Never Suspend Your Judgement

At Clearstone, we were having a great discussion today around wisdom, and what it takes to make consistently better decisions. Decisions about life, about work, about investments. As is the case with many "big ideas", the conclusion can me trace to a simple concept. Become aware if you are ever, in ANY way, suspending your judgement, AND then NEVER suspend your judgement.

In my business I have become a pattern matcher. It is an occupational hazard and drives those people closest to me nuts. In evaluating investments, company and people every day you learn to focus on the meta data -- the data that describes the data.

One pattern I have discerned from the most successful, and often most experienced, at starting and building great companies, is that they act as if they are always the PRINCIPAL (not the AGENT) in every activity they do and evaluate. They become absolutely trustful of their mind and their sensibility to makes sense of all situations and to judge all situations (sometimes harshly). They become the gifted athlete who, having learned the basic skills of the game, becomes free to operate on a higher level. They quickly hone in on the flaw of any plan, product, process, service or value proposition. I believe they do this by freeing their mind to question everything anew, and quickly give a "yeah or nah" vote to each premise they uncover.

If you consider the mistakes you have made in your past, you may find that buried in that decision was a premise or assumption that was commonly held as true, or you held as true, that slipped through real examination. You may also find that you did not feel compelled to push your thinking into that decision as work was already done in that area by "experienced, smart people." That is suspending your judgement. Pushing yourself to not smuggle in any hidden assumptions is the first step in getting wise.

Steady as She Goes...

The business of venture backed internet companies is pretty hot these days with sky rocketing IPOs and a flurry of fundings. But finding the signal amidst the noise has never been harder. 60 days ago, a certain company was all the rage. At least half a dozen of the new pitches I took referenced the company’s assumed success as a comp for their own glorious future. I remember thinking how fast that happened and how people were providing so much assumed intelligence towards investors, who MUST know what they are doing. Here we are a mere 60 days later and the company (which shall remain anonymous, but there are plenty of examples) is getting pummeled in the press. The founder left. While the piling on is now most likely overly negative, an analysis finally focused on the data that mattered — mainly that nobody is using the product.

Venture is rife with gossip and suspicion and shadenfreund because we all don’t know how the future will unfold and we all take risk. Gossip and information is unavoidable and fine and well, but in venture capital all the information MUST culminate in an independent mind, taking an intelligent and supported point of view. This point of view is open to critique and attack and risk, but taking a stand among all the unknowns of our business is the only hardscape that decision makers in the highly ambiguous world of startups and venture capital can use to move forward.

HomeAway IPO

There has been a lot written, most negative, about the valuation of the HomeAway IPO this week. Here are a few comments from a shareholder, who admits he has some bias, but I believe his comments are credible....

"So I’m totally biased (I’m a shareholder but not an insider) but IMO HomeAway deserves to be lumped in much more with LinkedIn & Facebook & Ebay for that matter than a Pandora or a Groupon because of network effects. Huge market (at least 10X of OpenTable), low penetration, increasing economies of scale, killer management team. Having seen the pitch, I’m not at all surprised at the market’s reaction."

"What’s funny is there were a number of negative articles yesterday by TheStreet, SeekingAlpha, and Business Insider saying they didn’t like the business or the valuation and IMO their analysis was terrible."

Comments on Ryan Born

OK, Ryan Born posted the essay below (below my comments) and for some reason LinkedIn would not allow me to comment in length. My comments here and his post below.


MY COMMENTS

OK, despite the obviously purposeful edgy tone, good post. And while I generally agree and give similar advice, here are three anecdotes or truths about SoCal investing and startups that contradict.....

1. On associates. One of my investments doing GREAT (and I mean GREAT) is SupplyFrame in Pasadena. I remember the day Clearstone associate Jaideep Singh came into my office and said "Dude, you got to meet these guys and you got to invest." They were pitching in the other room and I ran right in prepped for a good meeting. We made the investment two weeks later.

2. On Angel groups. So Cal is much less efficient than Northern Cal in its organization. You can find a diamond in the rough and you don't know where great advice and good investment money comes from. My advice is talk to everyone but DO definitely be ruthless with your time and make the party evaluating your company be responsible and professional and do not allow them to waste your precious time.

