Top 10 reasons why entrepreneurs hate lawyers

Guest Author · January 14th, 2010

Thanks to Walker Corporate Law Group, a boutique law firm specializing in the representation of entrepreneurs, for supporting Venture Hacks this month. This post is by Scott Edward Walker, the firm’s founder and CEO. If you like it, check out Scott’s blog and tweets @ScottEdWalker. He’s also writing a new series on VentureBeat: Ask the attorney. – Nivi

Last week I offered 5 New Year’s resolutions for closing deals in 2010. This week, I thought I’d have a little fun and address the issue of entrepreneurs’ frustration with lawyers. A recent tweet from Bram Cohen, the inventor of BitTorrent, captures this frustration well: “Lawyers are like phone companies. Their bread and butter is in tricking you into racking up minutes.”

There’s a time in just about every entrepreneur’s career when he or she has wanted, in the words of Shakespeare, to “kill all the lawyers”. In the spirit of David Letterman, here are my Top 10 reasons entrepreneurs hate lawyers (I should point out that “hate” is too strong a word to describe the feelings of most entrepreneurs, but it makes for a catchier title than “dislike” or “complain about”). Click here for a brief video version of this post.

#10 – “Because they don’t communicate clearly or concisely”

Lawyers love speaking legalese and hearing themselves talk. I learned this first-hand as a corporate associate for nearly eight years at two large New York City firms. The tax lawyers, the employee benefits lawyers, the antitrust lawyers and the rest all spoke their own language. As a corporate associate in charge of quarterbacking transactions, I dealt with the various legal specialists and had to learn their mumbo jumbo. At times, I was as frustrated as the clients.

In the book Garner on Language and Writing, Former U.S. Solicitor General Theodore Olsen wrote, “Legalese is jargon. All professions have it. All professions use it as a substitute for thinking, and they all use it in a way that makes them appear to be superior. Actually, they appear to be buffoons for using it. The legal profession may be the worst of all professions in using jargon. It’s not necessary to communicate that way. You’re really not communicating, and you’re not really thinking.”

#9 – “Because they don’t keep me informed”

Lawyers often keep their clients in the dark. The real estate lawyer I hired to handle the sale of a property came highly recommended and seemed like a good guy. But I never knew what was happening throughout the process. I showed up to the scheduled closing only to learn it was postponed because of some wrinkles, including the buyer’s financing.

Tom Kane, a legal consultant, notes: “[A] failure to communicate often (as in constantly, frequently, persistently, regularly…) is not only foolish from a professional standpoint (as in discipline by the bar, keeping professional insurance premiums reasonable, and so forth), BUT it is just dumb marketing. One could even say it is marketing malpractice.”

#8 – “Because they are constantly over-lawyering”

Corporate lawyers often have a one-size-fits-all approach to deals. I recently represented a software company in a relatively small business sale (about $10 million). The buyer was represented by a large law firm that sent an acquisition agreement with three pages of environmental representations. When I explained that none of the environmental reps (or indemnities) was applicable to the target because it was a software company with one office lease, the corporate counsel got on a soapbox about his client “not assuming any environmental risks.” He even patched in the firm’s environmental lawyer to support his argument.

As John Derrick, a California appeals specialist, points out in his book Boo to Billable Hours, “Just as the cost-plus contractor has no financial incentive to keep the price down once hired for the job, so the lawyer who charges by the hour has little incentive — at least in the short term — to keep down the hours billed. To the contrary, the lawyer’s incentive is to bill as much as possible. The result can be unnecessary lawyering.”

#7 – “Because they have poor listening skills”

While lawyers love hearing themselves talk, they are often not very good at listening. Entrepreneurs want their lawyers to listen carefully to their concerns and address them appropriately; and they don’t want to be interrupted. I feel the same way, particularly when I am negotiating a transaction and trying to close a deal. I have sat in too many conference rooms negotiating with other lawyers as they played with their Blackberries and answered calls on their cell phones. This is not only rude, but it’s also bad lawyering.

