startuppeople

Yesterday Techmeme launched a redesign. I like it. Nicely done Gabe.

I thought I'd use this news as a jumping off point to talk about my favorite feature on Techmeme. When a news event happens, I like to see various pundits' take on it without having to click thru and read every post. Techmeme has always done this better than any other news service. Let's take this news that Twitter can now comply with local censorship laws and takedown notices without taking down a tweet globally (good news in my mind).

It looks like this in Techmeme:

But if you click on the down arrow on the left of the news item, you get a "blown out" version of the news story which looks like this:

Granted that these are only headlines and they can't and don't give you a full sense of the take that each of these writers has on the news. But a quick scan of the tone and tenor of the headlines will tell you quite a bit. And when you've got 30 seconds to take a quick look at what's going on in the tech world, that's worth a lot.

I use this feature often. At least once a day. Many times way more than that.

For tech news, I've tried pretty much everything new that comes along, and for the past four or five years now, nothing beats the duo of Techmeme and Hacker News for me. Each has its benefits and together, you can get a great sense of what is going on in tech in real-time all the time. Thanks Gabe and Paul for building these services and maintaining them.

Blog polling widgets have been around a long time. I've tried out a few of them on AVC over the years. And polling has never taken off as a major form of engagement on blogs (as has commenting, liking, tweeting). I'm curious why that is so.

I met with a young man named Max Yoder yesterday who has built yet another polling widget. He calls it Quipol. I figured I'd give it a test run with the AVC community. And let's get right to it with the question of the day:

Let me know what you think of Quipol and blog polling widgets in general in the comments.

I read something today that I wish I had written. So I am going to cross post it. This post comes from Noah Millman and it is about the lame textbook thing that Apple launched recently. With that intro, I'll shut up and let you read Noah. The original post is here.

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I see that Steve Sailer and Matt Yglesias are both wondering why Apple’s iPad textbook initiative is so lame. Sailer wonders why Apple isn’t exploiting the interactive possibilities of the tablet to make textbooks much more effective. Yglesias wonders why Apple (or the Gates Foundation) don’t just give textbooks away for free, and thereby both increase the appeal of the tablet and reduce costs to hard-pressed school districts.

The answer is: Apple is a big company, and the Gates Foundation is a huge philanthropy. Large institutions are not the places to turn to, generally, for disruptive innovations.

Apple has no reason to go head-t0-head with textbook publishers, any more than it has any reason for going head-to-head with music labels or book publishers. It’s a much sounder business strategy for Apple to coopt these complementary businesses and make them dependent on Apple. Which is precisely the strategy that Apple has pursued.

The Gates Foundation is a somewhat more complicated story. In their case, I’d say the complementary relationship is between the foundation and the foundation’s clients – and their clients are education reformers, not education professionals. Simply giving textbooks away for free would upset an incumbent that the reformers are not particularly targeting, and would not put in place any structure for the creation of new textbooks. And incubating new products really is beyond the scope of what the foundation does.

Within the world of regular public school education, educational professionals have distinctly limited ability to express any kind of preferences – and the Bush-era education reforms have reduced this scope even further. The target market for textbook publishers is the politicians who set the curriculum for the nation’s largest school systems where that curriculum is set statewide: California and Texas. It matters very little what an individual teacher in Houston or Oakland wants or needs – or thinks their students need.

If you want to see disruptive change in the textbook market, then, you’d need to identify both a potential supplier of the product with no stake in propitiating the incumbents, and a buyer of the product for whom the product solves a problem.

My suspicion is that your best bet would be to have the supplier and the purchaser be, in some sense, the same entity. And I can think of two parts of the educational landscape where that situation might obtain: the KIPP network of high-performing charter schools and the home-schooling movement.

KIPP has the advantage of having a centralized structure and access to funding to implement a strategy. They already create their own curricula. Creating their own textbooks would be the logical next step. If the educational advantages Sailer sees as the potential in tablet-based study really exist, KIPP – which is already very data-driven in its approach to education – would be ideally placed to realize them. Similarly, if the cost advantages exist – initially, reduced spending on textbooks; over the longer term, reduced spending on teachers, as highly interactive tablets made it possible to stretch teachers over larger groups of students – KIPP actually has the incentive to realize these as well. One downside might be that KIPP would have an incentive to retain intellectual property in anything they created – but if it was successful, it would probably spur other charter networks to respond, and the smaller networks would be well-advised to work together rather than independently, simply for reasons of scale, and therefore to do something more open-sourced.

The home schooling movement, by contrast, has no access to funding nor any decision-making structure – but it has the advantage of having a much larger network of individuals potentially capable of committing resources to the project. One could imagine a Wikipedia-style process of textbook creation, where hundreds of thousands of home-schooling moms and dads donate a small portion of the time they already spend on teaching their kids to producing or editing material for the virtual textbooks they all use. You would, of course, need some kind of central structure to handle the programming – but even much of this could be relatively decentralized once the essential framework was in place.

