Sunday, May 28, 2017

Practical Advice: VC Annual Meetings

Depending on the annual meeting, I both love them and dread them.  First, let me just say that every venture capital firm should have an annual meeting.  No matter what the size of the fund(s) or size of the team. If you are a venture capital firm, once a year you should dust of the PowerPoint slides and small talk and fake an interest in having all your LPs in a room.  When I review limited partnership agreements with outside counsel, I always ask if the manager/fund has an annual meeting.  If not, that is something I will absolutely comment on.  A few obviously bias tips/ideas for having an annual meeting that hopefully are somewhat practical.  

1. Have an annual meeting.  If Greylock can have two a year, you can have one.  As a last resort, do it it every eighteen months.

2.  Don't have it in September, October, April or May.  I don't know who went first and everyone followed, but there is definitely a "season" to annual meetings.  Be the firm that has one the last week of July or in January.  Find a day with as few conflicts withing your LP base as possible and keep it so that it becomes a day of the year that all of your LPs look forward to every year.  

3.  Make it an experience. Don't do it at the Four Seasons in San Francisco or East Palo Alto.  Have it somewhere where your LPs can't pop in and out and are neurotically checking their email.  Even if you're in the Bay Area, think outside the box and have it at Cavallo Point, Sonoma/Napa or Half Moon Bay (doesn't have to be the Ritz).  The Pearl in the Dogpatch is just hard enough to get to that it's becoming a destination even within SF.  Don't be afraid to have it offsite in another city especially if you have it "off season".  I wouldn't recommend renting out all of AT&T Park (that didn't end well).

4.  Don't have a fireside chat unless it's actually beside a fire.  And yes, I've been to an annual meeting with s'mores and a bonfire.  

5.  Go into detail on the portfolio and teach us things that we don't know about the portfolio and the funds. Even if you don't give out hard copies of materials because of confidentiality/trade secret reasons, go off script. Connect with your audience. Don't assume we know why AI/ML is a big thing. Teach us. Teaching is the best sign of your mastery.  You also don't need to give us a bunch of industry data on VC.  Thanks to Pitchbook, we have that at our finger tips.

6.  Know your audience. Pick speakers/topics/companies that we want to hear about.  If your're in a Unicorn that is in the press a lot (e.g. Uber, Lyft, Instacart, Stripe, Airbnb, etc.) please try and tell us everything you can about the company.  This is the fuel that makes us run, the thrill of being a part of that something special you have invested in.  Give us a taste. If you place us in position of trust with information that is hard to come by, we will covet it and treat it as sacred and appreciate so much that trust that you have given us.  

7.  Avoid a ton of CEOs and panels. Teach us, but don't lecture us. Make sure you make it "LP digestable". If you're a healthcare venture capital fund you especially have to cut the lingo down and tell us what you're trying to cure and how.  Explain it as if you assume we know nothing, because we won't raise our hand in front of a room of our peers and say "Can you dumb it down to my level". We're sheep and so be our shepherd.  

8.  Invite everyone at your firm whether junior or senior. Treat it like a grade school open house where we get to see everyone. Be sure to thank the people that made the event possible.  

9.  Don't all sit in the back of the conference room with your partners at the "reserved tables" and check your email and "phone it in" because this is something you feel like you have to do.  This is an opportunity for your LPs to really connect with your cause, passion, mission. Make it so enjoyable that you too are engaged. 

10.  Don't have a plated luncheon with name tags. We notice when we get seated with the third cousins-once-removed. 

11.  Have fun. You're venture capitalists and none of you said when you were in kindergarten that you wanted to grow up and be VCs.  It's the best job in the world and a great gift to get to be part of the small industry. Have an annual meeting that shows you take your jobs/fiduciary duties seriously but not yourselves too seriously. 

12.  Tell us revenue and valuations. Go into detail. If nothing else, explain to us what each company does and why it's important/disruptive/awesome. Have us try cool stuff and try and absorb some of the magic of what you're doing.  

13.  Have everyone at the Firm present and don't have your CFO give the performance section of the PowerPoint slides. It will be dry, boring and overly scripted. Showcase the entire team and complement everyone both senior and junior for their efforts for making the Firm and its fund(s) a success.  