3. On available funds. True but there are all sorts of pots of money around a longtime venture firm. An example is Clearstone, where we are avoiding early stage investments into our main fund, but actively investing in early stage out of two other pools of money, one a super angel type fund. We just closed on new investments Cetus and CupidsPlay in the last two weeks (to be announced soon). I would assume that other long term venture firms have similar flexibility.

Jim

RYANS POST>>>>>

It’s been over 3 years since I moved to LA and started what I’ll call the Los Angeles Venture Capital “fundraising scene”. Over the past 3 years, I’ve raised a good deal of money (some disclosed, some undisclosed) and I’ve formed a few opinions along the way, which I’m going to share here in hopes that you can avoid wasting valuable time as you go about your own fundraising efforts in Los Angeles.

1. DON’T PITCH THE BITCH (i.e. Don’t pitch “Associates”)

In this instance, “the bitch” = “the associate at a VC firm” (gender agnostic). Don’t waste your time pitching associates at VC firms. In my opinion, VC associates have absolutely ZERO decision making ability / influence and will likely leave the firm within a 2 to 3 year period for one reason or another so any long term firm relationship you to wish establish through them will likely fade. Don’t bother with associates, it’s just a waste of your time. Instead, go straight for the VC partners with real check writing ability. If they pass you off to an associate, be wary. It’s straight out of the movie Boiler Room, except that in Boiler Room they chauvinistically advise not to sell stock to women. Here, I’m just advising that you not try to sell to VC firm associates, as it’s a waste of your time. Seriously, don’t pitch the bitch.

2. PAY LITTLE TO NO ATTENTION TO THE FORMALIZED ANGEL GROUPS

Every young entrepreneur in LA has heard of the Tech Coast Angels and their unaffiliated clones / red headed step children – The Pasadena Angels and The Maverick Angels (who actually charge you to pitch – run to the hills). In particular, if you have a “consumer internet” company, i.e. the kind of company you see regularly covered on TechCrunch, then my advice is to not bother with any of the LA based formalized angel groups. The reasons are too numerous to mention (HINT: They are Dinosaurs and although they’ll be bragging about Green Dot for the next decade or more, don’t be fooled, you’ll be wasting your valuable time and energy trying to get in front of them).

Rather than ranting aimlessly about these groups (NOTE: I’d be happy to debate them publicly about my issues with them), I’ll just simplify my reasoning behind this point with the following short story: Someone very high up (i.e. an executive / board member) at one of the groups recently told me that he’s fundraising for a new company of his own. When I asked if he planned on pitching the same formalized angel group at which he holds office, said NO (I’ll refrain from detailing why in an effort not to sell him up the river). Amazing right? I could go on and on and ultimately into a tirade ripping into these groups but I’ll keep it professional and just tell you that if a member of the group thinks it’s a waste of time to pitch the group itself, then it’s likely a waste of time for you too. If you are absolutely set on pitching members of formalized LA based angel groups (TCA, Pasadena Angels, and Maverick Angels), then go directly to the individual angel members themselves for personal investments (rather than the group) or better yet, go and pitch angels that don’t associate themselves with one of these formalized groups.

3. DON’T PITCH FIRMS WITH NO MONEY!

This may sound totally obvious but reality, it’s not always easy to tell, and there are at least a handful of “cashless VCs” in LA. Due to the awful economy of 2008, 2009 (RIP Good Times), and beyond, some VCs have died off or are in the process of slow downward spiral. Some have had a hard time raising new funds and are close to or already out of cash. Those that still have cash are slow playing their hands, or have reserved their remaining cash exclusively for follow on investments (i.e. topping off their existing portfolio companies when cash gets low). That being said, these VCs still hang around the “fundraising scene” and will often take a meeting with you, even though they have little to no cash to actively invest, just to ensure themselves that there are not passing on the next Twitter, Groupon, or Zynga. The problem here being that they wouldn’t have the check to write even if they though you were the next $1B+ exit. So how do you know which firms are out of money? Here’s 3 easy ways…

1. Ask them point blank how much cash they have to put towards new investments, the last investment they made, and the amount of the check.

