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Would you give up half your company for $250K?

This is a post that I wrote and VentureBeat published in 2013. The situation is improving outside the US, and in particular places like Germany where much more capital is now available. However, it is still a very different world outside of Silicon Valley.

Giving up half of your company for a mere $250K seems an absurd proposition. Only offer on Shark Tank? Bad business school case study? I must have missed a zero or two, right?

If that sounds bad, how about half of your company for $90K? Crazy?

No. This is the reality in many places outside of Silicon Valley (and especially outside the US). And it isn’t good.

The issue in Germany

I’m going to talk today about Germany, where I commonly see this issue. There are plenty of countries that have similar issues, but since Blumberg Capital is very active in Germany, and I sit on five boards in Germany, I feel most comfortable writing about the specifics that I know. I happen to be writing this today because I’m in Berlin and this issue is front and center for a couple of companies that I’m looking at.

If you are an entrepreneur in Berlin, you are hard-pressed to find capital for your company. Even with the notoriety that Germany, and Berlin in particular, has gained, there simply is not much capital available here. Relative to Silicon Valley, the capital available in Germany is a rounding error, and even relative to London, Germany suffers a definite lack of capital. It is slowly changing, but not nearly as quickly as it should.

In Germany, entrepreneurs starting out would appear to have similar opportunities to those available in the US — there are some very good incubators, there is an excellent group of angels, most of whom have built and sold companies previously, and there are a couple of very early stage funds. But, the scale is just too small. And at the early stage, the lack of capital is most pronounced.

And the ramifications are pretty significant:

– First rounds in Germany (call them seed rounds) tend to be small (50K – 250K), and nearly always done by angels or small super-angel funds. A 500K round is considered very good for the first round and is quite rare!

– Founders give up significant portions of their company to angels just to get a little capital at the outset. It is common to see investors take up to half of a company up front.

– Early stage companies are often under-capitalized, which makes it difficult to scale and raise further growth capital.

– The funds in Europe that invest more significant capital tend to wait until a company has substantial traction — say, EUR 5M -10M in revenue.

All of this adds up to a couple of significant issues that challenge the ecosystem.

1.  Capital risk is huge — companies that raise small rounds struggle to hit the milestones for their next round, and many either don’t make it or end up very small.

2.  Cap tables are screwed up. It is very common for founders to only have 10% ownership after they have raised Series A or Series B. It leaves far less upside, and we often see angel investors with bigger stakes than founders.

Why is this the case, and what can be done about it?

At each stage of the company, there are different issues.

Very early, when angels typically lead rounds, it isn’t uncommon to see a company raise $100K to $250K and give up half the company, usually with the promise of “shares for support.”  The investor promises to help with setup, operational expertise, fundraising, and some key elements of the business. I don’t want to be negative toward the investors who truly do act as cofounders and get companies off the ground, but not all angels fulfill this promise.  If they fall short, this approach is really aggressive from the angel perspective and doesn’t leave much room for future rounds in terms of the cap table. To me, unless the angel investor is truly a cofounder and helping day-to-day in operations, these “shares for support” and huge dilution scenarios don’t set the company up for success.

At the next round, typically Series A in Germany, which is roughly equivalent to seed rounds in the US, there are not very many players. One of the reasons Blumberg Capital is investing in Germany is because we are finding great opportunities to fill a part of this capital need. In contrast to the US, where there are a fair number of early stage funds, in Germany, there are very few, and there is a substantial gap between angel funding and bigger rounds where traditional European VCs jump in. This void is very real, and many companies never get beyond their initial angel round.

At Series B and beyond, what we find is most VCs are looking for significant traction. This means that companies need enough runway and capital to really scale, and if that isn’t there, the companies face serious capital risk. Again, because there is not a lot of capital available, the VCs who provide the larger amounts of capital are very smart to wait for companies to break out before making investments. They don’t need to rush. It isn’t like the company has a ton of options for financing.

A real world example

So, let’s take a real world example. Company A has a group of great founders going after a big market. They are one of the companies that attracts the attention of some strong angel investors. The angel investors convince the team they can really help, and that giving up 50% of their company when it is formed is not bad in exchange for their help. The company gets $250K for 50% at the outset.

This company does well and is able to attract more capital. It raises a pretty solid seed round ($500K) from angels and a small seed fund at a $2M pre, taking 20% in dilution.

It really starts to hit its stride now and attract a solid Series A of almost $2M at about a $6M pre-money valuation. In the US, this might be their seed round, and the earlier money may have come from bootstrapping or friends and family. They take another 25% dilution.