14.  Have one audience so don't combine your annual meeting with your CEO summit where you're having to court/entertain two audiences. You naturally should be courting and entertaining your CEOs first so it's noticeable that your LPs are second.  Make one day per calendar year all about your LPs. Also, don't have an LPAC meeting right afterwards where it's noticeable that you're kicking out the masses to go tell the chosen ones more than you told us.  Have the LPAC meeting beforehand or on another day.  

15. Give away some swag with your logo on it.  Not moleskin journals. Vests, mugs, pens, umbrellas, t-shirts, hoodies, golf balls, socks, windbreakers, etc.  We're proud to be your LP and so help us help you fly your flag.  Swag can be a badge of honor. Going to an annual meeting and not getting swag is like opening a birthday card from your aunt and not getting a $10 bill.  It's a fund expense after all and we play dumb to this once a year treat on our collective dime.  

16.  Make sure part of your meeting has natural light as we will naturally seek it out like plants after too long in the dark conference room of the hotel of your choosing.  

17.  Rehearse what you're presenting and when you present, don't read from a script and have your back to the audience because you're looking at your own slides/charts on the projector.  Play music before/after and during the breaks.    

18.  Give us a glimpse of what it's like to work at your firm and how you prosecute investments and win. This is a great opportunity for us to learn more about your firm and get closer to the narrative and operations of your firm outside of when you raise money.  

19.  Thank your spouses and invite them to the annual meeting. Invite your parents and other loved ones.  An annual meeting is basically VC show and tell.  You should be incredibly proud of what you do.  

20.  Have FUN and celebrate your successes.  

Practical Advice: Limited Partner Advisory Boards

Limited partner advisory committees/boards (LPAC) are a touchy subject that usually come up for conversation only during the legal negotiation of a venture capital fund's capital raise. However, they live on in operation until the fund is dissolved. Herein, I offer some cheeky advice on the need to have one, how to form one, their purpose and how best to use them.  

Every venture capital fund should have an LPAC. A venture capital firm should have one for every specific fund that it forms. I think there are too many conflicts to have one master advisory board/committee for the firm that operates as an omnibus board for resolving conflicts and voting on matters on behalf of every fund. This conflict exists because the members of the omnibus board/committee may be voting on matters for funds that the member is not an actual limited partner of, which seems like a real conflict of interest. As such, I believe that every discrete fund that a venture capital firm raises, should have its own LPAC comprised of limited partner representatives for each specific fund. This is especially true for firms that have multiple strategies and multiple funds, such as an opportunities fund that is doing later stage deals amongst the firm's earlier stage funds and underlying portfolio companies. The practical reason for having an LPAC is that it is generally easier to seek consent for an action under a fund's limited partnership agreement by going to the LPAC than seeking a vote from the entire limited partner base. Such a vote of the entire limited partner base, generally requires engaging counsel and drafting consents with a formal voting process. An LPAC vote can be done orally in-person/telephonically or over email without the need for counsel or the added expense.  

I am a big believer of venture capital firms choosing members of the LPAC based on their ability to add value to the GP and the Fund. Many firms simply choose their largest LPs or longest standing LPs. Venture capitalists should think about forming their LPAC the same way in which their entrepreneurs would think about forming their company's board of directors. Sometimes it's always most appropriate to select your largest limited partners as these are important relationships to maintain. I would suggest it is most important to select members that are best able to support you and offer the best advice and value back to your fund(s) and underlying portfolio companies. That may mean selecting a limited partner that offers strategic value to your companies because the limited partner has business interests that align with your companies and can affect their trajectory by being more closely informed with their operations. This may also mean selecting limited partners that are the best signal of influence as many prospective limited partners will ask who is on your LPAC and want to do LP references with these LPAC members during their diligence. Having allies on your LPAC that can offer a breadth of intimate and well-informed knowledge both about your firm/fund(s) as well as the industry in generally is critically important. With this in mind, you should consider picking your best LPs. Keep your LPAC to an odd number of persons (3, 5, 7) and don't use LPAC seats as cheap currency, because at some point you will inevitably have to make hard choices as you raise subsequent funds and may naturally err on the side of picking the most value added/largest/longest tenured LPs. Most importantly, pick the best individuals with the most experience and not the institution they represent. I have never seen the merit in picking your LPAC to represent different factions of LP organizations. For example, I have seen venture capital firms choose their LPAC members because they want a university, a fund-of-funds, a family office and a strategic. Under Delaware law, your LPAC members do not have a fiduciary duty to act in the best interest of the general partner, the LPAC (as an entity), the other limited partners or the Fund. While they cannot act in bad faith, they only have to act in their own best interest. With that in mind, there is no legal or metaphysical benefit to having a university endowment on the LPAC to represent the "endowment/foundation camp" of your limited partner base. Big name university endowments and white shoe foundations don't guarantee you big time fiduciary guidance or white shoe advice. Pick the best human beings from the organizations they represent within your LP base. 

