iocane advice

Chris Dixon and Fred Wilson provide a very special kind of bad advice on the topic of equity grants in startups.  Now, Dixon and Wilson are both very smart and very successful, and what they say about equity grants is absolutely true, so the advice is not bad due to its supporting expertise nor its substantive merits.  The advice is bad because nearly everyone who attempts to use this advice will use it to their own harm, and the few folks who cannot be harmed by this advice have already lived a life full of preparation and savvy choices.

Dixon emphasizes that the most important thing about equity grants is the percentage of the capitalization granted, and Wilson adds that the implied valuation of the grant (number of shares times share price of most recent financing) is also useful.  While these things are true, my objection is that the probable audience for this advice is composed of prospective startup employees, and the use that they will make of this advice is to try to choose a job based on the value of the equity grant.

This is a bad idea for two reasons.  First, valuing an equity grant is only secondarily about determining the percentage of the company – it is primarily about determining the exit value of the entire company, an exercise at which professional investors in the field routinely fail. (Fred himself will tell you that 2/3 of venture investments in a successful fund will break even or lose money.)  If you are thinking about joining a startup, and you have 2 choices, you are very unlikely to have any rational basis for believing that 0.1% of one startup will be worth more or less than 0.2% of the other.

Second and more importantly, if you want to work in a startup, you should not choose where to work based on compensation.  You need to pick the project and the people that get you most excited, period.  Without a belief in the mission and an authentic fit with the team, you will not be successful anyway, so any compensation will be a waste of your time and their money. If you have other employment options, you should explain that to the place you want to join, and if they want you they will make the comp work within their range, and you should accept.  Or, if you simply want to work at the place where you will be paid the most, you should not work at a startup. (Don’t be offended, this isn’t a test of character or a judgment of your soul – if you’re not a startup person, that doesn’t make you any worse or better than the people who are.)

Dixon actually gives really good advice in his post, for those who are paying attention:  “If management tells you the number of shares and not the total shares outstanding so you can’t compute the percent you own - don’t join the company!”  As I’ve said before, the reason to have a detailed conversation about equity comp with your manager is to test management’s clarity and forthrightness in general – not because you have any hope of making a correct equity valuation.

I would be willing to bet that neither Dixon nor Wilson has ever made a choice of company to join or invest in based on equity percentage.  They made their choices from their interests in the market, the product, the team – and then later, after a decision to join/found/invest has essentially been made, they did some optimization around the equity.  Choosing the other way around is about relying on luck, not successful choices and preparation.

[Bully for you if you know the reference for the title of this post!]

weighing your options

A friend asks:

I’m working through a start up analysis based on a web-based software app. What is “options consistent” with a start up?

The short answer:  show the prospective employee a 5-figure number, and convince the employee that it makes sense.

The long answer:

This is highly dependent upon the type of startup and the position of the employee. I’ll answer for a typical situation of a VC-backed startup and a developer from entry-level to senior (sub-exec) level. You could have a very different answer for startup that was not VC funded, or an executive level position. You might even have a slightly different answer for non-developers, certainly in the areas of marketing, administration, customer support. (I’m putting aside for the moment the question of whether it is “right” to treat execs or different functional areas differently.)

Many propspective employees seem to take a highly illogical view of evaluating startup options. They compare the raw number to that in their other offers, or to offers that their friends received. (“Well I think I deserve at least 30,000 shares in this company, because my friend Jonny got 20,000 shares in his company, and he’s an idiot!“)

This seems nonsensical because the value of the options must be calculated with respect to the specific company situation, especially in terms of the company’s existing capitalization and prospects for liquidity and growth. Having 20,000 shares in a company that has 10 million shares outstanding is, absent other facts, five times more valuable than 20,000 shares in a company that has 50 million shares outstanding. That’s simple enough, but it is by far less important than the other main factor. Having 20,000 shares in a company that is about to go public might be much more valuable than having 20,000 shares in a company that has just started.

Might be. Or might not.  What if the company that has just started is the next Google, as they all think they are? The problem here is that you have to evaluate both distance to liquidity and prospects for growth. Figuring out which startups will be successful and when and how big they can get is extraordinarily difficult – these are things that professional money managers routinely get wrong. A prospective employee has very little hope in getting this evaluation right.

So let’s look at it from the other side: how do companies decide how many options to offer employees? Typically a company budgets a particular target of dilution from issuances of options over 12 to 18 months. For an early stage startup, this target is often around 15-20% of total capitalization (including the options pool). A one-year hiring plan in that stage might call for something like one new executive, 3 senior employees, and 12 employees from entry to mid level. So the company would budget its options accordingly, obviously also aligning grants with external market conditions.