Now the founders have diluted by nearly 50% AFTER they gave up 50% at the outset; they have a total of about 20% ownership and have not even gotten to growth stage capital yet!  In the US, this would be almost the opposite, where investors would likely hold about 20-25%, and founders would still own the lion’s share of the equity. The screwed up cap table has very negative impacts on the upside potential and the incentive structures.

In general, the lack of capital and the fact that the investors extract so much from the companies act as deterrents to startup growth.

Improving education and access to capital

We aren’t going to wake up tomorrow and find that significantly more capital is magically available, so what can we do to work with the constraints that exist?

Pawel Chudzinsky, founder and Managing Director of Point Nine Capital in Berlin says, “Although improving all the time, access to early stage capital continues to be a challenge for startups in Germany. It is especially difficult for first time founders with limited networks and experience who frequently give up a lot of equity for little money in the early stages. … More capital, more transparency, and education seem to be the solutions to make things better here.”

Education is the area where founders can most directly impact their opportunities. I find that US founders are generally far more knowledgeable about equity compensation, dilution, fundraising, and scaling businesses, but as ecosystems like Berlin are evolving quickly, the base of very knowledgeable founders is increasing quickly. In Berlin today, and in many other places, experienced founders and investors are willingly contributing their expertise to help others build, and this is a key to making the system function efficiently.

As I have watched the ecosystem in Germany grow and mature over the past couple of years, I am seeing progress on all fronts. More investors are paying attention to Germany, so capital levels are slowly increasing. And, as the market continues to evolve, we are seeing that people are more mindful of raising enough capital to be able to scale, and also to ensure that the founders have the equity incentive to build great companies.

One final note: I have focused on Germany here because I have the most experience in Germany, but these issues are very similar in many emerging startup ecosystems around the world.  I hope that, as we continue to build these ecosystems, we will set them up to maximize the potential opportunities.


Rare interview: Oliver Samwer explains how Rocket has soared above its copycat rep

This was published by VentureBeat:

It’s still winter in Munich. It’s not cold, and while snow from recent flurries hangs in the trees, it melts to slush on the sidewalks and streets.

I enter a small, essentially empty coffee shop for a meeting with one of the biggest names in entrepreneurship globally: Oliver Samwer, the controversial co-founder of Rocket Internet.

Samwer hasn’t granted many interviews. He is known to walk out of meetings with journalists if they don’t go the way he wants them to go. He has a reputation for being obsessively aggressive.

But when I meet Samwer, he is warm, energetic, and refreshingly to the point. He has made time on a weekend, but there is no wasting time with Samwer. We had spoken several times previously and I was there to do more detailed due diligence on my team’s first potential investment into one of his companies.

He dove in, explaining his vision for the company, and how he intended to foster aggressive growth. He isn’t one for complimenting his CEOs, nor for sugar-coating performance. He moved quickly from point to point, and touched on multiple different initiatives that he was driving.

Since Blumberg Capital’s initial investment in Paymill, we have since collaborated on two more investments with Global Founders Capital, the new fund that Samwer and his two brothers, Marc and Alexander, recently raised.

Toward the end of the conversation, he made the single statement that to me defines what he, his brothers and the whole team at Rocket do, “Jon, I don’t build boats, I build aircraft carriers.”

I walked away from the conversation impressed, and Samwer has since agreed to share a few insights for VentureBeat.

Jon Soberg: I have always found the Alando story fascinating — how you wrote letters to eBay about establishing a platform in Germany which were ignored, and then decided to start Alando.  Fast forward to 2007 — can you talk about events or influences that inspired you to come up with the model for Rocket?

Oliver Samwer: When I studied in Germany and U.S. in the 1990s, I was absolutely amazed about the whole start-up scene in Silicon Valley. People had so many ideas and the Internet just seemed to be a great playground to express your business ideas. And then my brothers and me just started.

Soberg: When you were first coming up with the model for Rocket, what scale did you think you would achieve?

Samwer: We were always only focused on building good companies. When we saw that it worked well in Germany, we just took it to more and more markets. The optimism that we can create a global impact only developed over time. We obviously work very hard to become better and more successful every day.

Soberg:  In the press, the term “clone” seems to be almost always associated with Rocket.  Do you feel that they are missing parts of the story, and can you talk about the innovation in operations and scale that you have pioneered?

Samwer: I think there are always two challenges to build a successful company: Having an innovative idea is one thing, but being able to execute the idea properly the other. Whilst having full respect for the innovators, we focus most of our efforts on the latter and have been very successful with it so far.

We are indeed very innovative when it comes to the execution. Building great companies takes many years where you have to come up with innovative ways to overcome operational obstacles every day. Execution is often 90 percent of the success of a company and in a world that gets more transparent every day, execution will become even more important down the road.