The function of the LPAC is functionally only to vote on certain matters on behalf of the Fund: term extensions, capital call limitations within a specific time frame, crossing over deals between funds, warehousing, key person events, etc. A minority of firms have their LPAC vote on valuations, which I think this is a mistake. This should be left only to the General Partner. Aside from the formality of what your limited partnership agreement calls for, I think LPACs can be a valued source of advice and counsel for business decisions and an opportunity to share the progress and investment activity of your fund with your most trusted (and sometimes largest limited partners) between your fundraises. I think LPACs should convene twice a year, with at least one of these two meetings being held in person. If you have your annual meeting in October, I would suggest having your in-person LPAC meeting six months thereafter. I would walk through your new investments and follow-on investments within the specific fund. You will likely also want to talk about personnel additions/subtractions and any changes in your investment strategy/investment outlook. Definitely use your LPAC meetings as a forum to ask your LPAC members what they are seeing/hearing in the industry and how this may affect your firm/fund(s).  Give your LPAC members homework and seek their help, where they can. For LPAC members who are seeking co-investment opportunities, these meetings and the informal interactions therein are a great opportunity to gate such interest and avoid your LPs seeking co-investments from constantly calling/emailing seeking such deals. You should definitely preview your prospective capital raising plans with your LPAC first and rally their interest and commitments before approaching the rest of the limited partner base as your LPAC members should be your best references both within your existing limited partner base and prospective limited partner base.

After your annual in-person LPAC meeting, have a dinner with them. However, once you raise a new fund, only do so with your active fund unless you have a small membership of LPAC members with the same cast of characters and doing so doesn't get unwieldy. Don't forget that even though you aren't making new investments and some of your funds are 5-10+ years old, there is still an LPAC. The older a fund gets, the less need there is for meetings/updates and so you will likely only convene a meeting/call on an ad hoc basis to vote on a matter before the LPAC or solicit advice/counsel on a particular matter.

Take attendance and make sure the LPs that you have on your LPAC are engaged, informed and responsive. Lastly, make sure that you enjoy the company of your LPAC members and that they represent your values and the values of your firm/fund(s).  

Thursday, December 8, 2016

Good Things: What I'm Thankful For This Year

1.  The birth of our second daughter
2.  Speech therapists
3.  Snapchat's IPO filing
4.  Remembering to put out our daughters' shoes for St. Nicholas Day
5.  Jon David Armstrong
6.  Forgiveness 
7.  Costanoa Ventures at the Costanoa Lodge
8.  The Cubs, the Tribe and the Cavs
9.  Jeff Harbach and Bill Tobin 
10.  Michael Kim
11.  Hyper-converged storage
12.  Docker
13.  Getting to see Jeff Fernandez three times in one week every October
14.  Annual meeting swag
15.  Vests (the ultimate annual meeting swag)
16.  AbbVie
17.  Feld Thoughts
18.  Joanna Rupp
19.  Getting over my fear of heights, caves, the dark and claustrophobia thanks to Michael Eisenberg
20.  Gatorade
21.  The Lion Guard
22.  Samir Kaji
23.  French onion soup
24.  1K status and the anxiety-riddled pursuit of Global Services on United Airlines
25.  Leah

Tuesday, September 27, 2016

The Loneliness of Venture

I'm going to have a lonely Fall.  The loneliness of traveling away from my wife and two daughters, didn't propel me to reflect on some "woe is me" tragedy seeking pity from the "tough life" of being a hardworking LP.  No, rather it aroused an introspective look at what came from the past two weeks of loneliness: an opportunity for reflection and creative thinking. Loneliness is not sufficient for creativity, it is necessary.  When we allow ourselves to move away from the routine of everyday life, we are better able to think critically and reflect about our own thoughts.