Working either through the charter movement or the home schooling movement would enable a tablet textbook project to start small, yield immediate returns to participants, and scale easily, while largely ignoring the interests of incumbent institutions. And it wouldn’t require the sponsorship of an Apple or a Gates Foundation. Working through the regular public school system, which would certainly require some kind of megadollar sponsorship, would start big, would have to coopt the interests of incumbent institutions, and would make it difficult to impossible to actually yield quick returns to the most important participants: the teachers and students in the classroom. Which, unfortunately, has been the fate of all too many big-think reform proposals for the regular public schools. Much more sensible to build something in more natural laboratories for innovation, and then figure out how to “port” an already proven solution to the regular system.

This past Sunday afternoon I had the pleasure of being on the judges panel at the NYC Cleanweb Hackathon at NYU ITP. There were thirteen hacks presented to the judges. Of them, probably half had incorporated the "green button" for getting your utility data into their app.

The Green Button is an initiative promoted by Aneesh Chopra, the CTO of the United States. In a speech last fall, he challenged the utility industry to come up with a simple way to allow consumers to access their utility data. Last week, three big California utilities announced they had made the Green Button available on their websites.

And by sunday, the green button was in a half a dozen web and mobile apps that had been created over the weekend. This is the kind of innovation that gets me excited. The Green Button is like OAuth for energy data. It is a simple standard that the utlities can implement on one side and web/mobile deveopers can implement on the other side. And the result is a ton of information sharing about energy consumption and in all liklihood energy savings that result from more informed consumers.

The Green Button follows on the success of the Blue Button, a similar initiative that allows veterans to get at their medical data.

I'm a big fan of simplicity and open standards to unleash a lot of innovation. APIs and open data aren't always simple concepts for end users. Green Buttons and Blue Buttons are pretty simple concepts that most consumers will understand. I'm hoping we soon see Yellow Buttons, Red Buttons, Purple Buttons, and Orange Buttons too.

Let's get behind these open data initiatives. Let's build them into our apps. And let's pressure our hospitals, utilities, and other institutions to support them. I'm going to reach out to ConEd, the utility in NYC, and find out when they are going to add Green Button support to their consumers data. I hope it is soon.

Now that I've completed three posts on The Management Team over the last three MBA Mondays, it's time for four or five guest posts on this topic. The first one is from Matt Blumberg, CEO of our portfolio company Return Path. I've been on Matt's board for over a decade and I've watched him develop into one of the finest managers I've had the pleasure to work with. Here are Matt's thoughts on this topic.

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When Return Path reached 100 employees a few years back, I had a dinner with my Board one night at which they basically told me, “Management teams never scale intact as you grow the business.  Someone always breaks.”  I’m sure they were right based on their own experience; I, of course, took this as a challenge.  And ever since then, my senior management team and I have become obsessed with scaling ourselves as managers.  So far, so good.  We are over 300 employees now and rapidly headed to 400 in the coming year, and the core senior management team is still in place and doing well.  Below are five reasons why that’s the case.

1.       We appreciate the criticality of excellent management and recognize that it is a completely different skill set from everything else we have learned in our careers.  This is like Step 1 in a typical “12-step program.”  First, admit you have a problem.  If you put together (a) management is important, (b) management is a different skill set, and (c) you might not be great at it, with the standard (d) you are an overachiever who likes to excel in everything, then you are setting the stage for yourself to learn and work hard at improving at management as a practice, which is the next item on the list.

2.       We consistently work at improving our management skills.  We have a strong culture of 360 feedback, development plans, coaching, and post mortems on major incidents, both as individuals and as a senior team.  Most of us have engaged on and off over the years with an executive coach, for the most part Marc Maltz from Triad Consulting.  In fact, the team holds each other accountable for individual performance against our development plans at our quarterly offsites.  But learning on the inside is only part of the process.  

3.       We learn from the successes and failures of others whenever possible.  My team regularly engages as individuals in rigorous external benchmarking to understand how peers at other companies – preferably ones either like us or larger – operate.  We methodically pick benchmarking candidates.  We ask for their time and get on their calendars.  We share knowledge and best practices back with them.  We pay this forward to smaller companies when they ask us for help.  And we incorporate the relevant learnings back into our own day to day work.

4.       We build the strongest possible second-level management bench we can to make sure we have a broad base of leadership and management in the company that complements our own skills.  A while back I wrote about the Peter Principle, Applied to Management that it’s quite easy to accumulate mediocre managers over the years because you feel like you have to promote your top performers into roles that are viewed as higher profile, are probably higher comp – and for which they may be completely unprepared and unsuited.  Angela Baldonero, my SVP People, and I have done a lot here to ensure that we are preparing people for management and leadership roles, and pushing them as much as we push ourselves.  We have developed and executed comprehensive Management Training and Leadership Development programs in conjunction with Mark Frein at Refinery Leadership Partners.  Make no mistake about it – this is a huge investment of time and money.  But it’s well worth it.  Training someone who knows your business well and knows his job well how to be a great manager is worth 100x the expense of the training relative to having an employee blow up and needing to replace them from the outside.