Soberg: When I speak to people in the U.S., they frequently have no idea of the scale that Rocket has achieved. Can you give us a few metrics to illustrate?

Samwer: We like our role of being the silent giant in the background, rather than being the loud player in the front row. Some numbers I can share: Currently, we have 55 ventures, operate globally in over 40 countries, support founders and their companies that employ more than 20,000 employees worldwide, and achieved several well known exits so far.

Soberg: The founders of your companies say that you speak to each of them at least weekly, and they claim you always know all the details as well!  With 55 active companies across every continent that has any kind of market (none in Antarctica), do you have any special approaches for managing all of these responsibilities?  Is there a point where you purposely cut back your personal involvement?

Samwer: Naturally, we want to support the founders with real value-add and therefore need to be good at details. I am working very hard to get all the knowledge, because as Francis Bacon already said: wisdom is power. It makes no sense being the high-flying bird observing things from above, when you want to make a business. I like to be part of teams and you can only contribute when you know the details.

Soberg: There is a lot of discussion in the press about attrition at Rocket. I have also heard a lot about Rocket being “boot camp” for entrepreneurs, and helping to build entrepreneurial skills in many countries.  Can you talk about your attrition rates, your ability to replace people who leave, and Rocket’s contribution to local ecosystems?

Samwer: When you start working for Rocket, you learn a lot; not only about business, but also about yourself. We are a unique ecosystem of highly talented people who strive to build great companies around the world. As a result we have contributed to the global startup scene and become an incubator of many, many successful companies around the world.

Soberg: I have written posts on VentureBeat about hiring A players, and also people becoming A players.  Please talk about your approach to hiring (and firing), and any special criteria you have for hiring, and for identifying your top performers.  How do you reward your best?

Samwer: Most of the guys who start at Rocket are in their mid-20’s to early-30’s and with us get huge responsibilities as company founders right away. We believe responsibility and freedom is key to be attractive for A players. I would say, talented people who are curious and passionate about doing business every day join us resp. stay at Rocket and ultimately build great companies.

Soberg: Congratulations on your new fund. How do you determine which businesses you want to create, and which ones you want to operate with Rocket?

Samwer: Firstly, we need to make clear that the fund has nothing to do with Rocket’s business model. The fund focuses explicitly on areas, Rocket does not operate in yet and purely invests in companies. Our aim with the fund is to support young and creative people to fulfill their dreams by backing them in their execution of their ambitious business plans. Topics like “big data,” travel or mobile apps are definitely on the march and people send us interesting ideas every day. I would like to support them with my global network.

Soberg: You have said that there is motivation to keep winning over and over.  Do you have a criteria for when you have reached the peak?

Samwer: We are every day excited to work with some of the most talented young people in the world and about the limitless possibilities of the internet. This is what we enjoy and that is why we continue to strive every day to help to build some of the best companies in the world.

The real opportunity for payment startups: simplicity

My latest post on financial services– there will be more on different topics where I see some great opportunities. This was published by VentureBeat.

Payment-processing startup Paymill recently raised 10 million euros to drive expansion throughout Europe. As the lead investor from Blumberg Capital, I am positively biased about the opportunity, but the story is bigger than Paymill, Stripe, Braintree, or any of the new generation of payment processing companies.

So before giving in to the hype around financial technology startups, it’s worth examining the huge opportunities that lie in fixing broken processes.

How can we improve painful processes?

Every entrepreneur who has had to go through the process of setting up their payment gateway and/or merchant account knows that it isn’t always simple. When I set mine up, BrainTree, Stripe, and Paymill weren’t around. I was given a chisel and stone tablet and asked to deliver all my information in triplicate.

Intermediaries, paperwork, antiquated systems, processes, and regulations still play a prominent role in today’s ecosystem. Companies like Stripe have made things much simpler on the front end, especially for developers, eCommerce, and SaaS businesses.  But, much of the world hasn’t moved yet, and behind the scenes, there are typically multiple institutions involved just to accept a credit card transaction.

Take the story of Jamie, an entrepreneur whose company charges for digital goods. When he was setting up his site to accept payments, he signed up with a payment gateway (before Stripe or Braintree were around). He filled out all the paperwork. Two weeks later he was rejected because the form was not completed correctly. He redid it. Ten days later he got accepted, but only for the gateway; he still needed the merchant account.

He went to his bank where they were happy to help. They gave him a large stack of paperwork to fill out, which he did. A couple of weeks later he got a call to ask a few clarifying questions.  Did he have any transactional history? No. Could he explain exactly what he was selling? Sure, but they didn’t seem to get it. What about refunds? He didn’t know because he didn’t have history. They had to make conservative assumptions. Nine days later he got the good news. He had been given a merchant account as a high risk merchant, and his transaction fees would only be 2.5 times the norm, and he would have the opportunity to reduce his rolling reserve over time as he built up positive transaction history. I recall his response to the news vividly, but can’t really repeat it here.

