

To recap

When you get a cold email, read it, and triage it. Respond to it in the proper manner so you are taken out of the standard outreach cadence and can learn more if appropriate.  Congrats, just just saved 15 mins, and perhaps are going to learn more about a useful product/service.

Some thoughts on valuing SaaS companies

When I worked in venture capital, I was lucky enough to have the opportunity to invest in some really great companies during their early rounds.  Now some of those companies are going public, and I find myself spending some time thinking about when to sell my stock in these companies.

I don’t think anyone has truly figured out the formula to value these companies.  There just aren’t enough examples of SaaS companies that have reached maturity and shown us what they really look like in the long term.  Salesforce still grows at 23% annually and trades at over 100x EBITDA!

Nonetheless, I thought it’d be an honest exercise for me to write some thoughts down and then review them in a few years.

I think that growth should be the number one factor in considering SaaS valuations (when I say valuation, I mean how much is the company worth on a revenue/gross profit/EBITDA/FCF multiple basis).  If a company can grow at 50% for 3 years, it’s topline will be nearly 3.4x higher!  That’s powerful.

If you’re a real SaaS company, this means you have 80+% gross margins and should start seeing nearly 40 cents/dollar of new revenue start to fall down to operating cash flows.  Assuming the company that grows at 50% annually was cash flow breakeven, that means your operating cash flow in three years is more than your current revenues.

No two companies are the same.  The top factors that would effect valuation are how scalable growth is (sales/marketing channels and economics), how long growth can go for (market size, competition), churn (and how it contributes to growth), and margin profile (gross and net), barriers to entry (that will protect current revenues and make sure new competition doesn’t chip into existing growth prospects)…there are some other things pretty important too, like management’s incentive system.

I think what a lot of investors have figured out is that if a company keeps growing, you can pay through the nose (relative to what most companies trade at) and still make a nice IRR.  I agree that growth is the most important aspect of valuation, and that most of the other factors are basically contributors to growth.  Even in these heady times of crazy valuations, I’d say that a lot of the public companies are undervalued!   The other main factor here is the margin profile.  If you can’t ever be profitable, then forget it.  And, in the case SaaS companies, it’s more like you have to be VERY profitable.

I don’t have time to look up various rules on making stock predictions for companies you own.  So, I’ll leave you with this very basic spreadsheet (SaaS valuations thoughts) that should illustrate that growth is key in valuation and how I think various companies should be valued (although I guess the numbers in blue are very much up to interpretation in most companies).  Enjoy.

How to do well at your first industry conference as an entrepreneur

Last week I went to my first conference as an entrepreneur – HRTech, in Las Vegas.  I went in with little understanding of what to expect at a 10,000 person expo full of vendors, customers, investors, and others.  Nor did I really know how to best use my time.

We had a booth in the “startup pavillon” which was regrettably on the outskirts of the conference, but had decent traffic since it was close to the bathroom.  It was only large enough for 1-2 people to stand at, but was cheap :).

Here are a few of the things I learned for people who will one day attend their first conference as an entrepreneur/salesperson.

1) Make notes on cards, you aren’t going to remember.

When you talk to someone, especially a potential customer, you’re thinking “there’s no way I’ll ever forget this conversation!”  Luckily I still wrote down notes on ever single business card I got, and sent myself a quick email for those contacts I couldn’t get business cards from.  You will NOT remember 80% of conversations after you recover from your red eye back home.  This makes for most customized email follow ups post conference.

2) Get sleep before/during/after.

Lack of sleep and cognitive functioning are highly related, same with energy levels.  Why would someone trust/remeber you if you can’t articulate what you’re selling?  Don’t think going out until 2 am is a good idea just because it’s Vegas.  Get some rest and make the most of your time, as well as the money you spent getting there.

3) Do pushups/burpees/situps/squats (in your hotel room).

The endorphins released during exercise will make you feel happier during the conference which makes you a better sales person.  They’ll also increase your cognitive functioning.  See #2 above.

4) No one will visit your booth.

