Good morning MIT

"What to look in an entrepreneur", Neil Sequeira (General Catalyst)

Neil Sequeira, a partner at General Catalyst Parnters, talked to us about characteristics he looks in an entrepreneur:

• SUCCESSFUL BUT STILL HUNGRY
• Diverse in skill sets
• People that can build a team and know how to put together a team
• Nice people ("although difficult to describe, you know who they are")

Noubar Afeyan, Managing Partner at Flagship Ventures, mentioned good characteristics of entrepreneurs last Monday:

• Somebody young and hungry
• Somebody with urgency to deliver
• Somebody that thinks "Why should I wait until tomorrow to do something I could do today"
• Somebody who has tolerance to calculated risk
• Somebody with no fear of unknown

Breakfast with Matt Cutler, co-founder of Visible Measures

We had breakfast with Matt Cutler, serial entrepreneur and co-founder of Visible Measures, at the offices of General Catalyst Partners. Visible Measures provides web video analytics; it was founded in 2005 by MIT students and has received ~$18M in VC financing to date. Neil Sequeira and David Fialkow (both serial entrepreneurs and partners at General Catalyst) also attended the breakfast.

We discussed different topics about entrepreneurship:

• Focus on communication: People do not buy things that they do not understand. Be able to synthesize and explain your idea.
• Very quickly ask for help (and be humble)
• Get mentorship early in your careers: Look for great people in your life to model something after
• Persistance: get used to be rejected
• You need to believe in your idea because you have to convince a lot of people: talent, investors and customers

MIT Sloan Sales Conference

Tomorrow Friday is the MIT Sloan Sales Conference. The list of speakers include Sr VPs of Sales at HP, Novartis, Microsoft, Merck, IBM, or Google.

Sales is one of my weak skills and here at Sloan I am learning that it is a skill that can be learnt. For instance, I am taking Technology Sales, a class taught by Ken Morse (founder of 3Com) and Howard Anderson (founder of The Yankee Group and Battery Ventures) about how to sell, do prospecting, prepare a sales plan, handle objections, closing, etc; one of the most interesting classes I have taken so far.

If you are around and have time to attend the conference, don't miss it!

"Don't hire your friends", Jeremy Allaire (founder of Brightcove)

Jeremy Allaire talked to us about recruiting in startups. Jeremy is the founder and CEO of Brightcove, an Internet TV platform. He was previously an entrepreneur in residence at General Catalyst Partners. Prior to that, he became CTO of Macromedia (he created the Flash platform) when his previous company was acquired by Macromedia in 2001 (Macromedia was later acquired by Adobe for $3.5B).

Brightcove was founded in 2004 and has received ~$100million in financing since then (read NYTimes coverage in 05). The main investors are General Catalyst, Accel, The NYtimes, American Online and IAC.

He talked about building an entrepreneurial organization:

• The first inclination when you start a company is to hire your friends. BAD IDEA! Some friends may become marginalized and some other will outgrow when the company grows
• Try to hire somebody for which the job is not a lateral job but something that challenges him (i.e., it stretches the person)
• If you see somebody in your organization hiring B players, both should go
• Look for interdisciplinary individuals
• Run a meritocracy
• 3 attributes to build a team: smart, nice and hard working individuals
• When to fire? when people do not perform or people have personality conflicts

Meeting with Russell Fradin, CEO of Adify

We visited the offices of Adify and we met with Russell Fradin, CEO and co-founder. He is young, probably my age, but with a lot of experience in Internet startups in the Silicon Valley.

Adify provides an online ad network. He mentioned that in 2005 he identified an opportunity because the situation for advertisers was very inefficient as there are millions of places to advertise. There is a massive fragmentation: users on average visit 23 sites per day. Adify was founded in 2005 and has raised ~$25M from Venrock, US Venture Partners, ABC and Time Warner. It currently employs ~80 people.

We talked about entrepreneurship related to his previous and current experiences:

• He decided to take money at a lower valuation just to work with the right folks (Venrock)
• Look for VCs that are going to be VCs in 15 years
• Adify grew from 30 to 80 employees in 1 year. Not everybody can be good
• Bringing senior people might be difficult. They have their own voice and the existing employees joined because of you, and not because of the new external senior guy
• You cannot fire people because it is difficult to find new people
• It is difficult to predict revenues in new markets. It is like selling a phone. If you are a telecom company and you only sell 10 phones (with free minutes, etc.) you do not know how much people are going to use it. Later on you have demographics, etc.
• In B2B do not charge anything upfront because it would take forever to close deals. Instead charge a percentage of revenues.
• "Pick business/ideas that solve real problems even if the idea is not that sexy"
• "If you want to get to one point, go there now and do not go to another place that will eventually take you there"

Talk of Tim Westergren (founder of Pandora)

Tim Westergren gave us a talk about his company Pandora (the music genome project), an automated music recommendation and Internet radio service. You type a song and it finds the closest in terms of ~400 attributes. For him, each of the 400 attributes is considered a gen.

