Thursday, October 15, 2015

The Importance of Being Earnest

I was speaking at the SVB/Cendana Capital micro VC event earlier this week and made a few comments about how do you turn a fund down.  I made a joke about how I used to be a lawyer and was paid to say a lot without saying anything.  My point was (i) to be self-deprecating and drop a lawyer joke, (ii) and two to describe how I like to say no.  Which isn't to say a lot and not actually come to a conclusion.  I've written a lot about the lack of honesty in the LP community before as well as how to say No.  I love to speak publicly and hate it at the same time because I always tell the truth and I don't think most audience members expect to see that all the time.  As I've said before, I believe in a quick response after a call with a VC because I don't want to create any more anxiety for them than they already have in fundraising.  However, I don't like to send emails and say "this is not a fit" if I've taken their time and mine for an introductory call or meeting.  That's rude.  When I get an inbound request for an introductory meeting/call, I may send an email back saying this isn't a fit because there is no point in wasting anyone's time if I know there is no chance I could make a commitment (e.g., out of scope stage, strategy, or geography).  If we both have invested our own time and anxiety into having a discussion about our life's work, I think that deserves careful consideration and a thoughtful response back.  Moreover, if I am passing for now on a fund, I want to lay out everything that I like for you and the things that gave me pause.  I've long said that LPs are wrong more often than they're right as we all don't invest in that many funds.  If that's the case, there are going to be so many funds that do well that we don't/can't invest in.  A quick and thoughtful No is the least worst No.  

Tuesday, October 13, 2015

ENFP: What Oscar Wilde and I Have in Common

Call me Oscar Wilde. Why? Because we're both ENFPs.  Thanks to Bill Tobin at Strayer Consulting who had me take a Myers-Briggs Type Indicator (MBTI) personality inventory, I now know a lot more about myself and others around me.

For those of you who aren't familiar with MBTI, its an instrument developed by Isabel Myers and Katharine Briggs as an application of Carl Jung's theory of psychological types.  This theory suggests that we have opposite ways of gaining energy (Extraversion or Introversion), gathering or becoming aware of information (Sensing or Intuition), deciding or coming to a conclusion about that information (Thinking or Feeling), and dealing with the world around us (Judging or Perceiving).

  • If you prefer Extraversion, you focus on the outside world to get energy through interacting with people and/or things.
  • If you prefer Introversion, you focus on the inner world and get energy through reflecting on information, ideas and/or concepts.
  • If you prefer Sensing, you notice and trust facts, details and present realities. 
  • If you prefer Intuition, you attend to and trust interrelationships, theories and future possibilities.
  • If you prefer Thinking, you make decisions using logical, objective analysis.
  • If you prefer Feeling, you make decisions to create harmony by applying person-centered values.
  • If you prefer Judging, you tend to be organized and orderly and to make decisions quickly.
  • If you prefer Perceiving, you tend to be flexible and adaptable and to keep your options open as long as possible.
What are the adjectives or character traits that reflect an ENFP?

Extraversion (E)
Intuition (N)
Feeling (F)
Perceiving (P)

According to Myers-Briggs, ENFPs are typically enthusiastic innovators, always seeing new possibilities and new ways of doing things.  They have a lot of imagination and initiative for starting projects.  ENFP's energy comes from what is new and different, and they are spontaneous and enjoy action.  They can become so interested in their current projects that they drop other things that are less exciting.  They are concerned about people and understand others' needs and aspirations.  ENFPs readily communicate their enthusiasm, and this can be infectious.  They often inspire others as well. ENFPs are likely to be most satisfied in a work environment that is welcoming to people, innovative, and full of exciting new possibilities.  Others can count on them to find new ways of helping people solve problems and overcome barriers.  Because they see so many possibilities, ENFPs sometimes have difficulty picking those with the greatest potential.  They dislike routine and find it hard to apply themselves to the sometimes necessary details involved in finishing projects, easily becoming bored. 

It is important to note that the MBTI instrument is not a measure of your skills or abilities in any area. Rather it is a way to help you become aware of your particular style and to better understand and appreciate the ways that people differ from one another. Everyone has each of these eight parts to their personality, but prefer one in each area (often in different situations and at different times). No preference pole is better or more desirable than its opposite.

I highly recommend anyone who has not done an MBTI, or has not done one in awhile, to consider doing so. It is incredibly helpful to think about what makes you who you are, both successfully and less successfully. However, more importantly, it is an important tool toward better understanding the world and those around us and what makes others who they are.  I've never been asked to do one in an interview process and never asked a job candidate to take one, and am shocked by both.  It's an invaluable tool, but important to remember that it's not a science.