Unfortunately, the only people who want to come to your booth are the intellectually curious (and generally not relevant), or people trying to sell you.  That means you have to be aggressive in getting people to your booth.  The following tips help you do that.

5) Smile, hold something social proofy, and don’t be desperate.

If you smile and say “hi” some people will smile back, or at least nod.  If you hold something like a cup of coffee or a nice shiny pen, this communicates you’re legit in some small way.  And, if you can control your voice to sound full of confidence (which you will be anyways because you’re crushing demos left and right), they may even turn and look at you.

5A) Wear casual clothing.

Don’t feel like you need to rock a suit or a blazer simply because it’s a professional conference.  It’s preferred to wear something more casual to make yourself approachable.  Trust me, I A/B tested it.

6) Ask qualifying questions.

Just like in sales, you don’t want to spend lots of time with people who aren’t relevant to your goals.  Ask something like “Are you in employee benefits?”  If no, then “have a great conference” and you both feel good.  If yes, then “Great, I’d love to show you my product.”  It’d be weird if they just walked away after agreeing it’s relevant, right?

7) Discover.

You wouldn’t have the same conversation with a prospect vs a competitor vs a collaborator vs an investor right?  Ask them what their role is.  Try to figure out if you can use jargon, or if you’ll have to explain the various pieces of your product in more simple terms.  Craft your conversation accordingly.

8) Get sick swag.

Get something cool.  We almost bought pens, thank god my co-founder thought of these credit card sized bottle openers instead.  Much less likely to be thrown away.

9) Stay cheap.

This is especially true for startups.  Have your friends take you to free parties.  Make sure the cabs don’t charge extra for using credit cards (they charge $3 extra in Vegas, what’s up with that???).  Stay off the strip in a reasonable hotel…you’re just sleeping there.

10) Enjoy yourself.

There is a lot to feel overwhelmed by.  But, make sure to take time out to enjoy the experience of your first conference.  Make new friends.  See cool technology.  And have a beer.

The Admissions’ Mistake

The first class I had freshman year at NYU was 8 AM on the 4th floor of Bobst Library, right on the south side of Washington Square Park.  I remember it was a strangely cold, overcast September day.

I was incredibly nervous, and really unsure what to expect.  This was especially true considering the class was called “Writing the essay” and I wasn’t a very strong english student in high school.  As it turns out, I did ok in the class.  But, what really stood out to me was the advice my professor gave on that first morning.

She was 4-5 years out of Harvard.  And, she said that on her first day of college, the Dean had said “there will be a point during your first year here that you feel like you’re an idiot, everyone around you is so much smarter, and that YOU WERE THE ADMISSIONS’ MISTAKE!  Fear not, as this is definitely not the case.  Everyone feels like this at some point, and you’re going to be just fine.”  By the way, I am totally paraphrasing what I think was said, as I was hearing this second hand.

It’s going to happen to you.  When you’re a freshman, or start grad school, or are at your first job, or start a company, or (presumably) start a family…you’ll always have a point where you think you’re in over your head – you’re the admissions’ mistake!  But, you’re not.  You’re just having a bad afternoon, or week, or month.  And you’ll recover, look back, and say “wow, I was actually not half bad.”

I’m posting this because it’s been a pretty powerful lesson for me to keep in mind, especially when the going gets tough.  What made it powerful for me was that this was said to kids at HARVARD!  Everyone at the #1 school in the world was feeling insecure and stupid.  Imagine that??  If it was happening to them, then this is clearly an illogical feeling and I don’t have to pay it much mind :).  I hope you’ll interpret this with the same lesson.

Don’t be nice to startups

These days, chances are you or someone you know is starting a company. And, whether you’re hacking on a side project, scheming with a friend, or actually working full time, the number one thing founders are after is feedback (after venture capital dollars, revenue, a CTO… you get the idea).

With that in mind, I wanted to give some advice to friends of founders, early customers, and anyone else who’s giving feedback to startups.

Simply put: don’t be nice when they ask what you think of their product.