Pandora employs ~120 people (most of them with musical background) mainly doing taxonomy of songs (equivalent of a MBTI test for music, as he likes to call it). Each song requires between 15 and 45 minutes to classify.

Some interesting facts he gave about radio is that the average American listens to 20 hours of music a week and 17 of them is radio (despite CDs, iPod, etc.).

He mentioned some interesting things about his experience in entrepreneurship:

• When they started (right after the bubble) he asked his employees for a salary deferral; and they spent 2.5 years without a salary!  (later he found that this is illegal in California)
• He pitched his company 348 times to VCs! (he counted them!). A clear sign of commitment, determination, passion, persistance, and perserverance!
• VCs did not like the idea because it is not scalable since it requires human beings classifying song by song (30 minutes per song and they wanted to classify every song!). However, once you have done it, it is a big asset  (it reminds me of Skyhook wireless)
• They have 11 million user after starting in November 2005 (now they have 25K new listeners per day). And they do not do any advertisement! it is all blogs, chats, forums, etc. Thus they have no customer acquisition cost and investors/VCs love it.

I have to say that I am a big fan of Pandora and it really works for me!

Visit to Hubspot

We met Brian Halligan, CEO of Hubspot and MIT Sloan alumni (he says that he majored in beer drinking), during the Mass Tech Trek.

Hubspot provides an inbound marketing system/web marketing software (SW as a service model) for small and midsize businesses. They also provide the free SEO tool Websitegrader.com that measures the marketing effectiveness of a website and provides a marketing report of your URL. Many of my friends have started using it.

Brian started the company in 2006 and they received $5M in July 2007 from General Catalyst Partners. Currently they employ ~30 people and they have nice offices next to my apartment in Kendall Square (MIT).

Some comments he made about entrepreneurship:

• He recommended us not to syndicate VCs since it brings down the valuation. It is better to let them compete
• Number of founders: 1 is a negative signal to investors; 4-5 too much split and decisions take a long time with disruptive ideas
• Business Plan: you loose a lot of time updating it when you start talking to people. So make it simple and easy to update

Louis Gerstner, chairman of The Carlyle Group and former CEO of IBM

I went to see Louis Gerstner, chairman of The Carlyle Group and former CEO of IBM, speak as part of the Dean’s Innovative Leader Series at MIT Sloan.

Lou is one of the most respected business leaders in America. He is former CEO of Nabisco, former CEO of American Express, director at McKinsey and Company (where he spent 11 years after joining in 1965), and HBS graduate. He was chairman of the board of IBM from 1993 until his retirement in 2002 and is credited for transforming the culture at IBM and the historic turnaround that saved the company from ruin in the 1990's. Now he is Chairman of The Carlyle Group, the largest private equity fund in the world (see ranking).

He talked about good practices in business leadership:

• Smile in the elevators. How you look, how you behave and how you related is very important in leadership
• If you make an unpopular decision (e.g., layoffs), you have to spend a lot of time explaining people why you are making it. Take responsabilities, sign memos, explain decisions, etc. You should not make an unpopular decision by making rational decisions closed in your office
• If you have executives that are outperformers but not committed with your values, ideas and culture, then you should let them go
• Seek good advice and give good advice regularly

He is an excellent speaker and he was quite funny too. He talked about his first job after McKinsey in this way: "when I got my FIRST REAL JOB, I was thrilled to be the guy making the final decisions instead of bringing flip charts".

"Why do startups fail?", Chip Hazard (General Partner at IDG Ventures)

We visited the offices of IDG ventures in Boston to meet Chip Hazard, general partner, Stanford and HBS alumni, and former partner at Greylock.

In the past, IDG has backed up companies like Excite or Netscape. The previous week, they had raised an additional $280M fund in Boston and changed the name to Flybridge Capital Partners.