I'm very glad that Bill had me take an MBTI because I now know myself better and what makes me successful and what my limitations are.  Because it's a little awkward to walk around talking about why you're an ENFP when others aren't part of the MBTI dialogue or as self-aware as you, it's important to start small and think about having everyone on your team/firm do one together and share the results.  It can be a key tool for reducing workplace conflict as everyone will have a better understanding of how others formulate opinions and arrive at conclusions.  There will be enormously revealing thoughts that come from the experience.  It's been truly transformative for me, which is why I'm willing to share my MBTI indicators with all.

Saturday, July 25, 2015

The Lake Wobegon Effect and Venture

"All the women are strong, all the men are good looking, and all the children are above average."

I was listening to Garrison Keillor's "A Prairie Home Companion" last Saturday and thought to myself that a lot of his tales from Lake Wobegon apply directly to venture right now. The Lake Wobegon Effect depicts a real human tendency to overestimate one's achievements and capabilities in relation to others. This seems to apply directly to the venture industry right now, where everyone's current or last fund is at a 2.0x and everything seems to be going up and to the right. However, the last time the upper-quartile Cambridge Associates DPI benchmark was above 2.0x was 1997! TVPI and IRR benchmarks look strong for the intervening years, but venture funds (per the benchmarks) are still not returning more capital than they're investing.  

There has been a lot reported on the rise of the private IPO, which of course aren't liquidity events, and there were only four tech VC-backed IPOs in Q1 2015 and 74 of the 115 venture-backed IPOs in 2014 were healthcare (biotech and devices). I think we're delusional to think that it's always pleasant because until the 211 companies that raised $40 million or more last year get sold or go public, not all the performance metrics are strong, not all the benchmarks are good looking and not all the exits are going to be above average. 

When the summer ends and all the tourist investors in venture-backed deals leave the coast and return to their lives behind a trading desk at the hedge funds, mutual funds and sovereign wealth funds of the world, I'm not sure that we're going to be happy with Lake Wobegon's shoreline.  I think we'll see valuation erosion and as a result fewer people buying lakefront property along the shores of venture's high-priced Series Cs and Ds.  

So what can we do about it?  If you're a CEO or early stage board member, you might only take a term sheet from an investor who is long-term greedy and gets paid in ten years and doesn't get paid on one-year investment performance like the hedge/mutual funds of the world. If venture is an apprenticeship/relationship business, don't take money from people who view their investment with you as a transaction. Take money from people not computers.  Be long term greedy and not short term greedy.  Venture capitalists and venture capital firms take a long time to die, but hedge fund/mutual fund guys hop jobs and funds with as much volatility as the markets.  

Thursday, March 26, 2015

LP Portfolio Construction in Emerging Managers

It's as important to chose your LP portfolio as thoughtfully as you construct your portfolio of companies.  I say this especially when it comes to seed funds that are emerging today because the risk that something is going to go "wrong" within a new seed fund partnership today is high. This is in part because the barriers to entry to become a seed fund VC are lower than at any point in the venture industry's history and one doesn't need a track record as an institutional investor, or have managed Other Peoples' Money (OPM) prior to raising a $25-30 million seed fund. You may only need an angel track record or been a highly successful entrepreneur. When I say go "wrong" I mean that you'll actually have to read and follow the language of the LPA that Cooley or Gunderson so artfully drafted. In just the past four years, the seed fund landscape has already seen key man events, time and attention limitations, investment opportunity conflicts between funds (especially with the rise of opportunities/select funds), as well as issues regarding investment period terms among others. Given the low barriers to entry to become a seed VC today, it only seems to foretell that if the frothy market of today turns against the industry tomorrow and many of the 200+ seed funds raised in the last several years aren't able to raise a successor fund that the seed fund industry will see even more LPA terms come into play with more serious issues in play. It isn't that hard to imagine seeing GPs walk away from funds after the investment period when they can't raise a follow-on fund, raising serious governance issues when the keys are handed back to the LPs. This is why I think it's really important to think about LP portfolio construction when raising a fund because there are so many new LPs that have lamented venture for 10-15 years and are rushing into the emerging seed landscape because it's an easier beachhead to land on today than fighting to get into high roman numeral funds with long track records and waiting lists of institutional LPs out the door. It's also important not to just pick an LP because of the institution, but rather the actual individual(s) at the institution leading the investment. Venture LPs come in all shapes and sizes (foundations, endowments, fund-of-funds, family offices, insurance companies, consulting firms, corporates and pension funds).  They're easy to find on Preqin, but what isn't as easy to find, are really value-added and experienced LPs who have been through an LPA by experience and have lived through how to deal with all the issues that could and very well may come up over the life of a seed fund partnership.  Although LP stands for "limited partner", find people who are more partner than limited. That's why I admire LPs like Russ Hall at Legacy Ventures and Michael Kim at Cendana Capital, because they've been on both sides of the GP/LP table and are a beacon for finding signal amongst the noise in all weather.  