It’s human nature to want to support your friend, or another professional who’s put time and effort into a company. This usually results in sugar coating your feedback. Don’t.

Don’t think “oh, well they’re putting their heart and soul into this thing, so I want to support them.” If you tell a company their product is “pretty good,” “interesting,” “innovative” or sugarcoat it in any way, you are doing them a disservice.

If you think “well, I don’t want to be a jerk, and I know starting a company is really hard,” then don’t be a jerk – just be honest. Startup founders are rejected on an hourly basis most days, your additional rejection bounces off the armor just like all the rest. But, a truly honest answer to any product is hard to come by and very very useful because it is so rare.

So, the next time you’re doing a survey for your pre-product friend, tell her what you really think of her idea and vision. When it comes to feedback, the only wrong answer is the inauthentic/unthoughtful one. It’s a founder’s job to parse all the info that comes in and you’re just one input – so don’t worry about being ‘wrong.’ This same advice goes for early customers, users, etc.

Mid-post disclaimer: my favorite character/investor on Shark Tank is Mr. Wonderful. My favorite judge on American Idol was Simon Cowell (not that I’d ever watch that trash). They may be a bit tough, but at least you know where they stand (and you can calibrate how you interpret their feedback as you know they are a bit tough). In light of this, maybe not everyone wants this sort of brutal, Bridgewateresque feedback.

But you don’t have to be brutal, just be honest. Maybe once in a while that means being brutal, and so be brutal. And maybe sometimes it means swiping your credit card, or using the service, then do that too ☺. And, if it’s something in between, do some soul searching to try and figure out why you are on the fence.

Ask yourself, ‘what would make me stop what I’m doing and use this right now?’ Be a method actor for a moment, breathe deeply, and articulate what you’d need to be a user/customer. Don’t list random features you can think of that might be useful in some future scenario. Think RIGHT NOW what do YOU NEED in order to USE/PAY FOR THE PRODUCT. That will be the nicest thing you could possible do for a startup.

PS please feel free to reference this article when giving me harsh (but honest) feedback.

Slow industries getting slower

When I was working in venture, my job was to find interesting companies and then try to get a partner at my firm excited about visiting the company and potentially investing. Each monday, we’d have a meeting at 5 pm where myself and my 5 peers would each be responsible for presenting 2-4 companies worth talking about. It was a great way to hone my investment prowess, and a good way to figure out what made a company interesting or not.

One theme was always how fast a company can move. When you invest in startups, you need to have the opportunity to compound your money at 100% a year (and the expected compounding, or IRR, should be around 25% factoring in middling outcomes, and zeros), otherwise your losers will pull down your portfolio and you’ll never have big wins that return your fund.

One key to investing in companies that can grow this fast is to have a fast sales cycle. Basically, you can initiate a conversation, demo a product, and close a deal in a reasonable amount of time. For a freemium SaaS company, a reasonable amount of time may be a 14 day trial. For an enterprise SaaS company selling $50k/year software, this may be more like a few months.

During our Monday meetings, there was always constant push back for a couple of industries because the sales cycle was simply too long to build a company that could compound money at 100%/year (even if things went well!). In healthcare, it’s almost impossible to sell anything to insurance companies (it can take 18 months even if the ROI is extremely positive), same with hospitals. The government is unsurprisingly similar, along with the education system. Telecom companies…forget about it. Non-profits are more of the same.

So, that meant that most companies selling to these industries weren’t even on the table for consideration when we pitched them to partners. These companies were most likely at a similar disadvantage in other venture firms’ deal funnels. This is probably even more exacerbated at the seed level. We saw companies who had at least a few million in recurring revenues and had somewhat figured out sales channels that worked (and in fact some of these companies did have an expected IRR in the 20s, and made it into the portfolio, but sometimes this was due more to the decreased risk of a later stage company rather than the ability for an early stage company to move fast)…For seed stage, I can’t even imagine trying to sell the dream of selling a product to these sorts of organizations before there were any hard numbers.