A prospective employee who wants to know whether an offered grant is “fair” really has no better method of evaluating this than by asking the company to explain how they came up with the number. Ideally as an employee you’d want to ask:

  • What’s the fully diluted capitalization?
  • How far is the company from liquidity? What type of liquidation event does the company anticipate?
  • What are the company’s business prospects for the current year?
  • What is the options range for my position, and where am I in this range relative to other recent hires?
  • How far into the hiring plan is the company for the current year? How many and what positions will be hired?

And you ask these questions not because you can actually value the company based on the answers.  You ask as a test to see if the hiring manager has thought through the offer, and sounds as if there has been rational thought behind your compensation.  You want to work at a place where the management can provide sensible answers to these questions, independent of whether the answers can add up to a company valuation.

Many candidates do not feel comfortable asking these kinds of questions. Worse, some companies will not answer them, and will view the asking of such questions as a sign of impudence.  I’d say you should think twice about working for any company that would be insulted by the asking of these questions, but unfortunately that company attitude is not uncommon.

As a result, the best guideline to fall back upon for many prospective employees is back to good old Jonny:   What have I been offered at other companies, and what are my friends getting at their companies?

Which turns out to be not such a dumb way of evaluating offers, because many companies use more or less the same budgeting processes and have similar investor and advisor networks. So most companies end up in a similar range of options for similar positions. For most mid-to-senior positions, this will be a 5-figure number, and as long as that number can be justified to the employee, then you can move on to more important questions, such as why anyone would want to work at this company in the first place. There should be a lot of answers to that question, and the options offer should be only a very small piece of the puzzle.

best startup blogs for entrepreneurs

I once made a case for pmarca as the best startup blogger evah.  Now that I’m in the midst of my own entrepreneurial efforts, I’ve had plenty of occasion to revisit the category.

I still think no one matches Marc for the sophistication and deep experience of his posts.  But I think that once you have the background that he covers, if you are working on a startup you might want something that gives you more guidance about what you are facing day to day.  So here are a few possibilities for interested entrepreneurs:

ReadWriteWeb is running a serialized book called Startup 101 that describes the startup life cycle.  It has a number of factors against it:  the information is very broad and basic, it’s directed only at web startups, it assumes little to no experience in business generally.  Nevertheless it looks to be shaping up as a nice basic primer for first-time startup folks.

Venture Hacks has some good info, mostly about fundraising but also assorted other categories.  This is possibly the best resource for those who are mystified about how VCs think.

Eric Ries has made a name for himself around the catchphrase “The Lean Startup” – a solid summary of fundamental principles of running a low-burn, nimble business.  Much of this might seem fairly obvious to folks who have worked in modern web startups, but Eric has a really nice clean delivery of the concepts.

Steve Blank has shared the stage with Eric for “Lean Startup” presentations, so the two have a common mindset.  Steve differentiates himself with a much longer history of entrepreneurialism, which gives him great authority and many informative war stories to share.  His customer development model is highly valuable to any startup (though a bit better oriented to enterprise customers than mass consumers).

Steve’s blog has risen to another level in recent posts about how entrepreneurs can stop lying to themselves and deserve an epitaph that signify a family life well lived.  I haven’t seen any other startup blogger come closer to giving this topic the time and attention it deserves – managing the demands of a startup in balance with a rich family life is incredibly difficult.  Perhaps too few have succeeded in this to inspire many good blogs about it.

Finally, probably my favorite category of startup blog is from those who are blogging the process while they’re doing it.  Signal vs. Noise is a classic in this category, but I like to find new blogs from relatively unknown startups.  Two that I happened across recently are from the founders of Expensify and Alice.

What are your favorite startup blogs?  I’m particularly interested in finding ones from startup founders who are blogging it while they’re doing it.

entrepreneurial lobbying

Warning:  this post is very long and concerns tax policy, and so is likely to suck your soul while you read.  However, if you have been or ever will be a highly successful entrepreneur, then I’m talking about matters that mean millions of dollars to you.  Enjoy.

We are in a time when the government’s hand in the U.S. economy is heavier than at any time since as least as far back the 1930′s.  Makes me wonder who, if anyone, lobbies in D.C. for the benefit of entrepreneurial activity?