From the Wabet Blog: “While great corporate lawyers have several different attributes, one stands apart from the rest: being an exceptional listener. First of all, it’s essential that the corporate lawyer is always ready and able to listen to the client’s description of [his or her] goals and needs. This sounds trite, but involves a set of skills that is more than simply hearing the words spoken or reading the words on the written page. The exceptional corporate lawyer looks beyond the words to delve into the facts, circumstances and other aspects that define the situation… Some of the skill is derived from training, but to a large extent the exceptional corporate lawyer applies his or her experience and the wisdom derived from that experience.”

#6 – “Because inexperienced lawyers are doing most of the work”

This is the dirty little secret at most law firms, particularly large ones. It even has a name: “leverage”. Law firms try to create the highest possible ratio of associates to partners. The higher the ratio, the more money the partners make. For most entrepreneurs, this generally means paying for the training of young associates.

I discuss this issue in my blog post Behind the Big Law-Firm Curtain: The Good, The Bad, The Ugly, “The reality is that the smaller the client — the smaller the transaction — the further down the ladder the work gets pushed at the big law firms. That’s the way these firms work. The entrepreneur may meet the senior partner at the first meeting for his $15 million acquisition or $3 million financing, but that partner then goes back to his office, calls the assigning partner and gets some young associate to start cranking out the work.”

#5 – “Because they spend too much time on insignificant issues”

Lawyers are notorious for failing to prioritize issues. This is especially true in small transactions. Since I moved to Los Angeles from New York City in 2005, I have handled predominately middle-market M&A transactions, financings and restructurings, a departure from the billion-dollar deals I handled in New York. I expected lawyers on these transactions to produce documents relatively quickly and focus on the key issues of a deal, particularly in venture capital transactions that benefit from standardized documents from the National Venture Capital Association. Instead, I found much of what I found in New York: lawyers spending needless time fighting over insignificant issues.

Foundry Group co-founder and managing director Jason Mendelson recently asked, “Why can’t lawyers know when to leave well enough alone and not feel like every piece of paper needs a mark up? Especially given how expensive lawyers are these days, why on earth would the culture of ‘must mark up documents to show value’ persist? (Answer: lawyers make more money). Especially in the world of venture financing, this is very frustrating.”

#4 – “Because they don’t genuinely care about me or my matter”

Too few lawyers are passionate about the practice of law. Before launching my own firm, I worked alongside many big-firm lawyers who didn’t seem to enjoy what they were doing. This translates to indifference toward clients.

This quote from Zappos CEO Tony Hsieh in a recent New York Times interview struck a chord with me: “I just didn’t look forward to going to the office. The passion and excitement were no longer there. That’s kind of a weird feeling for me because this was a company I co-founded, and if I was feeling that way, how must the other employees feel? That’s actually why we ended up selling the company.”

That’s how I felt at the law firms where I worked. There were a number of passionate superstars at each of my previous firms. But many others were burned out and just going through the motions. “Just another fuck’n deal,” one of my former colleagues once complained to me. That’s why I launched my own firm: to create a team of passionate, hard-working corporate lawyers who love what they do and love helping entrepreneurs.

#3 – “Because their fees are through the roof”

As I discuss in the introductory video on the home page of our website, the traditional law firm business model is broken. Legal fees have sky-rocketed over the past decade, with lawyers at some national firms billing more than $1,000 per hour and lawyers at smaller, so-called “regional” firms, billing more than $600 per hour (see “Law Firm Fees Defy Gravity, Annual Survey Shows”). The number one thing driving these outrageous rates: overhead. Traditional law firms simply pass huge overhead costs onto their clients — expensive office space with lavish artwork and dramatic views; large support staffs complete with librarians, and receptionists; and, of course, high-paid associates.