2. Ask around – i.e. other VCs and entrepreneurs to get a 2nd opinion of the firm and it’s financial position, and

3. Do a little research and find out when they closed their last fund and the amount of the fund.

If everything passes the smell test, then by all means go ahead and court the heck out of them. If things don’t add up, be sure to ask for intros to other investors that are more active.

The Problem with the Super Angels

There is a lot of talk these days about the growing number of angel funds and super angel funds, that is funds that quickly invest 250k to 2MM (roughly) into a company and remain very hands off. To be sure these super angel funds do indeed properly fit into the new trends around company creation. At Clearstone, we have also launched a super angel fund and strategy.

What I worry about is the path that most companies take to success and the staying power of this capital. In my 15 years plus in venture I can think of only two portfolio companies, Overture (goto.com) and Rubicon, which were able to flawlessly hit their launch plan. Overture pioneered the pay for placement search market and raced to $100MM in revenues. Rubicon hit the market just right with a publisher centric advertising solution. Otherwise, all of our other successes, a dozen IPOs and an equal amount of large M&A exits, took a very crooked path to success.

In each of these cases, what was needed was conviction and a belief that the company and product we were building was going to be needed and valuable in the marketplace -- eventually. What was needed was smart, educated capital that had been heavily involved with customers and products and other, more nuanced sources of credibility around the growth of the company.

It is rare for any "1.0" version of anything to work just right. More often than not products, and the messaging and marketing around them, need lots of reiteration and market testing to hit their inflection points. The same is true with companies. In my experience the super angel money has been "hot money" that develops "alligator arms" and runs when the hat is passed in a conviction round. In addition, the small amounts of capital available from these funds put unnecessary and complicated restrictions on the already difficult business of making a start-up venture successful and driving it towards a large exit.

The success rate of start-ups is low and experience can make it higher. However, my experience tells me that capital providers that are small and hands off are by definition seeking (i.e. "hoping for") a quick hit and start-up success rarely works that way.

Luis Villalobos

As many are aware, a pioneering angel investor in our community, Luis Villalobos, recently passed away. I was just reading the comments section of Frank Peters' blog (and related post) and I was touched. Comments came in from all corners of the large, diverse Southern California entrepreneurial community about Luis. This reaction and the consistency of praise, and loss, is a testimony to the man, and I post the link here. We will miss you Luis.

http://www.thefrankpetersshow.com/2009/10/luis_villalobos_is_very_sick.html

DEO - The concept going forward

Everyone who is trying to grow traffic to their Internet site(s) knows the all important topic and battles of SEO: Search Engine Optimization. SEO has become a powerful practice area, and indeed an industry, that is characterized by perpetual improvement, tools, tips and tricks, information sharing and hoarding, and gaming the continually shifting algorithmic properties of the search engines, or maybe I should say search engine. Included in SEO is big concept stuff like content being "fresh, unique and relevant." Also included is a recognition of the negative controls, that is the effort to make sure you aren't blacklisted, delisted (or even relisted) as a spam site, mashup site, or poser site -- lest all your hard earned traffic disappear overnight. The complexities around this one effort, and often around one algorithm, are truly amazing and the free market in hyper-action.

However, looking out, I see DEO, Distribution Engine Optimization as the game of the future. More and more companies are recognizing that being a portal (a destination site) is a tough and expensive game for growth and return on effort (and for VC investment). I am seeing more and more companies start to make great and well distributed CONTENT, not traffic, their claim to fame.

In addition, the search engines of today are link-to-website, not content driven, and there is a large difference. Companies that deal in content first need to normalize that content, need to assure its quality and consistency and format and make it ready for mass distribution. Next they need to merchandize that content by applying their unique domain knowledge of what drives placement for that content, not on one site, but on 1000 sites. Next they need to complete that content by adding other pieces of content that are correlated, and put them in context (the context of a user of the content making a buying decision). Good Content DEO companies next want to add monetization to their content, so that it is attractive to publishers. I believe it is KEY to recognize that for many swaths of the online economy, monetizatioin fits better with CONTENT than it does with AUDIENCE. Finally, reporting to consituents will continue to be a differentiator.

I expect in 10 years there will be massive new market cap companies that are leaders in all these things, and these will be the new leaders of DEO.