The National Venture Capital Association has been in the news of late, as it tries to avoid Congressional and Treasury proposals to regulate “private pools of capital” – a generic term that includes hedge funds as well as venture capital funds.  Hedge fund activity in the credit markets may have contributed to the systemic failures in the financial system, but commentators indignantly proclaim that venture capital had nothing to do with the current mess.

The NVCA is the main lobbying organization of the venture capital industry, and in their stated mission and nearly all of their public policy positions, they say they have a broader mandate to “support entrepreneurial activity and innovation.”  The NVCA wants Washington to understand the VCs are not merely investors, but part of the lifeblood of the entrepreneurialism that fuels massive portions of the U.S. and world economy.

I suspect that at first the fine folks at the NVCA made this connection to entrepreneurialism because it sounds worthy and friendly to politicians, as compared to being cast as mere financial speculators.  But now this connection has become a key conceptual anchor of their argument that venture capital should be treated differently from hedge funds and other private equity funds.  Those other guys are pointy-headed number crunchers, see, who move massive amounts of money and credit with extreme disregard for our financial system.  VCs are closely involved with startup innovation, heck they are practically entrepreneurs themselves!

This conflation of VCs with entrepreneurs is even more critical in what has become the most important lobbying battle in the history of the NVCA, the fight over carried interest tax policy.  I think if more entrepreneurs understood this particular public policy issue, there might someday be better lobbying in DC for related issues that are closer to the hearts and wallets of entrepreneurs.

Briefly, VCs are typically compensated in two ways, with management fees and carried interest.  Management fees are a small percentage of the total capital commitment of the fund.  For example, a $100 million fund might have a 2% management fee, so the VCs receive $2 million per year for their operating expenses.  Carried interest is basically profit sharing on the investment.  So for example, if the $100 million fund operates for 10 years, and makes $500 million, a 20% carried interest might be applied on the profit – that would be $500 million less the $100 million of invested capital, less the $20 million of management fees (assuming 2% per year).  So 20% of $380 million is $76 million.  I’ve smoothed over a lot of variations and complexities, but this is basically how it works.

And how the U.S. tax system works – smoothing over a thousand times more variations and complexities – is that you either pay ordinary income tax of 35%, or long term capital gains tax of 15%.  Have you guessed what the carried interest tax policy battle is about?  That’s right:  carried interest has historically been taxed as capital gain, but many are now calling for it to be taxed as ordinary income.  In the example above (which would not be a particularly large or extraordinarily successful fund), the 20% difference in tax rates would mean $15.2 million less for the fund managers.  You can see why this is the Battle of the Century for the NVCA.

Now, let’s get back to this point about VCs being practically entreprenuers themselves.  In Congressional testimony, the NVCA says that venture capitalists rise above mere “financial engineers” (presumably the hedge funds and private equity guys), contributing sometimes daily management attention and real “sweat equity” into startup companies.  Some entrepreneurs may snicker at that testimony, and others may pluck their eyeballs out rather than read it.  I can freely admit that I’ve seen VCs who do make invaluable contributions to their portfolio companies, far above merely providing money.

But if the NVCA really wants entrepreneurs to view their efforts to “support entrepreneurial activity” favorably, they ought to extend their views on tax policy to the issues that really and directly affect entrepreneurs.  See, although startup founders can readily enjoy capital gains treatment on the value of their equity, some bizarre tax policies in this country often have the practical effect of forcing ordinary income treatment on the equity stakes of many private company employees.  The NVCA is fighting tooth and nail so that VCs (who are almost like entrepreneurs, after all) can get capital gains tax treatment, while saying not a single word about the policies that cause millions of startup employees to have their equity gains treated as ordinary income.

There are many ways that the NVCA could advocate tax policy for the benefit of entrepreneurs, but I’ll note the two most obvious ones, one a layup and the other a long ball in difficulty of change:

The layup is the Section 83(b) issue.  This is just an utterly bizarre policy that is harmless to entrepreneurs if you file all your paperwork correctly, but it is ruinous to entrepreneurs (and often their companies and lawyers) when there is a mistake in filing.  Briefly, founders and very early employees of startups usually receive stock (not options, but the stock itself) that is subject to vesting.  The tax code says that ordinary income tax is due as the stock vests, on the spread between the price paid for the stock and the value on the date of vesting.