And all of that was before he started any technical integration, or trying to get all of this live in a production environment.

Thank goodness for BrainTree, Paymill, Square, and others that are tackling this problem.

Credit Card Transaction Flow

But don’t kid yourself. We still have a lot of work to do. Just take a look at all of the steps and players involved in a “simple” credit card transaction (pictured left):

1.  Customer initiates transaction

2.  Merchant sends credit card information to payment gateway (could be handled by third party through an API)

3.  Payment gateway passes data to the acquiring bank (merchant’s bank).  Fraud analysis is done, often both by the payment service provider and the acquiring bank, and many use 3rd party providers as well.

4.  The acquiring bank sends the transaction to the credit card exchange, which acts as an arbiter and clearing house in the final transaction.

5.  The transaction goes to the issuing bank for approval (after fraud analysis is completed), and if it is approved, the approval code is sent back through each group to the customer (steps 6-10).

In all, 5-6 players generally touch each transaction, and the round trip is completed in seconds or less to get approval when you swipe your card or enter it online.  Companies such as Paymill and Stripe wrap the functions of the payment gateway, fraud analysis and acquiring into one service, but they work with partners to make that happen.  In Europe, Credorax has built a single technology platform that integrates the acquiring bank, fraud analysis and gateway, which is simplifying part of the chain.  All of these companies are doing great work to simplify payments, but they really represent the visible part of the iceberg. (This is not including companies like Dwolla who are building their own network outside of the traditional rails).

Plenty of opportunity remains to simplify and improve the entire value chain. Onboarding merchant accounts, ensuring that new customers meet Know-Your-Customer requirements (and evolving regulatory requirements), understanding true measures of risk, providing appropriate fraud analytics, and making all of this more efficient and customer-friendly remains difficult, especially in the global context.

The huge opportunities for this new generation come when today’s technology, data analytics, and design are applied to legacy problems in big markets (credit card processing globally is about $5 trillion). It isn’t an easy path, and although some new companies have skyrocketing growth, their huge opportunities come when they expand beyond just the “face” of payments and get further into the guts.

On the Set at CookTasteEat

CookTasteEat 003


I had the pleasure of joining the @CookTasteEat team on the set this past week and have nothing but gratitude for their warm hospitality!  It was an amazing experience, and they were extremely gracious in hosting Melina, Nadia and me.

Personally, I’m blown away by the way this team is so focused on producing a top quality product.  It pervades everything that they do, from the attention to detail with each recipe, the amazing guests, the high quality production and set, and that doesn’t even begin to speak about the food!  It is a huge differentiator for the company and the people, and I am very proud to be part of the team.

For Melina and Nadia, this was an amazing experience.  I love to expose them to different experiences, and allow them to see some of the myriad opportunities that they will have as they grow up.  Both of them loved the opportunity to say “Action!” when it was time to shoot, but the people and the food stole the show for them.   I loved all of the different conversations, from Melina explaining that her favorite food was clams, to even guessing that they were going to cook creme brulee, and both of my girls talking way too much about funny family stories.  Michelle was so good to the girls, listening to all of their stories!

Melina and Nadia had a blast, and they loved the food, and tried everything.  Lamb.  Caviar.  Creme brulee.  Strawberry short cake.  And salad (which made Dad very happy).  They tried everything, and there wasn’t anything on the menu that they didn’t like.  And some things I could hardly stop them from eating!

I can’t wait for the next time, and I am very excited about all of the opportunities ahead for CookTasteEat.  Some great partnerships coming, and with the continued dedication to quality, the sky is the limit for this team!


Why B players will not become A players

This post was originally on VentureBeat, and is a follow up to my original post:

I recently wrote a post entitled “Hiring B players will kill your startup” and I got some great feedback, ranging from supportive to visceral. I would expect nothing less from a topic so important.  A few of the comments addressed a related topic — the growth and development of B players to become A players — so I decided to write a follow-up piece.

Let me start with a simple statement: B players will not become A players.

Why not? 

I make this statement because moving up is difficult, and it rarely happens.  B players in an organization either don’t have the right skills, the right drive, the right fit, or a combination of all these.

Does this mean if someone is an average employee, they can’t be a great person?  Of course not.  One of my favorite comments I received involved deciding on a brain surgeon. Would you opt for the best (the A player), or the average (C player) surgeon with better bedside manner?  I think nearly everyone would opt for the best surgeon.