This dynamic is being combated in part by employee software – maybe you can build something so good that teachers will adopt it, and you can then later sell it to the larger school district after a critical mass of users already exists. Freemium models make it easier for organizations to try these offerings as well.

But, the sad thing is that the reputation of these industries means that many high quality entrepreneurs are not trying to start companies that service them. It’s frustrating to navigate bureaucracy. And, it decreases your odds of success due to the increased operational and fundraising risk. No doubt, the lack of new companies in an ecosystem leads to these industries falling even further behind.

I’ve now seen this play out with friends starting companies and weighing different markets, in addition to investors. If you want to succeed, there is an unwritten list of industries to stay away from.

It’s scary that some of the most important aspects of our society are disadvantaged because of slow procurement processes. In many cases, I’m sure this could change with the right incentives and training. But, it seems like most of these players will have to hit rock bottom before anything changes. Or, maybe a few pioneers can turn the tide. I thought it was really cool when I noticed a developers page on the MBTA site. Hopefully others take note.

Ten tips for MBAs who want to do a summer internship at a startup

Last summer I worked at a growth stage silicon valley startup.  As this is becoming more and more popular for MBAs to do, I thought I’d share a few tips that I learned.

1)   Don’t let your classmate’s job searches stress you out.  McKinsey is on campus in October, and will give out offers before people even come back from winter break.   That’s great.  But, it’s not what you want to do – you want to get your hands dirty this summer, so don’t stress when half your friends have jobs in March and you’ve just begun your search.

2)   Start your search early, like December early.  Make a hit list of the companies you want to work in – think about whether you want the absolute craziness of a seed/series A stage company, or the relative direction that a growth stage (100+ employees) company has.  Identify the industries and geographies you want to work in, and then use crunchbase, VCs portfolio companies, and linkedin to create a target list.

3)   Look at any connections you may have at a given company – alumni from your school, maybe their product manager played the same sport in college, etc.  If nothing strikes you, write a thoughtful and authentic email about what you’re looking for this summer, why you’d want to work at XYZ company (hopefully there is a rhyme or reason to why you want to give up $25k working at Goldman Sachs), and what you bring to the table (sales, strategy, just ready to get into everything and anything).

4)   Be aggressive about follow up.  Most startups are super busy, don’t hire interns, and won’t think about it until April/May.  Stay in front of your contact person, update them with how your search is going, and try to setup a time when you can fly to your target destination to meet with 5-10 companies.

5)   Some of the best advice I got was to get coffee with everyone at the company – from the person who answers the phones to engineers.  Get to know how each part of the machine works, or doesn’t work.  Why are people here, what motivates them, how is the strategy articulated by the CEO different from the perceptions of the people executing…there are lots of great lessons to be learned.

6)   Don’t be shy.  You have 8-12 weeks, express your ideas (humbly), develop projects you think could help the company and test them in a lean way, make sure you’re learning actual execution skills, not just making models and powerpoint decks for the c-suite’s next meeting with investors.

7)   Be aggressive about getting to work on interesting products.  Think SEO is an important part of your future?  Read the SEOMoz blog and tell the VP of marketing you can help.  Boss not giving you work?  Trust me, someone else in the company would love for you to help.  Don’t be afraid to answer customer service requests, or deliver some organic vegetables!

8)   Learn skills.  Sales, coding, SEO, writing content, customer service…what do you like to do, what are you good at, where are your holes.  How does this fit into what you want to do after graduation?

9)   Network.  Get to know people from other programs in your city.  Get to know PMs and VPs and engineers at other companies – what challenges have they dealt with and what can you learn?  What can you bring back to your company?  Learning from others in this way is maybe the most powerful aspect of a startup hub such as silicon valley, take advantage.

10) Reflect.  Understand why you did/didn’t like the role, city you were in, company you were at, etc and how this shapes your career going forward.  I HIGHLY RECOMMEND taking 10 minutes at the start of the summer to write down some goals, looking at the goals mid summer, write down how your experience is going so far, and then revisit both reflections in September as you get back to campus and start to think about full time employment.  Trust me!