Saturday, January 24, 2015

Career Day: What I Do For A Living

My wife took me to our 8 month old's music class to meet her teacher the other weekend. It felt a little like career day in elementary school when your parents come in and talk about what they do for a living and you dream about what you want to be when you grow up. After some self-reflection, I've finally figured out what I do for a living:

1.  I email men, unfortunately it's mostly men.  Increasingly more though it's women.  Woohoo!

2.  I ask them to get together with me to meet, either with or without the expectation of coffee or beer.

3.  I anxiously wait to hear back from them wondering if they'll respond to my email and want to meet with me.

4.  When they do, I feel gratified and am eager to meet.  When they don't, I feel rejected and wonder why they don't like me.

5.  We meet (hopefully over coffee or beers) and we spend the first fifteen minutes getting to know each other better with ice breakers and small talk. Talking about football, drought and children are safe words. Asking for sparkling water and not still is a clutch power move. It lets them know you move with the fast crowd. Sometimes we even have lunch or dinner and awkwardly dance around who picks up the tab.

6.  After the meeting, I email them and say how much I enjoyed getting together and hope to see them again soon. They usually reciprocate.  

7.  I plan my calendar around when I want to/need to see them again.

8.  I generally want to give them money after we meet (and often do), and for those that we don't have the opportunity to give money to, I hope that they don't reject me.

9.  Cold rinse, then repeat all over again.

Wednesday, January 21, 2015

Getting To No

My favorite book is Getting to Yes by Roger Fisher, William Ury and Bruce Patton.  I think about it all the time and re-read it once a year because I'm constantly thinking about its message as well as my other companion favorite How to Win Friends and Influence People.  I'm writing about the topic of getting to yes because of a conversation I had at Michael Kim's Cendana Capital LP/GP Summit in late 2014 where I made a comment about how I/we try and be the most value-added LP that a GP won't have.  The comment was certainly not made glibly but with a raw honesty in that LPs really are in the "NO" business more so than they are in the "Yes" business.  The same truism goes for GPs, perhaps even more so.  What I really meant by my comment is that we invest in about 2-3% of the GPs with whom we meet with on an annual basis.  As such, we're really remembered and respected (or not respected) for how and when we say NO more so than how and when we say Yes.  Saying Yes and committing to a fund is easy.  The hard part is saying No and knowing when and how to say no. Knowing when means not taking meetings knowing going into it that you have no chance in investing and you're just snooping or padding your stats.  That takes both confidence in what you are looking for, but more importantly confidence in what you are not looking for.  Not taking a meeting may seem brash at first, but in my humble opinion, it's better to not waste people's time and anxiety if you know there will never be a commitment.  Snooping is one thing, which LPs do a lot of to make sure they're not missing the new new thing.  That's okay though, if you're snooping and are value-added.  Meaning you offer to make introductions, you're an engaged listener during the meeting and can provide honest and constructive feedback.  Listening and helping and caring are really all that matters here. Knowing how to say no, is really more of an art than science. See my earlier post on the Truth in LPing Act. Honesty from a qualitative standpoint and fact-based reasoning from a quantitative standpoint are the only way to go. Not "we're over-allocated" or cutting back our allocations.  These aren't excuses that bode well with a GP after you've already sat down with them.  I like to put this parameter out front and center. This is what we do, this is what we look for and this is how much capital we have to hunt with. LPs by their nature cannot and should not invest in everything, and as a result, need to be mindful of how and when they say no. I use Salesforce to keep track of my notes as there are a lot of them, but what I don't have any of anxiety over and don't have to mentally keep track of is the rationale for why we didn't invest in a fund. I find comfort in the adage that if you always tell the truth you won't have to remember anything. So, in short: Getting to Yes is Easy and Getting to No is hard. Most importantly, getting to no is where reputations and memories are not forgotten and so honesty, even though it's hard is the only way to do it.  That takes courage and that's really what I meant by saying a good LP should have meetings where the GP walks away saying that's the most valuable LP relationship/meeting I have where I don't get any capital. There's nothing glib about honesty.