If you need a specific set of skills, attributes and attitudes, and a person doesn’t have them, you will be hard-pressed to discover them hidden somewhere.

The best managers can’t optimize everyone’s performance 

Before the comments flow about how this is not black and white, let me delve into context.  I am fully aware that I am not talking about inanimate objects, and that these are not absolutes.  I’m also not going to try to argue with anyone about exceptions.  Of course there are exceptions.  The world doesn’t fit nicely into a bell curve.

That said, the world grades on a curve.  Valedictorian status is given to the best student, not to everyone for giving their best effort.  This isn’t Lake Wobegon — all employees are NOT above average.

Leadership, culture, and many factors contribute to each person’s performance, both in absolute terms, and on a daily basis.  There is no question that environment plays a big role.  There is a full nature versus nurture argument, but organizational culture rarely adapts and even the best managers are hard-pressed to optimize everyone’s individual performance. Many people believe that a great manager can make everyone perform at their best.  I totally agree, but the A players working for that manager will outperform the B players. The best teachers in the world still have some A students, some B’s and some C’s and below.

B players won’t become A players:

  1. Within the same organization;
  2. Within their role.

Suffice it to say here that taking someone who is coasting in one role and shifting them to another rarely turns them into your best employee.  How many great managers reading this post can relate to having one or two “go-to” people on the team who always rise to the challenge?

A Players versus B Players

The difference between B players and A players is not measured by intelligence, education or raw skill.  It isn’t about who went to Harvard, and who didn’t.  A players possess the rare combination of drive, intelligence and pride in their work that is above and beyond the norm.  They don’t associate their names with anything short of excellence.  The best of the best are those with the lethal combination of natural talent coupled with drive.

At the top of the spectrum, A players are dynamic leaders and visionaries — they take on huge challenges that would seem insurmountable by others. But A players can be great at any level, and in different roles.  We have all had the experience when we spoke to a great customer service person who went above and beyond.  A players tend to transcend roles; they excel, wherever they are.

As soon as I mention the term “A Player” most people have images of Michael Jordan, Jerry Rice, or Steve Jobs. These people are obviously A players, but the key to their success is only partially their innate abilities.  Renowned for their extreme drive, work ethic, and attention to detail, none of them wanted a flaw in their game or their products. A Players don’t have to be selfish, prima donnas, or arrogant.  Plenty are, but that isn’t what makes an A Player.  Some of the most accomplished people I know are humble team-players.

Some will argue that coaching and leadership can make B players into A players.  In some circumstances, that is true, but in most business cases, it just doesn’t happen.  Work ethic is tough to change.  Initiative doesn’t simply appear.  Attention to detail is not simple to coach.  Not saying these areas can’t improve, but you don’t normally see quantum leaps.

Bottom Line

Everyone cannot be an A player.  This is the harsh reality.  In the US we idolize people like Jack Welch, who famously advocates cutting the bottom 10 percent of an organization every year.  It gets more difficult when the worst people are already gone, but at the end of the day, even when it gets difficult, some people perform better than others.  In our competitive world, only a small percentage of people are truly A players, and moving into that echelon from below doesn’t happen often.

Barca-Madrid, and by the way, Mobile World Congress



I just got back from Barcelona and Mobile World Congress.  I believe it was the biggest show yet, and felt quite different this year.  For one thing, it was freezing cold by Barca standards.  Between zero and 7 Celsius every day is NOT what you expect in that part of Catalunia, even in February.  MWC moved to a new location this year, which was bigger, and could accommodate the show more easily.  But, it was more like being at the convention center in Las Vegas than it was being in Barcelona, and for me it lost the magic of the old Fira.  My informal surveys got 100% agreement that people missed the old location.  Transport was more difficult—the trains were packed to the point that they were not letting people on for long periods of time, and in a city where every second car is a cab, there were times where none could be found, even if you were using the MyTaxi app.

I always get asked “What did you like best at MWC?” or “What was the theme of the show this year?”  I always have trouble answering because, for one thing, being on the ground, I don’t see all of the talks, and I don’t necessarily read the headlines.  I am there meeting people and I have my own agenda, which is not usually tied to the major themes.  That said, in my interactions, this year the theme seemed to be about “big.”  The major handset makers were there in force, aside from Apple of course.  Samsung, LG, HTC, ZTE, Qualcomm, Nokia—Halls 2 & 3 were basically owned by a few big guys.  And of course, there was Huawei with seemingly their own city, as always.  One of my friends joked, “Huawei offered to buy the whole Congress with all the little companies inside.”