We asked him why startups fail and he gave us 5 different causes:

1. "Quick failures": After 1 year you learn that the tecnnology does not work. That is okay in the VC business because you look back and you think that you would make the same decision.
2. "Market opportunity slow to develop or not so big": You think that there is a market, you get the first customer but it never scales but at the same time it is never so bad to stop and close the company.
3. "Technology takes longer to develop": If it takes extra 18 months you end up with competition
4. "Level of competition": If large and leading firms enter early in the same market you may have problems to compete
5. "Management team does not scale with the business"In order to solve it, you need to look for  an entrepreneur who is a proven leader (e.g., he has grown a company in the past) or founders who are willing to give away leadership.

He also talked about typical questions he asks himself before investing:

• Who are the customers and why they need to buy now? If the customer can delay the purchase one year then it is always a bad sign.
• He uses an internal framework/analytical process to identify what can go wrong with the company. And then, he talks to a lot of people to generate and validate hypothesis.

He also mentioned that for him, "PASSION is a strong believe that you are right and the world is wrong"

Finally he mentioned that he tries to invest only in companies that are less than 2 hours away from Boston because then he has the ability to help the company. Particularly at the beginning, when there are only 5 people with an idea and dream; he needs to meet them frequently to guide and help them.

Meeting with H.P., founder and CEO of Telenav

I visited H.P. Lin, CEO and founder of TeleNav, Stanford PhD and McKinsey&Co alumni. He seemed a very honest leader.

TeleNav provides location-based services (tracking, dispatching and navigation). TeleNav was the first to launch a GPS solution on the mobile phone in North America. They use GPS and cell-ID for indoors. They currently have partnerships with 80% of US carriers (carriers want to control the application and the billing) and it is the most preloaded navigation system on mobile phones.

The company was founded in 1999. The opportunity was that a mobile has its own position using GPS and it can have much more info about the location because it is connected to the base station (updated information related to the location, e.g., see in the map updated information of the movies played in the cinema next to you or even buy a ticket). They do not believe in advertising but subscription model. According to Deloitte, it is the fastest growing company in the Valley.

During the meeting we also talked about entrepreneurship and the story behind Telenav:

• They launched in 1999, which was too early for location based services. They went from 50 employees to 20. Now they are ~350.
• After the bubble, they had a 100% pay cut. But the core team stayed (9 out of 10 people, and the person that left was because he had a family to feed). They were very open about the financial situation.
• In bad times (post bubble), you need to believe and be persistent. If you survive you learn a lot.
• They find difficult go sell to the car industry because it has very long sales cycles.
• When raising money from friends and family, do not do it if they do not have enough money. Only very wealthy individuals.
• For them Android is not a threat but another platform.
• In a startup you cannot do bottom up innovation (~chaotic) like in Google. You need a top down innovation strategy.

"How to recruit excellent people in startups", Paul English (founder of Kayak)

Paul English, founder of Kayak, gave us a talk about how to recruit excellent people in startups.

Kayak is a travel search engine (I use it regularly). It does not sell directly to the consumer; rather, it aggregates results from other sites and then redirects the visitor to one of these sites for reservation. Thus, Kayak makes money from pay per click advertising, when the consumer clicks-through to one of the compared websites. In my opinion, the best thing about Kayak is its user interface and the options to search and filter flights.

Kayak's second founder is Steve Hafner (co-funder of Orbitz) and is funded by Sequoia and General Catalyst and on the board they have the legendary Michael Moritz, and cofounders of Travelocity and Expedia. They have raised $30M since 2004 and now they are already the 8th travel portal on the Internet. Their goal is to displace Expedia as the number 1 and do it with less than 100 employees (compared to Expedia that has ~700).

Paul sounded very focused, sharp, confident and aggressive and a clear winner in whatever he does. Paul is a serial entrepreneur and has started 4 other compones before Kayak. Among those, he sold one company to Intuit for $33M  after one year without having received any VC funding.

Among the things he looks in his employees he mentioned:

• Bandwidth: Smart and fast people that can handle change quickly
• Attitude: Team players that do whatever it takes to win
• People that feel confident enough in what they do so they can laugh at what they suck
• Extreme confidence and commitment to try to be the best
• Experience: It does not matter if you had done the same thing before. For him experience means success in something, not necessarily in the same domain. Success can mean awards, publications, promotions, sports, degrees, etc. And try to look for a track record of successive success
• Lack of disfunctional behavior: Rule of "NO NEUTRALS": everybody wants to engage with everyone. People that you get excited to work with. Fun is important if you are building for scale. Fun drives success and viceversa. This is much better than having an excellent programmer. The best programmers would be good for Microsoft or Google but not for a startup.
• Try to hire people that are in high demand and are not looking for a job
• Fire people after 30 days if they do not fit. Startups cannot afford having them longer. If he fires somebody it does not mean that he is incompetent (he mentioned that he has also been fired in the past), it only means that he does not fit in the startup.
• Google people before interviewing them. He wants people to have a presence on the web (profile in linkedin, blog, citations, references, etc.)
• He spends a lot of time evaluating candidates