That’s a real problem, because even as the stock vests, it has no liquid market – meaning that the stock can’t be sold easily.  So an entrepreneur who holds this stock in a successful company would get huge tax bills that he or she cannot pay.  Fortunately, the IRS allows the stockholder to make a “Section 83(b) election” – this is an election to pay the tax at the time of the initial stock purchase.  Since typically the price paid for the stock is the fair market value of the stock at the time of purchase, there is no spread and therefore no tax is due.

So that would be harmless, except that if you don’t file the election in the right way at the right time (30 days after purchase), you have to pay taxes the default way.  And that kind of mistake does happen, and it can cost millions – not just for the taxpayer, because ruinous tax issues for company founders and early employees can easily sink the company itself, and also typically results in malpractice suits against the company lawyers.

Why should the default position in the tax law be to pay a ruinous tax that no rational person would ever voluntarily elect to pay?  Why not just have a law that says if I don’t do a cartwheel on my lawn every 30 days, then I have to give my house to the IRS?  This is just utterly inane, so inane that it should be an easy win for the NVCA if they were to take it up as a lobbying cause.

The long ball would be for the NVCA to go after AMT/ISO reform.  This is a very complicated issue, but bear with me, because this problem does routinely affect startup company employees.  In a vast, vast oversimplication:  the problem is that the Alternative Minimum Tax requires Incentive Stock Option holders to pay a tax on exercise of their options, even though the company is private and there is no liquid market for their shares.

In a successful company, this can mean a tax vastly exceeding the assets of the employee, with no means of paying it.  A typical solution for many is to sell their shares at the mercy of the less liquid secondary markets (at severe discounts), in order to be able to pay the taxes.  And of course, a sale in that situation is typically taxed at ordinary income rates rather than capital gains rates, because of ISO tax rules.  So AMT and ISO rules conspire to mean that startup employees often are forced to sell their stock at discount values, and to add insult to injury the gain is taxed as ordinary income rather than capital gain.

So, NVCA:  you need to go after those two issues before any knowledgable person should regard you as an advocate for entrepreneurs and innovation.  Not only would you get the cosmic satisfaction of your actions actually conforming with your words, but you would also likely get grateful contributions from entrepreneurs and their lawyers.

faith and reason and startups

Faith is often mischaracterized as the opposite of reason, a belief held outside of rationality. But irrational belief is not faith, it’s just simpleminded credulity. And those who have no reasons other than reason are no less simple.

Faith and reason, properly understood, are intertwined sources of truth. The encyclical Fides et Ratio states this more elegantly:

Faith and reason are like two wings on which the human spirit rises to the contemplation of truth

In this light, I contemplated Fred Wilson’s note about investing on faith. The implication for some may be that this is investing without reason. However, Wilson’s leap of faith is no less legitimate than “pure” reason. Unlike religion, truth for startups has an ultimate arbiter in this plane of existence: return on investment. There are legions of startups that had all the reasons in the world to succeed – great idea, huge market, killer team – and yet they failed nonetheless. I’d bet that experienced startup investors have succeeded as many times on what Wilson calls faith as they have by stacking up reasons.

Coincidentally, the next day, Steve Blank posted on the startup transition from faith to facts. It might seem hard to argue with his view that startups begin on faith and must quickly move to facts to succeed. Again, I wouldn’t draw the divide that sharply. I’d say faith is a requirement throughout the journey, and so are facts. From day one, you must believe in what you’re doing, have faith informed by reason. And also from day one, you must engage with the facts; endlessly and relentlessly collect, examine and act on available facts with all your reason supported by your faith.

startups as the path to enlightenment

So if you didn’t work at PayPal during their halcyon days, what else makes for an attractive startup résumé?

I would say that ideally startup hiring managers should try to get folks who’ve been through at least two of the four private company stages, including at least one that the hiring company has not yet been through.

Well, I would say that, except I find that these “stages” are not particularly well defined by anyone.  Or at least not anyone I could find in 28 seconds of Googling.  So like any moron with a digital pen and printing press, I can just make up my own definitions.

Some of the typical “stage” terms are seed, early, expansion, and late - these are often used by investors, are vaguely defined, and don’t always track to a company’s internal status and expectations.  I’ll try to align the four stages of private company progress with some more-fun-if-equally-irrelevant quadrilateral perspectives, from psychology and Buddhism.

Stage I:  pre-product

psych: unconscious incompetence – the individual neither understands or knows how to do something, nor recognizes the deficit or has a desire to address it

Buddhist: the path to stream-entry; the fruition of stream-entry

This stage is everything before you have a product launched to anyone outside your “friendlies” (relatives, friends, close contacts) – from the idea on the napkin to your Hello World! launch to the general public.