5.       We are hawkish about hiring in from the outside.  Sometimes you have to bolster your team, or your second-level team.  Expanding companies require more executives and managers, even if everyone on the team is scaling well.  But there are significant perils with hiring in from the outside, which I’ve written about twice with the same metaphor (sometimes I forget what I have posted in the past) – Like an Organ Transplant and Rejected by the Body.  You get the idea.  Your culture is important.  Your people are important.  New managers at any level instantly become stewards of both.  If they are failing as managers, then they need to leave.  Now.

I’m sure there are other things we do to scale ourselves as a management team – and more than that, I’m sure there are many things we could and should be doing but aren’t.  But so far, these things have been the mainstays of happily (they would agree) proving our Board wrong and remaining intact as a team as the business grows.

So we learned last week that the Republican front runner Mitt Romney pays an effective Federal tax rate of about 15%. And guess what? So do the Gotham Gal and I.

That's because the vast majority of Mitt Romney's income comes from capital gains on investments and the same is true of my family's income.

There is a difference between Romney's capital gains and mine. I suspect that his capital gains are mainly real gains on investments he made with his own money. Mine are mostly capital gains our firm has made with other people's money. This is the carried interest capital gains discussion. I've been loud and clear that I don't agree with the current policy on carried interest taxation and I hope that the law is changed on carried interest. It will cost our family a lot of money in increased taxes but it is the right thing to do.

But there is a bigger issue here and that is whether it is good policy for someone of Mitt Romney's or my wealth to pay a lower tax rate than the average hard working american citizen. The theory in taxing capital gains at a lower rate than ordinary income is that the wealth that was invested that produced the capital gains has already been taxed once when it was earned. And it is also believed that a lower tax rate on risky investments vs safe investments (like bank deposits) provides an incentive to make those kinds of investments. I've long been a fan of these arguments and have supported the idea of a lower capital gains tax rate.

But I am bothered by the unfairness of the situation. When I get a big distribution from our funds, I always ask my accountants how much of the distribution I should set aside for federal, state, and local taxes. The answer is usually somehting like 28% (the difference between 28% and 15% is the state and local taxes). And then I often think of my two brothers who probably pay 40-50% of their income each year in federal, state, and local taxes. It just seems so unfair.

And so lately I've been more and more attracted to the idea of a flat tax where everyone pays the same tax rate on income above a minimum amount. In this model, we would eliminate all tax deductions; for mortgages, charitable giving, for medical expenses, etc. There would be no difference in tax rates for ordinary income vs other forms of income (ie capital gains).

If we did that maybe everyone could pay a 15% tax rate like Mitt Romney and our family does. We would have a fair tax system.

I've heard a number of arguments over the years against a flat tax. One is that a flat tax is regressive meaning that it penalizes lower income earners by taxing them at the same rate as higher earners. But I think we are all coming to realize that the current system may be even more regressive since most wealthy people find ways to pay lower tax rates.

Another argument against the flat tax is that eliminating deductions will cause massive disruption in markets and society. There will no longer be an incentive to own a home vs renting one. There will no longer be an incentive to make charitable deductions. The list goes on and on because our current tax system is chock full of such incentives. I think it would be good long term policy to eliminate all of these incentives and just let the markets work without tax incentives but clearly deductions would need to be phased out over a long time period to reduce the severity of the shocks that eliminating deductions would create.

The President's "Bipartisan Commision On Deficit Reduction" made a lot of noise over a flat tax. And many of the current Republican presidential candidates are in favor of a flat tax. It seems like we may have reached a point in our political discussion where we can seriously consider a flat tax. I would be excited to see that happen.

On my way from a breakfast meeting to the office yesterday I got a phone call on my cell phone with a 202 area code on it. I picked up the call and on the other end of the line was someone in Congress who I've known for a decade or more. He told me that the Senate Majority Leader Harry Reid was going to pull the PIPA bill in about thirty minutes. He also told me that the technology/Internet community had done a great job fighting the SOPA and PIPA bills and that the fight was over for now. I thanked him for the call and then I told him that we need to find a different way to address the online piracy problem because otherwise the technology community was in for a game of whack a mole with the content industry every year or two with our elected officials getting caught in the middle. He agreed.

I'm not in the mood to celebrate in the wake of the news that SOPA and PIPA are dead. Because the online piracy issue is still very much on the table and the content industry is not going to just walk away from the it. And as I've said in most every post on this issue, I am sympathetic to their concerns.

I think what Anonymous did in the wake of the Megaupload shutdown is deplorable and I am not a fan of vigilantes and mob rule. In stark contrast,  I am extremely proud of the online demonstrations we all participated in over the past month to change the mood in Washington over the two bills. We showed that the Internet can be a medium for "peaceful demonstration" and we do not need and should not resort to stunts like Anonymous pulled this week.

I'd like to make a couple points about this whole SOPA/PIPA fight and then go on to where we go from here.

First, the Internet community's opposition to these two bills was never coordinated by a central organization. When my partner Albert first raised the alarm bells on what was then called COICA back in September 2010, we could not find anyone other than a few policy wonks who had this on their list of issues. Our industry does not have an MPAA or an RIAA. For the past 15 months we have been working with various individuals, a few companies, and a few advocacy groups to fight these bills. We found each other over the Internet, coordinated efforts (or not) over the Internet, and used the Internet to protect the Internet. The opposition was chaotic, distributed, diverse, uncoordinated and extremely effective in the end. Just like the Internet.