As a result of the recession and this broken business model, large law firms have recently shed associates in large numbers. LawShucks reports, “2009 will go down as the worst year ever for law-firm layoffs. More people were laid off by more firms than had been reported for all previous years combined.” But as Dan Slater argues in his recent New York Times DealBook post, Another View: In Praise of Law Firm Layoffs, “These layoffs — which in many cases have been paired with salary freezes or cuts and significant reductions in law school recruiting –­ are the best thing to happen to the legal industry in years. Call it a blessing amid recession. Start with the benefit to cost-conscious corporate counsel, who for too long have been bilked by a law firm compensation model that leads lawyers to prioritize their ‘hourly quotas,’ which determine year-end bonuses, over quality service.”

#2 – “Because they are unresponsive”

We’re all busy, but that’s not a viable excuse for failing to promptly return a client’s phone call or email. Clients may have differing definitions of “promptly,” but one business day is a good starting point. I experienced unresponsive lawyers as a client in personal matters, and I experience it as a corporate lawyer trying to close deals on behalf of my clients. Entrepreneurs crave immediacy (and so do I).

A recent deal I was on ran days late, requiring an all-hands conference call to finalize a few key issues in the acquisition agreement. I distributed an updated version the same day with instructions to the lawyer on the other side to call me for an update before he left for the weekend. The weekend passed. I heard back from the lawyer on Monday afternoon, over email — and he had sent a new blacklined version with all new issues raised.

#1 – “Because they are deal-killers”

Lawyers are often viewed as deal-killers because of their failure to set a positive tone and their annoying habit of raising all sorts of reasons why a particular deal won’t close or why a particular idea won’t work. One of the better lawyers I worked with at a firm often said: “Good lawyers are able to identify significant potential legal problems; great lawyers provide solutions to those problems.”

As James Freund, a professor and retired partner at Skadden Arps in New York, points out, “In a transactional practice, nothing comes easy. There are invariably two opposing points of view on significant issues, and the parties will even clash… over a circumstance that may never come to pass. Every disputed issue has to be resolved in order for the deal to take place. And the business lawyers bear the primary responsibility for getting it done. Viewed in its broader context, this activity falls under the rubric of problem solving. Unless you’re a problem solver, you’re unlikely to be an effective business lawyer. And the problems that stand in your way aren’t limited to transactional matters… they can involve dealings with regulatory agencies, tax planning, strategizing about how to protect intellectual property, and on and on.”

Conclusion

While much of this list includes criticisms of my industry, I hope it helps initiate dialogue among entrepreneurs and the lawyers who represent them, to improve the value of the services we offer. And, please remember, I put this list together in the spirit of having a little fun. What experiences have you had with lawyers? Feel free to share in the comments section.

If you like this post, check out Scott’s blog and tweets @ScottEdWalker. He’s also writing a new series on VentureBeat: Ask the attorney. If you want an intro to Scott, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

How to bring a product to market, Part 2 — after product/market fit

Nivi · January 12th, 2010

“Where the #@!*% is Part 2?”

That’s what I’ve been hearing since we published Part 1 of our rare interview with Sean Ellis.

Here’s part 2.

In Part 1, Sean discussed what you do before product/market fit: how to get there, how to measure it, and how to survey your users so you can improve fit.

In Part 2, he explains what you do after fit: optimizing your positioning, implementing a business model, and optimizing your funnel — all so you’re prepared to acquire users quickly and profitably.

If you don’t know Sean from his blog or tweets, he lead marketing from launch to IPO filing at LogMeIn and Uproar. His firm, 12in6, then worked with Xobni (Khosla), Dropbox (Sequoia), Eventbrite (Sequoia), Grockit (Benchmark)… the list goes on. 12in6 “helps startups unlock their full growth potential by focusing on the core value perceived by their most passionate users.”

This is the first time Sean has done an interview on the record. I’m really psyched he’s making his insights public — this interview is a must-listen.