Paul is also an investor. He weights a business idea this way:

• 70% - the team: Do I love them? are they aggressive? are they ethical? are they smart? are they committed? do I want to have a beer with them? can they recruit good people?
• 20%  - the market: is this a growing and changing market? am I interested in this market?
• 10%  - the idea: what is the widget? what are they doing?

Visit to Salesforce.com

In our visit to the main offices of Salesforce.com, we met with a group of MBAs working there, including Jason Garoutte, VP of Sales and MIT Sloan alumni. The visit was organized by Freddy Kerrest, who spent various years working with them.

Salesforce.com is the leader in on-demand Customer Relationship Management (CRM) solution vend. It was founded in 1999, has ~$7B in market cap, >$700M in revenues, ~40K customers, ~1M subscribers, and ~2,500 employees. Their vision is to be "the world's first multi application, multi category on demand company".

In the past, you had to install SW, maintain and update new releases. Now there is no SW installation: you use internet and log with your credentials. Customers are happy for not having to deal with Hardware, servers, wires, etc. Half of their business comes from small and medium size companies that cannot afford SAP.

Interestingly, Jason cited a quote of Ken Morse (who was also with us) about the difference between sales and marketing "Marketing is something you do alone in your room in the dark and sales is something you do outside with other people"

How much money should you raise?

During the last two weeks I have been in the following 3 talks about raising capital and term sheets (typical terms):

1. Sarah Reed (partner, Lowenstein Sandler) and Santo Politi (founder and General Partner, Spark Capital): "Negotiating Term Sheets with Venture Capitalists: What Really Matters"
2. Noubar Afeyan, PhD (Managing Partner and CEO of Flagship Ventures): "How to raise capital"
3. Jonathan Gworek and Emily Hayes (Morse Barnes-Brown Pendleton) together with Jon Chain (partner at Dace Ventures): "Don't be fooled by VC fundraising"

The typical questions were: when to raise capital, how much and at what valuation.

They all agree that you should RAISE AS MUCH MONEY AS POSSIBLE whenever you can. But be disciplined in how you spend it. Raise when you can because if you raise only when you need it you will be in a difficult situation to negotiate. You do not want to negotiate when you are desperate because VCs know it (and it will probably mean that you have not reached a milestones or something else is going wrong). You want to raise when everybody is optimist and convinced about the idea. Moreover, raising capital takes a lot of time and you do not want to keep spending time pitching your idea to VCs and negotiation terms.

Also, they all agreed that when you receive angel funding, you should try to avoid having a valuation. Instead, try to have a convertible note with a discount rate (e.g., ~30%). That means that next time you raise money (e.g., round A), you convert it into equity at the valuation of the round A (+ applying a discount rate). This helps for 2 reasons: 1) you avoid discussions and arguments with friends and family and angels about how much equity you need to give them; 2) you do not want to signal the premoney valuation of the company at a crapy price.

OTHER INTERESTING TOPICS DISCUSSED

• A typical rule is to raise capital for 18 months plus a buffer of time to raise next round
• It is typical to vest the stock of the founders in 4 years (usually, 25% per year). That means that if a founder leaves the company after 3 years, he would keep only 75% of his equity. If the company is acquired or the founder is fired/replaced, then you can have accelerated vesting.
• In a typical exit/liquidation after 2 or 3 rounds of financing, the whole founding team would have between 15% and 20% ownership (i.e., 2 founders, 10% each).
• A typical option pool is 15% to 20% in a post round A investment.

For those interested, a typical term sheet for a round A can be found here.

"Just do it", Ray Stata (founder of Analog Devices)

Last week we had Ray Stata as a guest speaker in our Entrepreneurship and Innovation lecture series.

Ray is an MIT alumni, co-founder and Chairman of Analog Devices (market cap of ~$9B). He also provided the funding for the Stata Center. Now he is involved with Stata Venture Partners.

He mentioned that "if you want to be an entrepreneur, JUST DO IT, do not wait for the big idea or opportunity... anyway, business plans usually change over time".