Second, these two bills were drafted by the MPAA and the RIAA and walked into Washington without an iota of conversation with the technology industry. I can't tell you how many Senators and Representatives have told me that they were told by the MPAA and the RIAA that the technology industry was on board and that these issues would not impact the Internet and tech community adversely. This is no way for one industry to propose that Congress regulate another industry. I think it is absurd that one industry would have the arrogance to think it is appropriate to ask Congress to regulate another industry for them. And yet that is what went down on these bills.

So where do we go from here? I think we should come up with an entirely new framework to think about online piracy. The PIPA/SOPA framework was litgation heavy and very invasive. It was "we are going to do this to you." It's not surprising the tech industry didn't like it one bit.

We need a new framework that is based on a shared set of goals and objectives. The tech industry will benefit if the content industry makes more money online. And though they seem not to believe it, the content industry can make more a lot money online. So we should be able to get alignment around that issue. We can help each other. The tech industry has already helped the content industy many many times. On that topic, I love this Nat Torkington rant:

All I can think is: we gave you the Internet. We gave you the Web. We gave you MP3 and MP4. We gave you e-commerce, micropayments, PayPal, Netflix, iTunes, Amazon, the iPad, the iPhone, the laptop, 3G, wifi--hell, you can even get online while you're on an AIRPLANE. 

So I've been busy over the past few days thinking about a framework that is based on a partnership between the content and technology industries. I have a bunch of ideas on this and I've heard a number of good ideas from others in the past few days as well. I have no doubt that a group of leaders from the tech community would be happy to sit down with the content industry and come up with an entirely new way to think about and address online piracy. But before that happens, the content industry, as represented by the MPAA and the RIAA, needs to understand that a litigation heavy invasive approach will not fly and they need to forget about that framework and come ready to come up with an entirely new one. I hope they can do that.

Over the past two weeks via my partnership with Microsoft and Office Web Apps, I’ve provided templates of models for you to create enchanting PowerPoint pitches, Word business plans, and Excel financial models. They are all available for you to download from my SkyDrive account. I hope these documents and blog posts help you save a boatload of time and increase the quality of your efforts.

I leave you with two sets of top ten lies: one of entrepreneurs and one of investors so that you know what not to say and what not to believe.

Top Ten Lies of Entrepreneurs

1. “Our projections are conservative.”

2. “Jupiter says our market will be $50 billion in ten years.”

3. “Several Fortune 500 companies are set to do business with us.”

4. “No one else can do what we’re doing.”

5. “Hurry up because other investors are about to do our deal.”

6. “Our product will go viral.”

7. “The large companies in our market are too big, dumb, and slow to compete with us.”

8. “Our management team is proven.”

9. “We filed patents so our intellectual property is protected.”

10. “All we have to do is get 1% of the market.”

The average number of these ten lies that I hear in most pitches is ten. At the very least, tell investors new lies.

Top Ten Lies of Investors

1. “I liked your company, but my partners didn’t.”

2. “We are patient investors who want to help you build a great company.”

3. “If you get a lead, we’ll invest too.”

4. “There are no companies in our portfolio that conflict with what you’re doing.”

5. “Show us some traction, and we’ll invest.”

6. “We love to co-invest with other firms.”

7. “We’re investing in your team.”

8. “We have lots of bandwith to dedicate to your company.”

9. “This is a plain, vanilla termsheet.”

10. “We will get other companies in our portfolio to work with you.”

Do you know what the difference is between the lies of entrepreneurs and the lies of investors? The investors have money.

It’s not all bad news. Think of everything that an entrepreneur needs (tech ones, anyway), and you’ll see that most things are free or cheap.

• Marketing: use blogs and social media to promote your products.

• Tools: most tools are Open Source and free. Microsoft offers free versions of applications like Word, Excel and PowerPoint in the cloud!

• Infrastructure: More cloud goodness—you don’t have to buy servers anymore.

• People: callous for me to say, but in a recession, people are free or cheap.

• Office space: what office space? You can work out of your garage (like David Hewlett and Bill Packard) or just form a virtual team.

The bottom line is this is one of the cheapest times to be an entrepreneur, so go into your garage and start prototyping. Then when you need to create enchanting documents to raise money using PowerPoint, Word, and Excel, we’re all set to help with Office Web Apps, SkyDrive, and my templates.

Promotional consideration paid by Microsoft.

Now this is a fun project. I’m helping Sam Adams “tap” the knowledge of beer drinkers and crowd source its next brew. Join the party by getting the app and designing your beer:

The final brew will be released in Austin in the first week of March.

#sponsored

In our last fun friday we talked about exercise routines. The discussion in the comments was terrific and many connected exercise to diet and nutrition, which is totally logical. So I thought we'd just move on to diet & nutrition as our next fun friday.

The way fun fridays work is I talk a little bit about my current favorites in a topic category (books, movies, music, exercise) and then I turn it over to all of you to discuss in the comments. It is fun and I enjoy these friday discussions very much.