SlideShare: How to bring a product to market, Part 2
Audio: Interview with chapters (for iPod, iPhone, iTunes)
Audio: Interview without chapters (MP3, works anywhere)
Transcript with highlights: Below

This inteview is free — thanks to KISSmetrics

We’re bringing this interview to you free, thanks to our sponsor KISSmetrics.

Sean is an advisor at KISSmetrics and we interviewed their CEO, Hiten Shah, in How to measure product/market fit with survey.io. KISSmetrics built survey.io with Sean — now they’re collaborating on KISSMetrics, a new tool for funnel optimization that we’ll discuss in an upcoming interview with Hiten Shah.

Prerequisites

You’ll get more out of this interview if you also read:

  1. Part 1 of our interview with Sean.
  2. The startup pyramid.
  3. We use several phrases interchangeably in the interview: Growth = scaling = acquiring customers with a known ROI. Preparing for growth = after product/market fit = optimizing promise + implementing economics + optimizing the funnel.

Outline

Here’s an outline and transcript of Part 2.

  1. What comes after fit?
  2. Prepare for growth
  3. a) Put the metrics in place
  4. b) Optimize the funnel
  5. c) Optimize the messaging
  6. Prepare for growth as quickly as possible
  7. Remove bottlenecks to preparing for growth
  8. Preparing for growth is not a low-burn period
  9. Preparing for growth doesn’t require growth
  10. Use a business model to grow quickly
  11. Grow and create new channels
  12. Nail the first user experience while preparing for growth
  13. Leave no room for the competition
  14. Marketplaces are an exception to this model
  15. Why Sean decided to focus on startup marketing
  16. Just scratching the surface

[Read more →]

No ocean boiling please

Nivi · January 8th, 2010

Tim Bray, co-editor of the XML specification:

“The Web These Days · It’s like this: The time between having an idea and its public launch is measured in days not months, weeks not years. Same for each subsequent release cycle. Teams are small. Progress is iterative. No oceans are boiled, no monster requirements documents written.

“And what do you get? Facebook. Google. Twitter. Ravelry. Basecamp. TripIt. GitHub. And on and on and on.

“Obviously, the technology matters… More important is the culture: iterative development, continuous refactoring, ubiquitous unit testing, starting small, gathering user experience before it seems reasonable.”

Italics mark my emphasis. Read the rest of Tim Bray’s Doing It Wrong. And my favorite book on iterative software development is Extreme Programming Explained, which you can find in our bookstore.

5 New Year's resolutions for closing deals in 2010

Guest Author · January 6th, 2010

Thanks to Walker Corporate Law Group, a boutique law firm specializing in the representation of entrepreneurs, for supporting Venture Hacks this month. This post is by Scott Edward Walker, the firm’s founder and CEO. If you like it, check out Scott’s blog and tweets @ScottEdWalker. – Nivi

It’s a new year — which means it’s time to make resolutions. Rather than write about my resolutions, I decided to put on my lawyer hat and advise entrepreneurs on what I think their New Year’s resolutions should be. During my 15-year career as a corporate lawyer (including nearly eight years at two major law firms in New York City), I have seen entrepreneurs make certain fundamental mistakes over and over again. So what better way to welcome in the new decade than to recommend the following resolutions to entrepreneurs…

Resolution 1: “I will create a competitive environment when I’m doing deals”

There is nothing that will give an entrepreneur more leverage in a negotiation than a competitive environment (or the perception of one). Every investment banker worth his salt understands this simple proposition. Not only does competition validate a firm’s interest, but also it appeals to the human nature of the individuals involved. Competitors can be played off each other and, as a result, the entrepreneur will be able to strike the best possible deal.