Among the characteristics that define entrepreneurs, he mentioned:

• COURAGE
• CONVICTION
• PERSISTANCE

and as Gartner mentioned three weeks ago, entrepreneurs must "identify a transition that is going to happen in the market place and take advantage of it"

His motivation to start Analog Devices was that he wanted autonomy, change the world, and do something different. He wanted to have a technology driven company, which sold to engineers. As a company, you are either an innovator or a cost reducer and he decided to be an innovator.  He also created the concept of fellows within Analog Devices. This was addressed to great engineers that want to influence the company but do not want to have the typical management path. With this prestigious position, you signal that in your company, innovation matters.

He considered that a big difference between companies and research in academia is that in companies, you search for a solution optimization whereas in academia you search for local optimization.

Entrepreneurship panel in Silicon Valley

During our Silicon Valley treck we had an interesting panel about entrepreneurship. Some of the participants (see picture below) included Neeraj Choubey, Sloan alumni and VP at Venrock Associates or Ronjon Nag, MIT alumni and CEO and founder of Cellmania.

Some interesting quotes:

• "Entrepreneurship is always hard until you exit; then you think it wasn't hard"
• "Being a VC vs. being an entrepreneur": It is like Jerry McGuire: "do you want to be the agent or the athlete?"
• Who is the business guy in a startup? "If you do not make it or sell it, then you are the business guy"
• "2002 was a very educational period: what to do when you do not have money and customers"
• "Ideas are everywhere (e.g., universities). The problem is execution"
• "Raise more money Thant what you need (or for more time) because you do not know when you are going to have a recession"
• FAMILY (spouse, etc.): "You need family support... the family needs to be on board and risk profile must be similar. And be honest if you want to be an entrepreneur" (it takes a lot of your life).
• "Try companies like Facebook, VMWare or Salesforce.com before going to start your own company: those are excellent places to find partners and contacts and gain experience"
• "When you are in a startup, you are a VP of X plus 15 other positions"
• Consulting provides good skills for entrepreneurship, such as attention to detail
• "Do not assume that you are normal"

 

 

Gideon Gartner in our E&I lecture series

We had Gideon Gartner as a guest speaker in our Entrepreneurship and Innovation lecture series.

Gartner is an MIT and Sloan alumni, entrepreneur and philantropist. He is best known for founding Gartner Group (market cap of ~$2B) in 1979 and Giga Information Group (now part of Forrester).

He was asked about what is needed to succeed in entrepreneurship and he mentioned: "Look at what will happen next and put yourself in a position to take advantage of it".

He mentioned some other characteristics to succed in entrepreneurship:

• Overcome obstacles
• Question the status quo
• Be opportunistic
• Be risk taker and resilent
• Be a change agent
• Be different (stand out of the crowd)
• Be creative

He also mentioned that luck is important in entrepreneurship but "you need to stablish preconditions to have luck" (e.g., build a network of people)

Interestingly, Howard Anderson (founder of competitor the Yankee Group) also came to the talk.

We just finished our project with Care.com

We just finished our project with Care.com, an online marketplace for families to find babysitters and nannies, tutors, pet sitters and dog walkers, senior care providers, and housekeepers. Javi Torres, Jeff Vyduna (also Sloanies) and I spent the last 3 weeks of January doing an externship at their offices. We were waiting for some market data to complete our analysis and last week we gave the final presentation.

Care.com is the premier source of trustworthy care options for children, pets and elderly parents. The idea is quite simple but there was a customer need and an opportunity to create this marketplace. On one side you have Craigslist, which is free but you cannot trust and you do not want to leave your kids with people that could potentially have criminal records. In fact, there are some very sad stories with babysitters found in Craigslist. On the other side, you have nanny agencies which are quite expensive (up to $2K) and provide a limited service compared to Care.com. Some of the interesting value added services they provide include references, testimonials, SSN verification, address verification, criminal record verification, maps, etc.

The goal of the project was to get experience in a promising new startup with experienced founders. Care.com has all the ingredients of a success story: Superb management team (with whom we spent most of our time during the project) all of them graduated from HBS in the 80s and 90s and with plenty of previous experience in the Internet sector; Clear strategy and disciplined execution; Large and growing market with no leader yet; Funded by Matrix Partners and Trinity Ventures, two of the leading VCs in the US; Amazing board and angel investors, including Reid Hoffman, CEO of LinkedIn, and Brian Swette, former COO of eBay.

I have no doubt that they will be very successful and I am happy to say that the experience has exceeded my expectations.