There was a lot of NFC this year, and that had been more absent in recent years.  The App Planet hall lost a little magic in my eyes this year.  Fewer small players and startups, although they could be found in other places.  Country booths were good this year, with some very strong global representation, and that was where I saw the best new startups.

This year for me was special.  I was invited to an event at the Barca-Madrid football match, which is unlike any other game on the planet, and it happened to be on my birthday.  Spain takes its football more seriously than just about anything, including possibly its economy, and the day of the match, it was the #1 topic on everyone’s tongues.  Barca recently lost to AC Milan, and there was a question of whether they would recover against their bitter rivals.

The air was alive ahead of the game, and not just with the freezing breath of the 100,000 people present.  Have I said that it is a marvel to me how efficiently 100,000 people can get into and out of a stadium in Barcelona when we get hours of traffic jams in the US?  Digression.  I love the singing at soccer matches; 100,000 flags waving in time to song.  This time I got another new and fairly unique experience, sitting near the visitor section.  This is not the same as the US, even compared to Raiders Stadium.  The visitor section is tiny, and has netting all around it, and bars so that people can’t get in and out.  Didn’t prevent the endless banter in language I won’t repeat here, the attempts to throw things both directions, and even one firework that was lighted, and thrown into the visitor section (successfully), then returned (also successfully).

The game itself was a disappointment for the home team.  Barca was outplayed by Madrid, and even if the penalty shot given the Ronaldo should not have been called, Madrid still stifled the Barca offense, had strong counters, and would have won.  It was the one disappointment .  The palpable energy in the city after a win is something special—I saw it last time I was in Barcelona.  After this match, the city was still alive, but the energy was not quite the same. 

Maybe not all bad because the meetings the next day start at the same time regardless of how late the parties go.

Try the Black Diamond

I took my two daughters skiing this weekend, and it was a welcome break from the daily grind. My daughters are 10 and 6. Both of them are skaters, so skiing is not so physically difficult for them, but the intimidation of looking down a steep slope creates a real mental challenge.

They did lessons the first day. Lessons can be a mixed bag, especially the group lessons, because you don’t know the mix you will get. This time, both of them were very fortunate, and had only two people in their classes; they got individual attention and they made fast friends, which always helps. The teachers supported them, but continued to push, which is not always the case. In group lessons, and often in many classes, the lowest common denominator determines the level. Both Nadia and Melina found good matches in this case, and both girls finished the day completely excited about their new friends and the runs they had completed (including the first black diamond for each).

The next day was family ski day, and Mari and I took them up the mountain early in the day. They have skied about 5-6 times before, so they are competent skiers, but it is always interesting to see how much progress has been made in lessons. We decided to start on a blue that was in range of what they had done the day before. There was one steep section at the top, and Nadia immediately said she couldn’t do it. I of course reminded her that she had done more difficult runs the day before, but she was not swayed. Melina went ahead cautiously, but was not particularly happy either. After side-slipping with Nadia for a while, I had her look up and see what she had just accomplished. “Yeah, but I don’t want to do it again,” she said. “But, you did it no problem,” said the dad who always wants his child to take on challenges. We got to the bottom without incident.

The next run had only slightly less slope, and they both went down with no problem. The third run, I had to work to keep up with them, especially Melina. By lunch, they were totally comfortable and looking for new runs, including more challenging runs. They had found a comfort zone with the standard blues, and were willing to keep pushing. When Nadia got home and saw her grandparents, the first thing she said was “I went down a black diamond.” Huge accomplishment. Not easy for a young child, and often more difficult for adults.

The biggest thing was overcoming the initial fear. Looking at a steep section of a mountain from above, you can’t see what is ahead– it could be a cliff or just a slightly steeper slope. You don’t know. Intimidating. As you get closer, or get to the edge, it can still be frightening, and it always looks steep from above.

Taking the plunge over the edge takes courage, and is not unlike taking challenges in life. Carol Dweck, in her book

    Mindset: The New Psychology of Success

captures this better than anyone I know. Challenging oneself to grow is the best way to achieve success. Just as I told Nadia to look back up the hill after she had come down, it is true in life that looking back, things look much less intimidating. The key is remembering the fact that you tried the Black Diamond, and you made it.

Why I’m skeptical the Moneyball strategy will work in early stage VC

This is a post I did for VentureBeat in December. I have always been a numbers and stats person, and I enjoy digging into models, so the whole concept of finding signal in the noise is interesting, even if I’m very skeptical that it works for early stage venture investing. I do believe that data is a critical input, and the better the data, the better the potential to help.

Venture capitalists picking up the Moneyball strategy. It’s a fascinating idea, and I know plenty of my peers are working on algorithmic approaches to better their craft and gain an edge. As I see innumerable pitches that leverage “big data” as a key aspect of a business, and read about all of the ways that big data is changing the world, it seems natural that it will infiltrate the world of venture capital. Whether it works or not remains to be seen.