I learned this important lesson as a young corporate associate in New York City. As I discuss in my video post, Lessons Learned in the Trenches of Two Big NYC Law Firms, I recall having two M&A transactions on my plate: one was a divestiture — i.e., the sale of a division of a multinational corporation being auctioned by an investment bank; and the other was the sale of a private company to a competitor (with no i-bankers involved). In both deals, my firm was representing the sellers but, as we worked our way through the negotiation process of each deal, we ended-up with two completely different acquisition agreements with respect to the material terms.

In the auctioned deal, because the i-banker was able to play the prospective buyers off each other and create a competitive environment, the final agreement was extremely seller friendly and included broad materiality qualifications, a huge basket/deductible and a cap on seller’s liability of 10% of the purchase price. In the private-company transaction, however, there was only one prospective buyer — and the buyer’s principals knew that the seller was anxious to sell and thus were playing hardball. The deal terms ended-up being extremely buyer-friendly and included a large portion of the purchase price being escrowed and a cap on the seller’s liability equal to 100% of the purchase price.

The lesson learned is that you must create a competitive environment (or the perception of one) in order to have strong negotiating leverage. There is, however, one important caveat that entrepreneurs should keep in mind: this game must be played carefully and is better handled by someone with experience. The last thing an entrepreneur wants is to end up with is no deal at all.

Resolution 2: “I will leave my heart at home”

You have to think with your head, not with your heart — particularly when you’re doing deals. The best deal guys are masters at taking their emotions out of transactions and being extremely disciplined. They will just walk from a deal if they get out of their comfort zone (e.g., with respect to the price, risk profile, etc.), regardless of how much time and money they have spent.

On the other hand, most entrepreneurs become emotionally wedded to a particular transaction and are unable to maintain their objectivity as they move further along the deal process. They get all excited as soon as someone waves some money at them and allow themselves to get drawn into the money guy’s web. It is critical that entrepreneurs understand this dynamic. Entrepreneurs will generally be negotiating with guys on the other side of the table who are far more deal savvy than they are – venture capitalists, private equity guys, etc. – guys who are masters at playing on their emotions.

This is why it is so important for entrepreneurs to establish a game plan (i.e., dealbreakers) before the negotiating process begins and to have the discipline to stick to the plan and be willing to walk, if necessary. If an entrepreneur is seeking venture capital financing, he should sit down with his transaction team before reaching out to the VC’s to establish his dealbreakers with respect to key terms, such as valuation, the liquidation preference, board composition, etc. The same approach should be followed if he’s interested in selling his company: What’s the lowest purchase price you’ll accept? What’s the highest cap on liability you’ll agree to? Will you agree to escrow part of the purchase price? If so, how much and for how long? Once you establish the dealbreakers early on, you can take your heart out of the equation and think with your head.

Resolution 3: “I will work my balls off”

This is the advice a senior partner gave me when I was a young corporate associate at a major New York City law firm: “If you want to be a great lawyer, you have to work your balls off and make practicing the law the number one priority in your life.” He explained that this means everything else in your life has to be pushed aside, and you need to “work, work, work.” And when you’re not working, he added, you need to be reading treatises and articles discussing the deals you’re working on to get a deeper understanding of the significant issues. When I explained to him that, after three months, I had been working nearly every weekend and that my girlfriend was ready to leave me, he told me that I need to get a new girlfriend.

I received similar advice from Harry Hopman, my old tennis coach (and the winningest coach in Davis Cup history), when I was playing tennis in the minor leagues after college. He preached to me that: “It all comes down to one word — desire. How badly do you want it? How much are you willing to sacrifice?” And he was right. When I was traveling and playing tournaments in Europe and South America, I noticed that the best tennis players were generally the hardest working; the qualifiers were the ones going out drinking every night, not the top seeds. Sure there were exceptions — like John McEnroe — but the exceptions were rare.