When it comes to diet and nutrition I am blessed in the sense that I have a fast metabolism and I have always been able to eat whatever I want and not gain weight. I was thin as a rail in college. I've added a bit of weight since then, maybe 10% of total body weight. A fast metabolism is a good thing for me because, as many of you know, the Gotham Gal is a very good cook and food is a big deal in our household.

I grew up in a household full of people built just like me. Diet was never a big issue in our family. My mom's advice was always "moderation in everything." We always had sweets, sugar, fatty food, etc in our diets but we didn't eat a lot of it. We didn't eat a lot of anything.

Then one day when I was about 12, my dad came home and said that his doctor told him his cholesterol was too high. My dad takes stuff like that seriously and so he (and our entire family to a lesser degree) went on a low cholesterol diet. We cut back on eggs, red meat, fatty foods, etc. To this day I still think twice before putting anything like that in my mouth. But I do put "stuff like that" in my mouth. My guiding light is "do everything, but do it in moderation." I think my mom would be proud.

Living with the Gotham Gal for 30 years now has brought a whole different approach to food to my life. We always have food out in our kitchen. This past weekend we had a chocolate cake. Two nights ago it was homemade "Hostess Ding Dongs" in our kitchen. Both came from a friend of ours who just had to share her amazing creations. And they were amazing. We keep ice cream in the freezer, usually from some boutique gourmet provider. And it seems like we always have homemade chocolate chip cookies in the cookie jar. My kids' friends like to come to our house.

We eat dinner at home most nights during the work week. But we go out to eat a fair bit too. You can read Gotham Gal's blog to get a sense of it. Our family are foodies and I very much include my kids in that description. We eat pretty much everything and we enjoy food.

But that does not mean our diets are bad. The Gotham Gal has counted calories and fat in her food intake since long before I knew her. And our kids know how to count calories and what is good and what is not. My girls like to go on juice cleanses and my oldest daughter avoids fried foods and red meat in her diet (with an occasional steak just because).

So that's my approach to diet and nutrition. Which is basically no specific approach. I eat everything but try to do it in moderation. I try to avoid the bad stuff most of the time. But I let myself enjoy it every now and then. I just had my annual physical and my doctor gave me a clean bill of health. At age 50, that feels good.

So with that backdrop, I'd love to hear what all of you do.

Last week I stopped by our portfolio company Boxee's offices to catch up with the team. On the way out, they gave me a "dongle" and an antenna to put into the back of the Boxee Box in the conference room in our office. I did that earlier this week and now we have live HD TV coming into our conference room over the air.

Boxee showed this off at CES last week and here's a short one minute video from The Verge showing how it works (with a 20 second pre-roll).

When I set this up in the USV conference room, the Boxee Box found 53 channels being broadcast in HD over the air. We have the basic broadcast channels, CBS, NBC, Fox, ABC, plus channel 9, 11, 13, and a whole bunch of other channels I never knew were broadcast.

If you don't have cable and are relying on the Internet for your video entertainment, this is a great way to get additional content for free. It reminds me of my childhood when we connected a TV to an antenna and turned it on and we were watching TV coming in over the air into our home.

The Boxee Live TV dongle and antenna will be available shortly. You can pre-order it here. You do need a Boxee Box to make this work.

I hear a lot of commentary in the Boston area about how VC's have needed to replace angels in seed rounds.  In an area with some much technology wealth created over the years I always found this puzzling.

Angel groups in the Boston area are a force.  My simple question today is : do they work or are they de facto doing a disservice to the ecosystem ?

Entrepreneurs complain loudly about angel groups.  It seems that the typical process involves endless due diligence and months of process for check sizes that often end up being disappointing.  The experience leaves a sour taste for many, and the complexity of dealing with the groups requires dedication and even expertise in navigating what is perceived to be a tortuous process.  Angels should be expert funding available fast on the back of the demonstrated expertise of strong founders.  Instead they're painful and convoluted education processes.

The quick list of gripes include:

• worse overhead than VCs for a fraction of the capital
• tortuous diligence process
• slow consensus building and decision making
• investor overhead in refinancing
• difficulty in accessing the right talent / mentors post financing

The irony or the shame of this situation is that angel groups are full of individual stars; people who have deep expertise and accomplished much more than I ever will in my lifetime.

If you contrast this with say Dharmesh Shah, Dave Balter, Joe Caruso, Ty Danco or Jennifer Lum, you see fast acting money that gets engaged and delivers ad hoc but meaningful expertise, and delighted entrepreneurs.

I get the logic from an angel standpoint: carefully dip your toe into angel investing, get structure around the process and of course network with like minded individuals.  The issue is that it simply does not seem to work that well.  I suppose the root cause is that creating consensus from a large population of diverse and talented people with strong opinions is like herding Cheshire Cats.  I talk from experience: the investment committee of Atlas once numbered over 10 partners and it was completely suboptimal.  The process seems to get much worse when angel groups collaborate, with timelines extending for months in many cases.

I talked to one awesome individual who is a member of one of these groups and is an expert on databases.  His question to me was" "how do i get exposure to medical devices on my own ?"