As someone who has worked at both ends of the spectrum — as a CFA performing public equity analysis, and an early stage investor — this is more than just a passing interest for me. I pay close attention to data, and I firmly believe that people who understand the numbers better than their competitors, will ultimately win. In public equities, some groups have clearly found ways to outperform using algorithms over time periods.

Are algorithms the future of VC?

In VC, we know the stats; a large percentage of companies fail, and returns have lagged over the past several years (although some firms have continued to outperform). Is data analytics the answer as some have suggested? Is it key to success in our industry, which is clearly changing? I have to say no, but will qualify my answer.

At the early stage where I invest, I am often assessing a team with a product that is not yet in the market, with no revenue, and with plans to hire some significant team members within the first year. Small data. There are very, let me stress VERY, few data points. And most of the data points that are there are qualitative, and there is plenty of noise. It hasn’t stopped me from building a few models along the way to see if I can glean some insight, but I can tell you what the models yield — garbage in, garbage out.

One might argue that algorithms can help predict markets, and I believe that could be true, but the size of the market opportunity for most companies is defined not by the actual size of the market, but by the team’s ability to address the market. It is SAM, not TAM. Let’s say a model detects that a market is developing, can the model help select the team that will win in that market? Revenue and growth are tightly coupled with a team’s ability to understand the needs of their customers and to fulfill those needs. It comes down to the team. I have yet to see a model that can tell me that a Mike Lazerow, Jason Goldberg, or Joe Lonsdale are better at figuring out their markets than others, but I can tell you that if you meet with any of them in person, you will know.

Early-stage vs. later-stage investing

That said, I do think they can be helpful in some ways, especially in later stage investments. One of my toughest challenges is assessing opportunity cost. If an algorithm can help me decide which of several investments has the best potential, then it can be valuable. But, in my experience, the value is directly linked to the maturity of the company, as small data becomes bigger data. And the breadth of the comparison set is critical to get a good signal; any bad data in these models can really skew results.

One algorithmic approach that I believe has potential is employed by Correlation Ventures. They analyze investments made by other VC’s using their proprietary algorithm, and join some of the rounds. Just the fact that they are leveraging the work done by other VC’s gives them an inherent advantage in selection — they add another layer to existing analysis.

Data won’t help us find the next Zuckerberg

The combination of human and algorithmic analysis is the best way to use data analytics. But data analytics won’t help us score the home run hits that are absolutely essential. The Moneyball approach simply doesn’t work because hit rates are not high enough to manufacture returns by getting on base. The key is swinging hard every time you step up to the plate — a Facebook home run is like hitting the ball OVER McCovey Cove and getting 10 runs for it.

So when I look at how data analytics will impact VC, do I realistically think algorithms will give me a competitive advantage? No. These are not liquid markets, and there are very few good data points. Will it help with due diligence and adding a few data points for my analysis? Maybe. Will it help identify target markets? Potentially. Will it make me a better investor? Doubtful. Will it help me win deals versus our competitors? No. Will it help raise money? To be determined.

To quote one of my mentors, Wharton Faculty member Dave Pottruck, “Go with your gut, but always crunch the numbers first.” But in the absence of all that much valuable data, VC’s need to rely on old school-hustle, homework, and instinct.


Why hiring B players will kill your startup

This post was originally written as a guest post for VentureBeat:

B players and C players are far worse than D’s and F’s. In fact, in my experience, B players are the worst hires you can make.

Before getting into the details, it may be useful to level-set and explain what I mean by these employee stereotypes (although there have been some differences of opinion over the years.)

A player: Fully self-sufficient and takes initiative that positively impacts the company.
B player: Does some things well, but not fully self-sufficient, and not consistently strong.
C player: Just average, and does not excel in any area.
D player: Poor performer, and shouldn’t last long if you are a half-capable manager.
F player: Should be out…like yesterday.

Good Enough is the Enemy of Great

When you have someone on your team that you think is doing well enough, you will likely trust them with mission-critical tasks like hiring or pushing code. This will impact the entire evolution of your company. If you entrust important decisions to someone who is just “good enough,” you will watch the opportunities pass.

This is why hiring B players will kill your company. The work will be good, but not great. They will deliver on time most of the time, and hustle sometimes, but not always.

Let’s say you are in a startup, and you have a B player as your vice president of sales. The person will close a good account, but won’t consistently beat targets. If they go head-to-head against a competitor with better salespeople, this person (and potentially the whole startup) will lose. If you’re an early-stage startup, you are walking dead. Raising the next round will be like selling against a stronger competitor — you won’t ultimately win.