What others call ‘seed stage’ is often short of this – just the idea through a prototype, with ‘early stage’ then following from pre-launch to revenue traction.  But although that division may be natural for funding demarcation, from a product perspective you just don’t know what you have until it’s in the hands of the buying public, so I regard all of this period of not knowing as a single period of sustained ignorance.  It is all the pre-product path before the fruition of entering the great stream of commerce.

Stage II:  maximum iteration

psych: conscious incompetence – though the individual does not understand or know how to do something, he or she does recognize the deficit, without yet addressing it

Buddhist: the path to once-returning ; the fruition of once-returning

This is the period where the company has both the maximum flexibility and the most urgent need to rapidly iterate development.  Not just product development – everything about what the company makes, does and is.  The flexibility is there because the product has been launched, which not only lifts the inchoate burden of launch, but begins the collection of data (customer feedback, product metrics, use data etc) which can now be mined for insights about how to shape and reshape the product.  The need is there because if you don’t iterate, you will not grow and then you will not exist.

And again, it’s not just product iteration but an opportunity to examine and tune everything you do as a company:  recruiting and review systems, management team and tools, compensation, cultural principles, office design, everything.  The things you do to shape the company during this period will have an enduring effect on everyone who works there for years to come.  Too bad you don’t really know what you’re doing just yet.  But now is the time to get on the path to once-returning, to reincarnation and rebirth into the next stage.

Stage III:  revenue optimization

psych: conscious competence – the individual understands or knows how to do something; however, demonstrating the skill or knowledge requires a great deal of consciousness or concentration

Buddhist: the path to non-returning ; the fruition of non-returning

Unless you were oh-so-clever enough to launch without a revenue model, the company began to enjoy early revenues during the maximum iteration stage.  Iteration remains critical, but now your flexibility is naturally limited by the existence of paying customers, who often have a limited tolerance for change.  You have to optimize existing lines of revenue while making careful tradeoffs in launching new lines of revenue.  You may for the first time begin pursuing meaningful acquisitions or divestments that could change the face of the company.

This stage may be the most difficult among the four; your hard-earned knowledge seems to have the perverse effect of increasing the challenge.  When you were young and ignorant, it served you well to underestimate the difficulty in changing the world.  Now that some corner of the world has bent to your dream, you find that the dream is a shared hallucination of many rather than your own private trip – and your role isn’t to enjoy the ride but to supply the vehicle.

Nonetheless you are on a path of no return:  in returning there is only defeat and regression to a lower form of living; you can only move forward for true enlightenment.

Stage IV:  maturity and liquidity

psych: unconscious competence – the individual has had so much practice with a skill that it becomes “second nature” and can be performed easily (often without concentrating too deeply)

Buddhist: the path to enlightenment; the fruition of enlightenment.

The mature company does not have to be moribund, there is a vitality and pleasing grace to the well-oiled machine.  You know what you’re doing and you’re at the height of your powers, freed from the mixed blessings of youth.

And no matter your personal attitude towards money, getting the company to liquidity is the last barrier to enlightenment.  (Here I’m putting aside the case of those who want to build a big, sustainable private company without calling it a “lifestyle business” – the more typical startup dream involves shareholders and employees who want to be able to freely trade their stakes in the business on the open market.)

With your first big liquidity event, you find out if the other side of that barrier really is nirvana.  You find out whether the money has changed you, or whether it exposed who you really are.

That is the startup path as self-actualization, the startup path to enlightenment.  When you’re hiring for a startup, you need to pay careful attention to which of these stages your candidates have progressed through, and uncover their self-knowledge about their enjoyment in what has been learned and their eagerness to learn what hasn’t.

btw, if you are on that path or would like to be, and have skills in javascript, php and/or other web programming-fu: send me your résumé! (just a link to your LinkedIn or other relevant online bio would also be fine.)  use the intarwebs to find how to contact me.

résumé gold

If you are a hiring manager for a tech startup, what is the one company you’d most like to see on the résumé of a prospective candidate?

A lot of people might reflexively answer ‘Google’ on the belief that it’s still the most interesting and profitable company in technology.  While this isn’t as bad as saying ‘IBM’ or ‘Microsoft’ it’s still an undue faith in the benedictory power of large companies.

Not that there’s anything wrong with folks from IBM or Microsoft, mind you – I’ve worked with many and hired some, and don’t regret any incidences from either.  However, as a statistical matter, you’re not likely to find the kind of employee that really thrives in a small startup if they’ve spent a ton of time working in longstanding behemoths.