My response to this is:

• You should not use angel investing to get exposure to sectors you know nothing about
• If the angel club process is that painful you are self selecting out of the best companies
• You would make way more money going deep on a segment you know better than anyone
• You could actually help companies and have more fun doing it

My thesis at this stage is that angels should break free of angel groups and invest in the stuff they know best, and make a real difference to the companies that they fund.  I am sure there are many examples of successes that started with angel group funding, but in the age of transparency that we live in, the model does not seem to stand up to the test of common sense.

By empowering a thousand strong angels who leverage what they know, we would get a much more vibrant and efficient angel ecosystem.  We'd bring fluidity into the system.  Jeff Clavier and others showed the way in terms of demonstrating how you should put together groups of individuals who each bring a facet of expertise to a startup.

My advice; get on Angellist, showcase what you are good at and start targeting the best next gen companies in spaces that you know.  Four $25K checks in A+ companies that you can help would make a world of difference.

This is the third post in my Microsoft partnership, and it’s all about numbers. The topic is crafting your financial forecast to include in your pitch. Bill Reichert, my partner at Garage Technology Ventures, created an Excel model and wrote this blog post. There’s a lesson in this too: Get the best person for the job. His grasp of financial models and how to present them exceeds mine by two orders of magnitude.

The Purpose of Financial Projections

When it comes to financial projections, there are two types of entrepreneurs: first, the “visionary entrepreneur” who considers financial projections silly, so she makes up numbers that look good to investors; second, the “intense entrepreneur” who develops an 10,000 cell spreadsheet that includes the number of licenses of Microsoft Office that he needs to buy in year five.

If you are the first type of entrepreneur, you run the risk that the investor won’t trust you with his or her money. This type of entrepreneur often alienates investors because of his cavalier attitude. If you are the second type of entrepreneur, you run the risk that the investor will think that you actually believe your projections.

When it comes to financial projections, however, there is only one type of investor: people who don’t believe your financial projections, whatever they are.

So what’s the right balance of vision versus detail? The point of financial projections is to tell a story with numbers—a story about opportunity, resource requirements, market forces, growth, milestone achievements, and profits. Your job is to create a numerical framework that complements and reinforces the vision you’ve painted with words.

The investor isn’t interested in the precision of the numbers, but he or she is interested in what the numbers say about the economics of your business, and what they say about your understanding of your business. The goal is to tell a credible, as well as exciting, story about what your business could become.

To be credible, your numbers have to make sense on the first review. If you are suggesting that your company will grow faster or be more profitable than any company in history, you will lose credibility. Your numbers must survive simple questioning:

• Do the capital requirements shown in your projections match the funding you are asking for?

• Do you know how many customers you have to land to generate the revenues you are projecting?

• Do you know how long it takes and how much it costs to acquire a customer?

• Do you know what resources will be required to support customers?

• Do you know how much you will have to spend to stay ahead of the competition with your product or service offering?

How to Use the Template

With that introduction, here is an Excel template to help you present your financials to investors. There are two main sections to the model: one for presenting your five-year financial projections and one for presenting your twelve-month operating plan.

The reason to develop a financial model of your business for five years going forward is to make explicit the driving factors behind your revenues and expenses as you pass through several stages of product development, market penetration, and organization growth. As they say, if you don’t know where you’re going, any road will get you there.

The point of the templates is not to suggest a rigid structure that you should force your financials into but rather to show the level of detail you should have in your summary. Your driving metrics are going to be specific to your business. It should be clear how they drive revenues and expenses.

Most important, you need to show investors how you will grow your company from the bottom up—sale by sale, employee by employee—rather than building a model from the top down. No one believes that a model built on getting “only one percent of the target market” is a credible plan.

You won’t be presenting your operating plan to investors in your first few meetings, but you’d better understand how you are going to run the business once you raise capital. A well thought-out operating plan will reflect your ability to allocate resources—people and money—to the highest priority objectives.

Building from the Bottom Up

The problem with financial accounting, however, is that it forces you to present your numbers using big company functional categories, such as sales, marketing, engineering, general, and administrative. But startup companies really operate as projects, with most projects running across functions.

You need to run your company as a startup, but present your financials using the standard framework of accounting. That means that the details of your operating plan will reside in a model built around the activities required to achieve your critical milestones.

That way, when an investor drills into why you are planning to spend money the way you are, you can frame your answer in terms of business priorities and deliverable milestones, rather than saying something like, “Most companies spend 25% on sales.”

Still, building your operating plan from the bottom up based on projects you need to execute is challenging. We all over-estimate how much we can accomplish in a month. Make sure your projections are tempered by real world experience. You want to over-deliver during those early years, not under-deliver. You don’t want to have to ask for more money before you’ve proven what you promised to prove.

Two Final Tips

First, don’t call your projections “conservative.” We refer to this as Entrepreneur Lie #1 (Guy will explain nineteen more lies in the next post in this series). Investors want to see a bold plan that is well thought-out and realistic, if everything goes reasonably well. They don’t want to see a delusional plan. Your job is to show that you have tapped a team with the experience and insight to justify your bold optimism.