Hopefully these help.  Good luck!

 

 

 

Different VC Structures

A question came up on the founders dating discussion boards about different VC structures, so I thought I’d put together a short model on some typical structures. Mainly, this looks at straight preferred stock vs participation, and allows us to put in a dividend on existing and new investments. Here’s the excel: Participating vs Preferred

Straight preferred stock is the most common type of vc investment. Basically, the investor has the option to get their preference back (how much they invested), or convert into common stock at an agree upon ownership percentage. So, if I invest $10 mm for 20% of the company, if the company sells for $10 mm, I can either take my $10 mm back, or convert for 20% of $10 mm, which is $2 mm. Obviously, I will keep my preference. I’m indifferent whether to convert or not at a $50 mm exit where my preference is worth $10 mm, and my common stock is worth 20% * $50 mm = $10 mm upon conversion.  Above a $50 mm exit, I’ll want to convert to common and take my 20%.

Participating preferred basically means you take your preference, and then convert. So, in the case of the $50 mm exit, I take my $10 mm off the top, and then get 20% of the rest. This is clearly worse for the other common stock holders who now get 80% of $40 mm, not 80% of $50 mm. It’s worth noting that if you do a series A with participation, you’ll be pressured heavily to continue to have follow on securities that have participation.

Another confusion was on how the equity conversion is calculated. Basically, is it the amount invested divided by the pre or post money?  The short answer – it’s the post money. Here’s why.

The value of stock = the value of your assets (IP, people, future cash flows, etc) + cash on hand – debt. For people with finance training, this is simply the equation for enterprise value (EV = stock + debt – cash) rearranged.

The value of your assets is your pre-money. What is your company worth right now given it’s future prospects. If you add cash, this adds value to the stock in a 1:1 ratio (every dollar going in adds $1 of value since as stock holders we could theoretically liquidate and get the $$ back.  You can see the advantages of being a value added investor here, your dollars are worth more than 1:1, hopefully).  So, the ownership percent = money invested/post money valuation.

One note, if money invested doesn’t go to the balance sheet, but instead goes to a shareholder’s pocket, then the post doesn’t go up for those dollars.

Check out the excel Participating vs Preferred – I always find this an easier way to understand this stuff.  I also wrote a post a while back on convertible notes which is another common security for early stage companies.

If there’s an error in the excel, please let me know!! Enjoy!

My Takeaways from HBS’s 2013 Entrepreneurship Conference


Below are some random notes that I wrote down today at the Entrepreneurship Club’s annual conference at HBS. This is a bit free form, but I think there are some gems in here. I’ve taken out attribution to protect the innocent, except in the case of Dharmesh Shah because I think the comments are important in the context of Hubspot.

    Overcoming Adversity
    “Never ask an entrepreneur what you’d do differently, it will take up the entire panel.” This was nice to hear, I guess all entrepreneurs make lots of mistakes.

    “Good judgement comes from experience, and experience comes from bad judgement”

    Embrace the challenges you face, don’t spend time thinking about what you did wrong, keep moving.

    Love the tough things – like slowing growth, HR issues, getting rejected by VCs.

    Failure is part of the process, especially in fundraising. Therefore, it’s not failure.

    Advice on Raising Capital
    Most investors, especially angels, are afraid to make the first move. You need to get the ball rolling.

    Social proof is important in seed stage capital raising. Get some high profile people to use your product, or partner with you, or recommend you.

    When talking to investors, think about your trophy case – what are you actually proud of about your biz (customers, awesome senior hires) – not just the fact that you got some feature done.

    Most companies don’t get multiple term sheets – just the guys being chased by the big VC firms.

    VC firms structurally take a lot of time to get $$ from. A past entrepreneur can write you a check after coffee.

    Don’t ever actively fundraise. You should be in the early stages of getting to know investors, or at the end of closing a round, but never actively seeking capital. “Passive fundraising.”