Doesn’t mean that big companies can’t innovate – in fact these days some say that only big companies can innovate big.  Of course, it may be that the people saying that tend to reap consulting dollars from big companies for advising on innovation . . .

Anyway, Google is a slightly different case than IBM and MSFT, in that it hasn’t been around as long and is not quite so large in terms of revenue and employee base.  However, because of the neck-crimping trajectory of Google as a company, I think it might be hard to get startup-ready employees out of Google:  the good ones that are still there are engaged on the big premium projects, many of the not-so-good more recent vintage are as big-company-minded as anyone, and the truly great early employees who departed are retired or VCs – too rich to be enticed into a little startup unless they start it themselves, which they rarely do as it distracts from counting the money.  Even if you follow startup news, you don’t hear so much about Google guys leading startups, with the notable exception of Paul Buchheit at FriendFeed.

So, if not Google, what company should be the most desirable to see on a résumé, all other things being equal?  I think I’d pick the one company that spawned founders and early investors and employees at YouTube, LinkedIn, Facebook, Yelp, Slide, Zinga and Yammer:  PayPal.

See, the ideal company – at least in terms of educating talent for the next venture – doesn’t have a Googlerian or Microsoftesque trajectory.  From founding to acquisition by eBay for $1.5 billion, PayPal lasted about four years and grew to a profitable company with over 600 employees, having been through a lot of growth, innovation, regulatory challenges and corporate evolution.  People in key positions through the bulk of that time saw the whole arc of company development, but never got so fat and happy that they didn’t want to do another startup.  Yep, if you’re hiring for a startup, the name you’d most like to see on that résumé is PayPal, pre-acquisition by eBay, natch.

black storm networks

So what’re you up to these days?

I’m spending a good amount of time in residence with my old friends at Storm Ventures, which reminds me of the last time I sat around with them, back in 2002. Coincidentally that was also around the last time the sky was falling, though the dot-com implosion was more localized than today’s lovely global financial crisis.

Although more contained, I think in many ways that downturn felt more severe in my world, the tech industry centered around Silicon Valley. It seemed that there were more local job losses, but more than that, the feeling of panic ran a little deeper, and wasn’t backstopped by the recent practical experience that we have today because of the prior crash. When the dot-com bubble burst in 2000, the prior domestic market crash was in 1987, and 13 years is enough time for people to forget, long enough for the prime of a career to pass through the ephemeral industries of the tech world. In 2008, the last crash was only 8 years ago, so now most people working here remember what happened the last time, and they can separate the chickens from the oracles.

A lot of people say that an economic downturn is a great time to start a new business. Of course, there’s a difference between saying it because others say it, and saying it because you’ve seen it before. In 2002, one of the partners are Storm was saying it to me, and it all made logical sense: costs were lower, recruiting was easier, competition was scarce. But I hadn’t seen it before. Tae Hea Nahm and Tim Danford at Storm were sure it was the right time to incubate a company, so they formed Black Storm Networks and recruited the founding team of Ajay Mishra, Pat Calhoun, Bob Friday and Bob O’Hara. The founders huddled in Storm’s offices through the dark days of telecom nuclear winter and built the company piece by piece.  I was lucky just to hang around and watch the sweat and optimism they put into every single day.

Jump ahead to 2005 and Black Storm had become Airespace, the leading startup for a new class of enterprise wireless networking equipment.  That year, Airespace was acquired by Cisco in a great deal for both sides. I was lucky again, for by that time my peripatetic career had allowed me first to invest in the company for another firm, and then to join the team in time to help the last push.  For most people, the story of any startup ends with the liquidity event. But I enjoy watching the afterstory too; I like to follow whether the acquired product continues to succeed, whether the team has an impact in the new company and afterwards. On that measure as well as others, I’m really proud of the Airespace team.

The product and its successors achieved a dominant market position. Airespace’s CEO, Brett Galloway, has become a senior exec at Cisco responsible for all wireless and security products. Pat Calhoun is now the CTO of one of Cisco’s biggest business units. Bob Friday continues his wireless wizardry as a director of engineering for Cisco. After several successful years for Cisco, Ajay joined Airespace’s biz dev paladin, Bob Tinker, for another startup run. Bob O’Hara pulled perhaps the best move, retiring from Cisco last year to live in Twitterville.

Anyway, my fondness for that team and those days brings me back to these days, back at Storm with time to dream. I believe it because I’ve seen it:  an economic downturn is a great time to start a new business.