Second, model your company on other real world successes. You don’t have to make up your business model. You should be able to model your financial projections on companies that have been successful before. Use the S-1 IPO filings of companies with business models similar to yours to get an idea of what is realistic. If your projections are wildly different than other highly successful companies, then your assumptions are probably off.

Conclusion

Your operating plan and your longer-term projections will evolve. You should be constantly engaged in testing your assumptions and adjusting your actions as you learn. The trick is making sure you are always using your precious resources—people and money—most effectively, for the highest return, rather than letting inertia perpetuate activities and expenditures that are not productive.

It’s obvious, but it’s true: The number one cause of failure is running out of money. And the number one cause of running out of money is the failure to grow revenues faster than you are growing expenses.

As much as your investors may tell you, “We back teams,” they expect you to make money. If you deliver on your numbers, you will become rich and successful. If you fall short, you won’t. So as much fun as it is to paint an exciting vision, at the end of each month, you will be measured on your ability to deliver what you promised.

Good luck!

——-

Read Guy’s previous posts in this series: “How to Create an Enchanting Pitch” and “How to Create an Enchanting Business Plan.” You can also download the PowerPoint and Word templates directly from Guy’s SkyDrive account.

Promotional consideration paid by Microsoft.

I love attending developer conferences. That's where I meet the most interesting entrepreneurs. I'd rather go to PyCon, RailsConf, or Node Summit than TED, Davos, or SWSW. In fact, I've never been to TED, Davos, or SXSW and don't have any plans to go to them. But developer conferences are a different story.

Just last week the Node Summit folks reached out to me on Twitter and I replied back.

@sechrest @NodeSummit someone should send me an email with the detials

— Fred Wilson (@fredwilson) January 5, 2012

Node Summit is next week in San Francisco and I've got board meetings both days in NYC so I can't attend. Bummer. I'm certain that there are a ton of amazing things going on in the Node.js world that I'd love to learn about.

Which leads me to the point of this post. Why aren't there any developer conferences in NYC? Why are they always in the Bay Area, Austin, New Orleans, Atlanta, Orlando, or some other location? NYC is an amazing place to visit. There are great nightlife opportunities for post conference networking and fun. There's a huge web/tech community here. And plenty of people who could help make up a great program for developers.

I know that City Hall has a program to put together hotel deals and venue deals to bring conferences to NYC. I'm going to work with a group of folks I know to help change this. If you think it's a good idea and can help, please contact me. I'm fed up with saying no to the conferences I do want to attend.

This is the third and final post on the subject of the management team. The final phase of company development I am going to cover is "building the business." Building the business largely means building the management team. They are one and the same.

Many founders are naturally talented at building product and building the user base. But building the company comes harder to them. I once discussed this with Roelof Botha and he made a fantastic suggestion. Founders should think of the business as yet another product they are building. It is the penultimate product they are building because from the company can come any number of additional products and any number of additional initiatives. The company, if built correctly, will be more important than any single product it can create. Think about Steve Jobs and all the amazing products he created. But Apple is the most important thing he created. So building the business requires a deep commitment from the founder. At the appropriate point, they must turn their attention to it and make it their top priority.

Let's quickly review the three stages so founders will know when they must turn their attention to building the company. The first stage is building the product. That is before product/market fit has been obtained. The second stage is building the user base. That is the period where you, either through organic growth or sales and marketing, build the user base to a level where you are certain you can build a long term sustainable business. Once you've built the user base to the point you know you can build a business, you enter the building the company stage.

As I said before building a company means building a management team. You start with a senior management team. You will need leaders for every part of the business. You will need a leader for your engineering team, you will need a leader for your product team, you will need a leader for your customer support/community team. You will need leaders for finance, marketing, sales, and business development. And to help you build and manage all of these people, you will need a experienced and talent HR leader.

Many founder/CEOs don't look for a partner to help them build the company. I think that is a mistake. The HR leader can be this person. But you need to recruit someone senior and experienced enough and make them an integral part of the senior team if you really want a partner to help build the company. I have also seen founder/CEOs recruit a strong number two, a President or COO, to help them with the company building piece. That can work too if the President or COO is a strong manager and team builder.

Companies are not people. But they are comprised of people. And the people side of the business is harder and way more complicated than building a product is. You have to start with culture, values, and a committment to creating a fantastic workplace. You can't fake these things. They have to come from the top. They are not bullshit. They are everything. There will be things that happen in the course of building a business that will challenge the belief in the leadership and the future of the company. If everyone is a mercenary and there is no shared culture and values, the team will blow apart. But if there is a meaningful culture that the entire team buys into, the team will stick together, double down, and get through those challenging situations.

Building a company is the most interesting work I know of. It is what every entrepreneur should set out to do. A company is a self sustaining entity that expresses the hopes, dreams, vision, values, and culture of the founder and leaders. It is an amazing thing and I have been blessed to watch a number of incredible companies be created.

Some startups won't reach this stage. That is the way it is. But for those that do reach this stage, I challenge all of you to step up to the work of company building with a passion and commitment for it. It will not be easy. It will be among the hardest things you will do. But the rewards are so great. Atoms and bits can be assembled to create fantastic things. But it is the things you build with people that are the most fulfilling of all.