    Trying to raise VC is a good way to check your idea and strategy. They may not want to invest because it’s simply a bad idea. But, it can be tricky to figure out if this is what they truly think, and even harder to figure out if they’re right! It’s just a proxy.

    Other Nuggets

    You need someone with a tech background on the founding team or else you’re dead. eCommerce is the exception.

    There is a point where a founder becomes CEO – and they are very different roles that can cause a lot of confusion when you make that transition. The biggest difference is that a CEO takes a step back and thinks about the business from a higher level.

    The benefits to not being in SV – lack of turnover, especially for engineers. But, there are lots of knowledgable founders in SV to leverage. If you’re a founder in Boston, you know all other founders and VCs.

    Intelligence is pattern recognition (not in the VC sense, just patterns generally).

    “You’re a harvard MBA, you’re going to be ok. Play the 30 year game. Learn the most right now. Doesn’t mean starting something, but could” – this is targeted towards anyone thinking they need to take a job at McKinsey right now.

    When you’re feeling “on tilt” after an entrepreneurial failure, maybe take time and get a job and make some $$. Don’t go back to starting something for the wrong reasons.

    When you fail, you’re in some senses at the height of your power – you just learned a lot. You probably failed for some structural reason, or bad early decision, that you can circumvent next time.

    Dharmersh Shah on Culture

    Culture is not perks (beer/ping pong), culture is how you work together.

    Hubspot didn’t think about it for 3 years. Their CEO went to a “CEO group” – like group therapy – determines they should focus on it. Dharmesh put in charge despite being introvert. They were 75 FTEs.

    They did a net promoter score (NPS) survey of employees – “Would you recommend Hubspot as place to work?” – people loved working there => main reason was other people at Hubspot. But, what do you do with this info?

    Culture debt is like tech debt – really hard to get over. Start with the right culture.

    If you hire a schmuck – you send a signal that it’s ok to be schmuck, even after you fire that first guy because they were there for 9 months.

    Every hire should raise the average of the team…hard, but good goal. Every hire should also do something you can’t do yet. Hires ELEVATE the team, aren’t just there to be delegated to.
    Good interview question: “What can you do that none of us can?”

    The better the culture, the easier recruiting is. Save time. They put their culture deck online. 1 mm views. 2nd ever most read culture deck to netflix. Imagine the resumes they got…

    Better culture => don’t have to worry about stupid stuff – like where people sit and what that implies about their power.

    Most companies have a purpose (except maybe Zynga). Theirs is to reduce spam and sketchy marketing tactics.

    Dharmesh has made 50 angel investments (only met 12 people in person, mostly online DD- looking you up online, playing with product, etc). Ideas don’t matter a lot – they will change.

    There is a currency with titles. People want a narrative when sharing “what they do” with others…this is a really interesting point!! Plus, it hurts people’s chances to succeed after Hubspot if there are no titles (they didn’t have titles for 3 years).

    They had an unlimited vacation policy. People weren’t taking it. Now 2 weeks min vacation. Still don’t track it.

    If you don’t know what your culture is (and can articulate it), you are probably just hiring people like you and telling self you’re hiring for culture.

    They like humble people. Humble people spread credit and take blame. They have questions to flesh out culture fit for each of their principles.

    Dharmesh on raising money
    When raising angel round:
    Get good at marketing yourself/your company.
    Angels will:
    -Look at your website
    -Play with product
    -Look at demo video
    ==> before taking meeting

    Have someone who doesn’t know what you do go through site and speak out loud as they use your product. Do they get it?

    Design of slides matter in raising capital. It’s dumb, but it’s true

    Don’t talk to VCs too early. Too much time wasted, can make you think your idea is bad.

One last note: Many of the people at the conference are clearly people you’d want to work with: hard working, smart, humble, genuine. But, there are always a few people on these panels that come off as arrogant and abrasive (especially VCs it seems) – just a warning to those on panels. If a bunch of HBS people walk out of a room and note how arrogant you were, you’re an outlier on this scale!

I hope these notes are helpful 🙂