Update:  Bob O’Hara adds his perspective.

crushing on Marc

In which I shall argue that Marc Andreessen is the greatest startup blogger of all time, and possibly also the most distinguished tech entrepreneur alive today . . . and why he will probably be a mediocre venture capitalist.

The Case As Greatest Startup Blogger

Have you read Marc’s blog?  (I am not on a first name basis with Mr. A, but I can’t use his last name throughout this post because I keep misspelling it, which drives me nuts.)  I challenge you to find any other blog about tech startups with a higher percentage of incredibly incisive and valuable posts.  He’ll lay out every important guideline for being a competent startup entrepreneur.  He’ll tell you the truth about venture capitalists.  He’ll give you invaluable career planning tips, warn you about entrepreneurial misjudgment, tell you how to hire, and even describe the role of luck and age.  Did you go to business school to learn how to be an entrepreneur?  Well, you should have just flushed $100K down the toilet and read his blog instead.

But wait, maybe he’s not a ”’real blogger”’ – can you be great if you’ve been on hiatus since last August?

I say yes, it’s about quality over quantity, even if you can have quality in high quantity.  I like mystery fiction and consider genre work as legitimate art, so I’ll draw analogy from there.  I prefer Dashiell Hammett over Donald Westlake, even though I think Westlake is just as talented a writer as Hammett if not more so.  Hammett put every beautiful thing in his artistic soul into about a dozen novels and short story collections, while Westlake spread it out over more than 100 volumes, using as many pseudonyms as Hammett had books.  Both were great, but Hammett was the greater artist for the purity of his delivery.  Marc’s blog is pure art compared to the good-quality-high-volume blogging by some venture capitalists and lawyer-turned-blogpreneurists.

And of course, the real authority behind Marc’s blogging about startups is his phenomenal success as an entrepreneur.  You have to listen seriously to someone who’s done it before.  But can he really be considered the greatest living tech entrepreneur?  Let’s turn to that -

The Case As Best Living Tech Entrepreneur

Well what does “most distinguished” or “greatest” or “best” mean anyway?  Here I just mean the one who knows the most about making successful tech startups, the one you should listen to if you want to be in this business.

Yes, I know that Gates and Jobs, Larry and Sergei, Bezos and Omidyar, Ellison and Slim and many others have made much more money in tech.  But sheer wealth does not settle this question.  It’s about how you got there.  I’ll eliminate guys like Carlos Slim because they made their fortunes as investors and financiers, not as the operational guys who built the businesses.  All of the other guys I just mentioned, except one, made the bulk of their entrepreneurial fortune from just one company.  I wouldn’t exactly say “once you’re lucky, twice you’re good” with these guys – they are all way beyond good with what they’ve done for their companies and for tech history – but I would value advice from MarcA over any of them, because he’s both made history and created his fortune across multiple entrepreneurial efforts.  People who have had the vast majority of their success over a single company are just statistically disadvantaged in providing the kind of advice that entrepreneurs need.

Jobs is the one to consider carefully.  Between his first and second acts at Apple, he founded an interesting business in Next and a magical one in Pixar.  But his reputation gives me doubts about whether he is capable of giving advice to entrepreneurs – it’s possible that his own genius gets in the way.  He might be like Magic Johnson:  an incredibly gifted athlete who could not make the transition to coaching because he found it hard to explain the game to people who did not have otherworldly talent.  Of course, all this is just impression from news reports and second-hand sources; it’s possible that Jobs is a great coach.  But the evidence isn’t in the public record or the rumor mill.

And now, let’s look at Andreessen.  He founded one of the key companies of the Internet age in Netscape, becoming the original tech hype poster boyNetscape went public, sold to AOL for billions and was finally crushed by Microsoft.  Marc suffered the hype backlash and doubts, but he got back on the horse and founded Loudcloud, which grew to a $100 million revenue business, went public and then cratered in the dot-com bust.  Marc and his CEO rebuilt the company as Opsware, built up another $100 million revenue business, and then sold for $1.6 billion to HP.

Does anyone have a record like this?  Recap:

What he did What it means
founded a company of true significance in tech history, went public. Knows about making history.
sold to and became senior exec at giant media conglomerate. Knows about selling your soul.
crushed by monopolistic competitor, was treated with disdain and doubt in media. Knows about falling from grace.
founded another tech startup, went public. Knows about redemption.
crushed again in bubble burst, assets sold and restarted. Knows about being a two-time loser.
restart grows to $1+ billion exit. Knows about triumph after they all forgot about you.
best tech blog evah. Shares the wealth of knowledge.