Brave New World author Aldous Huxley once wrote "If one's different, one's bound to be lonely". There is a  narrow gap between loneliness and solitude. Solitude can lead to creative focus but loneliness can lead to depression. Through solitude one is happy to be alone and recognizes the opportunity for a clearness and singleness of thought that comes with that peace. This struggle between solitude and loneliness was best described by Thomas Mann who said "solitude gives birth to the original in us, to beauty unfamiliar and perilous" but also "it gives birth to the opposite: to the perverse the illicit, the absurd".   

Modern studies in psychology have tried to differentiate between solitude and loneliness. One school of thought is that loneliness is the product of rejection, either a rejection inflicted by society or inflicted on oneself and therefore lends itself most to creativity. This is a very interesting notion as it would suggest that solitude alone is not enough for the creative process. Rather, solitude driven at some point by social rejection. 

I can't suggest that entrepreneurs and their investors seek solitude because of some social rejection. However, I do think that there are likely many instances where folks pursuing entrepreneurial endeavors do so because someone said that it couldn't be done and that the simple notion of disruption suggests there is rejection of the status quo, and often rejection by the status quo. Bold and brazen, or contrarian thinking, thrives on rejection because it is unfamiliar.  

I think there is great power in making parallels to many great entrepreneurs and venture capitalists who have high emotional intelligence and seek solitude in their own thoughts. I think that venture is naturally a lonely profession because although most investors have partners, it is still an individual sport. We are often alone with our thoughts in determining if we want to make an investment and why, only to then to discuss it with our partner(s) to seek input. Rejection can be a powerful tool here because it may have the ability to power ambition and be a cause of loneliness. I think there is likely a key correlation between some of the most successful entrepreneurs and investors and their ability to find creativity from solitude. 

Some of the most creative investors, like the folks at Foundry Group, have an annual month-long sabbatical with little to no work responsibilities where the other partners pitch in to give the partner on sabbatical the opportunity to focus on creative thinking and recharge his batteries.

After further thought, I don't think it will be a lonely Fall, but an opportunity to harvest the solitude afforded from autumn's extensive travel.  

Thursday, April 28, 2016

Non InCautus Futuri: Artis Ventures


Earlier this morning, AbbVie announced it was acquiring Stemcentrx for $10.2 billion, making it the largest venture-backed healthcare M&A event in the history of the industry. Lots of press is going to be made today about Sequoia Capital and Founders Fund having been an investor. What is going to be overlooked is that Stuart Peterson and Artis Ventures were the first outside investor in the Company leading a $20 million Series A financing by committing $17 million. Some folks may not be familiar with Artis Ventures or Stuart Peterson. Stuart is joined by his long-time partner Mike Harden. Who is one of the few Washington and Lee University graduates to go into venture (shout out to our alma mater). Mike and Stuart live the W&L motto non incautus futuri "Never unmindful of the future".  They think big and pursue BHAG: Big - Hairy - Audacious - Goals.  They are not investors in incrementalism. They have invested in some extraordinarily transformative businesses like YouTube, Stem CentRx, Cohesity, Nimble Storage, Juicero, Bracket Computing, Modern Meadow, Aruba Networks and Practice Fusion among several others. If you're wondering what the unifying theme is -- it's that Stuart and Mike are conviction-based investors looking to back companies and entrepreneurs making an impact in people's lives. They're not pie in the sky dreamers or impact investors, they are very savvy fundamental investors, paying homage to their very successful careers as long/short public equities managers. Stem cell oncology therapeutics could not be a more important initiative and curing small cell lung cancer could not be a more audacious goal. Perhaps most importantly, they are extraordinarily generous, kind and trustworthy people. Part of that comes from Stuart's childhood growing up on a farm and not forgetting his roots. Part of that comes from Mike's acceptance into a lifetime commitment to W&L's Honor Code.