I have built multiple engineering teams from the ground up, and I always started with an anchor rock star.  The engineer that everyone wanted to work with, and whose work was so solid that he or she made everyone else more efficient and effective.  I’ve been asked before how many engineers it would take to replace someone like that, and the correct answer is that there is no way to replace a person like this.  Even if I could hire 10 B player engineers for the same price, I would never do it.  The product quality would suffer and the time-to-market would slow; you simply can’t replace skill with numbers.

Lessons learned

My opinions on hiring and people haven’t come by accident. I’ve got scars from my career (and I’ve seen it from many angles — founder, executive, consultant, investor). I’ve made some pretty bad hires along the way. The really bad hires are the easy ones — it is obvious when someone fails or is clearly the wrong fit. You wonder what you were thinking, but at the end of the day, you can reverse these mistakes quickly and efficiently.

I have needed to fire a fair number of people as well, and I will say this is one learning from my experience — I have never felt that I fired someone too soon.

At one of my startups, I fired my entire QA department and made the engineers do all their own QA. The result: better quality product, released faster. The QA department had become a bottleneck, and they weren’t doing quality work. The engineers weren’t happy, the product management team wasn’t happy, and the product suffered. I saw the release cycles slowing down, and saw some of the tension between the QA and Engineering departments. As I dug in, my conclusion was one I had not originally wanted to see — I had a B player at the top of the QA department, and the rest of the department was B and below. It was killing us. My biggest mistake was not recognizing it sooner.

When I was a little boy, my uncle used to tell me “he who hesitates is lost.” Those are words to live by.

I have plenty of individual examples as well, and the toughest ones are always the ones who are doing fine. Managers often blame themselves. Is the job not well-defined? Does the person have enough support? Maybe they just need more time, and they will improve. It isn’t easy to find great people, so why let the decent person go hoping to find someone better?

There is an opportunity cost to keeping someone when you could do better. At a startup, that opportunity cost may be the difference between success and failure. Do you give less than full effort to make your enterprise a success? As an entrepreneur, you sweat blood to succeed. Shouldn’t you have a team that performs like you do?

Every person you hire who is not a top player is like having a leak in the hull. Eventually you will sink.

Passing on a Great Deal Sucks

This week has been a painful one for me from an investment perspective. I had to pass on more than one company that I “know” will be extremely good. Intangible reasons, unquantifiable measurements, incongruent comparisons and divergent opinions litter the trail to the final decision. In the end, it is a simple yes or no.

The Process
At Blumberg Capital, we make decisions as a team. It doesn’t mean that we always have unanimous agreement, but we generally have enthusiastic support from at least part of the team, and acceptance from the rest of the team. When we have everyone lined up behind a deal, that either means we have found something special, or we have a bad case of groupthink. Some level of disagreement or hesitancy is by far the most common scenario, and I have to say that some of our best companies did not have unanimous support at the time of decision. The consensus-driven decision making process has pros and cons, but generally, if you have the right people in the room, it should yield good decisions more often than bad ones.

How Do I “Know” the Company Will Be Great?
Of course, I don’t know for sure that a company will be great. They say that this is a pattern recognition business, and there is at least some truth in that– you will know for sure if I am good at choosing companies in about 10 years. Hopefully a bit sooner if I outperform :-). That said, there are times when the writing is on the wall, the patterns obvious, and the main question is how big can the company become. In a particular case this week, one of the companies is the early market leader in its territory, scaling much faster than the next player, and there isn’t much competition yet. There is operational history demonstrating that this team knows how to build a very sound company. But, it is all relative...

If I KNOW the Company Will Be Success, Why am I Stupid Enough to Pass?
There isn’t a great answer to this question except to say that our decisions are based on making estimates several years out. Not easy. We attempt to understand market evolution, assess company execution, estimate competitive forces, determine capital needs and the ability to raise capital, and project dilution and ultimately exit. Boil it all down to “yes” or “no.” Sometimes there are “maybe” or “wait and see” decisions, but I will cover those in a separate post. Inexact science. We compare apples to oranges, and hope to yield the best fruit crop we can for our investors. Sometimes we get orchards, and sometimes lemons.

Opportunity Costs
The most difficult decisions are between companies where we are quite convinced they will be successful. We have limited capital and team bandwidth, so we simply can’t invest in every company that we believe will be successful. We are trying to determine which will be MORE successful, and will generate the best returns for our investors. And, there are times when we are looking at several companies that we really like, and we simply can’t invest in all of them. This has been one of those weeks. It is a champagne problem as an investor to be choosing between companies we believe will all be very successful, but sometimes the champagne tastes bad.