Who is even close to this?  I actually hate giving this much love to someone in public, but this string of experience is so compelling, I had to write it down before I could believe it.

The Case As Mediocre VC

With all the love I just dropped on MarcA, how can I predict anything less than glorious success in his new efforts as a venture capitalist?  I won’t link the posts again, but you can see on his blog that the guy has done his homework and he really understands what he’s getting into here.

Part of my doubt is that I’m just playing the odds.  VC is an industry where luck plays a vast role in success, especially early in the VC career.  If you’re not lucky early, you don’t get to keep trying, because people will not keep giving you money to invest.  This is different from entrepreneurialism, where if you are determined, you will get to keep trying over and over again until you give up – you can make your own luck through repetition.  Again I’m not going to relink, but above I noted that Marc knows how to make the most of luck.  Nevertheless, it’s called luck for a reason, namely that a favorable outcome is against the odds.

More importantly and less sensibly, off the top of my head I’m not aware of any great VC who has the record of entrepreneurialism that Marc has had.  I guess that’s not surprising, since I just spent 500 words explaining that I don’t know of anyone with Marc’s record.  But as many people (including of course MarcA) have noted, there have been great VCs who were lifers in the business as well as great ones who came from operational roles and even former journalists and analysts and lawyers.

But that record of Marc’s is just too entrepreneurial.  It seems to me that guys with that kind of DNA have some difficulties in becoming, essentially, a specialized class of money manager.  Some of them can be great individual investors (investing their own money, which Marc has already done well), but they seem to have some sort of mental discomfort in managing other people’s money.  I don’t know why, but I’ve seen that quite a few times.

Mind you, if I ever got a chance to invest with him, I would take it . . . because it would be worth losing money with him as an investor to get time with him as an entrepreneur.

update 30 Aug 09:  Marc seems to have taken down his archive, which is really too bad.  Fortunately, you can still find his posts by searching the Internet Archive Wayback Machine or seeing this possibly unauthorized copy.

apples to apples

Facebook turned 5 years old last week, and a couple of commentators took the opportunity to compare the company’s progress unfavorably to Google’s.

I understand the compulsion to compare every hot startup to the current media darling that literally put its name next to the definition of “Zeitgeist” – but still, I don’t believe there is any practical value in that exercise.  A meaningful comparison compares things of like kind, and comparing every company to the once-in-a-decade champion is not apples to apples.  Take a look at this list of companies, which I’d say are all the same kind of apple (of course one of them is literally an Apple):

Company Year Founded Year IPO Feb 09 Market Cap
HP 1939 1957 $87 B
Intel 1968 1971 $83 B
MSFT 1975 1986 $173 B
Apple 1976 1984 $91 B
Oracle 1977 1986 $91 B
Cisco 1984 1990 $99 B
Google 1998 2004 $119 B

These are the true giants of Silicon Valley (plus our favorite giant from up north), all companies that have spent a goodly amount of time with a market cap over $100 billion.  Comparing any private company to these monsters is a fool’s game; it’s like comparing a college basketball player to Michael Jordan.  Actually it’s worse than that – projecting athletic talent is considerably easier than projecting $100+ billion success for a company, because there are orders of magnitude more points in a company where externalities and luck play a tremendous factor.  (I always like to recall that Intel and Microsoft were initially made giants not by their own strategy, but by the strategic decision made by IBM when it chose to outsource production of its PC microprocessor and operating system.)  These true giants are Black Swans, by definition nearly impossible to predict, and useless as comparative points except when holding both points in retrospect.

If you must make comparisons, it’s more realistic to compare to the next tier, for example:

Company Year Founded Year IPO Feb 09 Market Cap
Sun 1982 1986 $4 B
Amazon 1994 1997 $44 B
Yahoo 1995 1996 $19 B
eBay 1995 1998 $18 B

I could put a dozen more on that list, but I’ll let you pick your own peer group.  Any one of those companies (yes, even that one that you think is irrelevant/dying/dead) could still take the multi-decade journey to giant-hood.  But even if they never do, they’ve accomplished something extraordinary in growing up from a tiny Silicon Valley startup (with one favorite from up north) to an independent company, a true a difference-maker in technology and the daily lives of millions upon millions of people.  Because they haven’t had such outstanding externalities and luck in their favor, they are a better basis for comparison.