Saturday, April 2, 2016

Finding Saturday People

Last week was Holy Week and I should have written this post last Saturday between Good Friday and Easter Sunday, but it felt more important to write it this weekend as we brought home our second daughter from the hospital yesterday (a Friday). On Good Friday, the disciples didn't know that Easter Sunday was coming and that resurrection was on its way. They showed up on Saturday in the darkness, an unknowing place.  As my wife (Leah) and I move forward rearing our two daughters we seek to surround ourselves with "Saturday people". Friday people show up when there is a true crisis but are the loudest mourners. They rally at someone's bedside or walk in protest. But then Saturday comes and the spotlight is lifted and darkness and uncertainty follows. Sunday people show up for resurrection when the clouds have lifted and its time to rejoice. Saturday people show up for the wake, they show up for the ceremony and not the reception. Saturday people see the ugly tears and don't leave in the face uncertainty. They show up for chemotherapy treatments long after the diagnosis. Today is Saturday and my little sister is in town for the weekend helping Leah and I as we welcome our second daughter home with a spirited 22-month old on the loose. My sister (Emmy) is a Saturday person. 

Whether you're an entrepreneur, a venture capitalist, or a parent --- find Saturday people in your lives. Find VCs who help you through a crisis at your company or in your life and stand by you because they believe in YOU and dream with you. Find LPs who support you at the trough and lift you up to the peak that you both know is possible. Find LPs that believe in you as a person and want to help you build a business.  Ignore those who say they're not in this business to make friends or only care about performance. Yes, if you're a fiduciary, performance is the stick by which we all are measured. But more importantly, find Saturday LPs that believe your future performance is indicative of your current persona. Find Saturday LPs that call you to say you're doing a great job or understand how hard it is to have partner leave and ask what they can do for you. Find Saturday LPs that ask not what you can do for them, but what they can do for you.  Find Saturday LPs that believe in the Full Gospel of Venture Capital. 

Tuesday, March 29, 2016

Seed Fund Investment Period "Vesting"

I've grown worried lately as tales of Lake Wobegon are fewer and farther between these days and not all the unicorns are good looking and the seed funds are above average.  What I'm most worried about is the Valley startup employee mentality toward employer loyalty and tenure with employees jumping from one startup to the next as their options vest and they chase unicorn employers with the hopes of finding gold in them thar hills. I think we've begun to see this spill over into the seed fund universe where former founders/startup employees who made a little cash began angel investing and then decided to become fiduciaries and manage Other People's Money (OPM). There is an increasing number of seed fund GPs who view the investment period of their funds as the term of their funds and are leaving 1-3 years into their new-found careers as venture capitalists. I know we're the "limited" in limited partner, but these are still partnerships. We're seeing a number of GPs leave because they "always wanted to be an entrepreneur".

Generally, employee options vest over four years with a one-year cliff. Wouldn't it be great if all of these newly-formed seed funds had similar vesting, whereby if all the GPs didn't stay for a full four-year investment period, that the LPs got to keep that portion of the departing GP's carry? If a company is saying to its employees, after four years, it's clear that you have earned your keep and we value you, isn't there a pretty solid argument that GPs should have to earn their keep (at least new ones) over a four year period as well? Because of the pace of deployment by so many seed funds in the past three years, there isn't much relief if a few GPs at a firm bail, or all of them frankly, because a key person event is generally only trigger-able during the investment period.  If everyone leaves after the investment period, LPs are generally left with the choice to dissolve the fund with a 51-85% vote and receive illiquid in-kind stock certificates, or let whichever GPs are left let it ride. Maybe the remaining GPs raise a successor fund, or they slowly exit stage right. Maybe the workaround is to only invest in seed funds that don't follow-on after the seed round.  At least then, if a GP or several GPs leave, there isn't much left to manage out. The cooling in the markets is likely only beginning and I'm worried about what this foretells for the countless new seed funds that were raised in the last 2-4 hours (oops, I mean years).