The Gotham Gal has been under the weather this weekend. Last night we made soup for dinner and decided to sit on the couch and watch a movie and go to bed early. After dinner, we fired up Boxee and checked out Netflix. Nothing good there. Then we fired up the Mac Mini and checked out Amazon Instant Video. Nothing good there. Then we went to the Cable Set Top Box and checked out movies on demand. Nothing good there. Frustrated and unwilling and uninterested in heading to a "foreign rogue site" to pirate something good, we watched a TV show and went to bed.

Making movies is expensive and risky. I totally get that the studios need to make a lot of money on those movies to make their business model work.

But denying customers the films they want, on the devices they want to watch them, when they want to watch them is not a great business model. It leads to piracy, as we have discussed here many times, but more importantly it also leads to the loss of a transaction to a competing form of entertainment.

We would have paid good money to watch Sherlock Holmes or Tinker Tailor Soldier Spy. But it simply was not an option. So we went with a TV show that was free and then went to bed.

I am sure there was a time when scarcity was a good business model for the film industry. And I am sure that many of the leaders of the film industry came of age during that time. I understand their muscle memory in terms of the scarcity business model. But restricting access to content is a bad business model in the age of a global network that costs practically nothing to distribute on.

I've argued this point many times with film executives. They insist that they need their windows. They argue they need to manage access to their films to extract every last dollar from the market. That just doesn't make sense to me. If they went direct to their customers, offered their films at a reasonable price (say $5/view net to them), and if they made their films available day one everywhere in the world, I can't see how they wouldn't make more money.

I understand that many participants in the broader film ecosystem might do worse under this model. And I understand that moving to such a model will cause great disruption and pain to the broader film industry. But the studios themselves are likely to do better in a direct distribution model where they reach a broader market at lower effective prices to the end customer. This is what happens in digital distribution. Prices come down, markets expand, customers see lower prices and broader availability. Producers do better. Everyone else does worse.

But for some reason the fim industry doesn't want to move to the new model. They want to stick with scarcity. So they lost a transaction last night. And they lose transactions every night, to piracy, to competing forms of entertainment, and possibly to apathy brought about by frustration. Such a shame.

A number of popular websites will go dark this coming wednesday in protest of the SOPA and PIPA bills. Apparently Reddit, Minecraft, Craigslist and possibly Wikipedia will go dark. I want to join them.

I don't control my blog's web server. Typepad controls it. But I control my domain, AVC.com. I'm guessing the right thing to do is redirect where AVC.com goes on the 18th. But where should I redirect it to?

If you have good ideas, please share them in the comments.

And I'd encourage everyone who has a blog do to do the same.

And I'd encourage Twitter, Facebook, Google, YouTube, Vimeo, eBay, Amazon, Etsy, Tumblr, WordPress and Typepad to go dark too. I know most of these services won't do it. They need to be respectful of their users' needs. But it would sure make a strong statement about the importance of the Internet and the danger of messing with it.

A number of years ago, I wrote a blog post talking about the need to teach middle school and high school students how to write software. In the comments (where the good stuff happens), a Google engineer told me to go down to Stuyvesant High School and meet a teacher named Mike Zamansky who had taught him to write code in high school. So I did that and thus begun my education into the world of computer science education in the NYC public high school system. What I learned was that other than Mike's program at Stuyvesant and a few other small programs, there wasn't much. So began my quest to see more computer science and software engineering in the NYC public school system. 

Yesterday I went up to the Morris High School in the Bronx to watch Mayor Bloomberg's State of The City Address. In a speech that was largely about the intertwined nature of education and the economy, he announced that the city is opening The Academy For Software Engineering this fall in the Union Square neighborhood of New York City. It was a proud moment for me and Mike Zamansky, who was seated next to me on the stage.

I want to personally thank the Mayor, his education team led by Dennis Walcott, and his economic development team led by Robert Steel for adopting an integrated set of technology, economic development, and education policies and then aggressively rolling them out city wide. The Academy For Software Engineering is just one part of a much bigger strategy of developing new industries and new jobs in New York City and making sure we have the education resources, both in K-12 and at the college/university level, to properly staff these new industries.

The Academy Of Software Engineering is not a "specialized school." It will be open to all students as part of the high school admissions process in NYC. The City's goal (and mine too) is to open up opportunities for many more students than the small number of specialized schools can deliver. Hopefully the curriculum that is developed and teachers that are trained at the Academy will get rolled out into high schools all over the city in the coming years.

The Gotham Gal and I have provided the initial financial support to hire a new schools team and recruit a top notch Principal. But we do not want to be front and center in this story. The team at the DOE and City Hall that has brought this school to life and the Advisory Board of educators and industry leaders (led by Evan Korth of NYU) should get way more credit for what has happened to date. And we will need more financial and industry support (as well as a fantastic Principal) to make this school a success. So if you would like to join us in this effort, please email me via the contact link at the bottom of this blog and let me know how you would like to help. This is an ambitious effort and we will need it.