I have seen this same pattern during my legal career: the most successful clients tend to be the hardest working. The private equity guys and hedge fund guys I represented in New York City were animals; working around the clock and cranking out deal after deal. I attribute a lot of their success to just plain hard work. In 2005, I moved out here to California to help entrepreneurs, and it’s been a mixed bag in terms of the work habits that I’ve seen. Some of my clients are intense and put in the long hours; others, however, are just dreamers — and they are the ones who struggle. In short, there are no shortcuts to success.

Resolution 4: “I will not let my investors screw me”

Here’s the advice I give all my clients to avoid getting screwed by their investors: do your due diligence prior to accepting any money. The number one mistake I have seen entrepreneurs make in any deal is the failure to investigate the guys on the other side of the table. Remember, you will, in effect, be married to your investors for a number of years. Accordingly, entrepreneurs must do what any bride or groom does prior to tying the knot — date for a while and, of course, meet the family.

What does this mean in practical terms? It means surfing the web and learning everything you can about the particular firm making the investment and, more importantly, the particular individuals with whom you are dealing (and who, presumably, will be sitting on your board for a number of years); it means breaking bread and having a couple of beers with the potential investors; and it means getting references and talking to other entrepreneurs and founders who have done deals with them. Issues to address include: How have they treated their other portfolio companies? Are they good guys or jerks? Can they be counted-on and trusted? Do they share your vision for the venture? Will they add significant value (e.g., through contacts, domain expertise, etc.)?

There is an outstanding video discussion on Mixergy.com between Brandon Watson, a smart entrepreneur (currently at Microsoft), and Andrew Warner, the founder of Mixergy, as to what could happen if you don’t adequately diligence your investors. Brandon is extremely candid and discusses how he got “bullied” by his board. Moreover, he expressly notes in the comments to that post that, “the diligence factor was that I knew them, but had never taken money from them. It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.”

Resolution 5: “I will retain a strong, experienced lawyer to watch my back”

This is obviously a bit self-serving, but every entrepreneur needs a strong, experienced lawyer to watch his back. There is just too much at stake for entrepreneurs to be (1) using sites like LegalZoom, (2) pulling forms off the web and trying to play lawyer, or (3) retaining the cheapest lawyer to save money. And as the Madoff affair and other recent high-profile cases demonstrate, there are a lot of unscrupulous characters out there trying to take advantage of unsophisticated entrepreneurs.

There are also more subtle potential problems entrepreneurs need to be protected from, including the inherent conflict of interest that certain service providers have. For example, entrepreneurs need to be careful with investment bankers, who generally only get paid if a particular deal closes. Indeed, a middle-market i-banker’s entire year can be made or broken based on whether or not he can close one or two deals.

Unfortunately, I experienced this issue first-hand shortly after moving to California when I got pulled onto an M&A deal in which an i-banker stuck his finger in my chest and warned, “We’re going to get this deal done despite you fucking lawyers.” He then later complained to the managing partner (who had the client relationship) that I was blowing up the deal because I had retained special environmental counsel from my old NYC law firm and we were pushing too hard on the environmental indemnity. Good work by the i-banker (and cheers to my former managing partner) for getting the deal closed by watering down the environmental indemnity: less than six months later our client’s company was indicted for environmental problems that it inherited as part of the acquisition.

The bottom line is that a strong, experienced corporate lawyer will sober the entrepreneur and lay out all of the significant legal risks in a particular transaction; he will then push hard to negotiate reasonable protections. If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections become a kind of insurance policy to the entrepreneur.

If you like this post, check out Scott’s blog and tweets @ScottEdWalker. If you want an intro to Scott, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

10 skills I look for before writing a check, Part 2: Perspiration and Appetite for Risk

Guest Author · January 5th, 2010

This post is by Mark Suster, a serial entrepreneur turned VC at GRP Partners. If you like it, check out Mark’s startup advice blog and his tweets @msuster. And if you want an intro to Mark, send me an email. I’ll put you in touch if there’s a fit. Thanks. – Nivi

There are 10 skills I look for in an entrepreneur before writing a check. They are not things that a VC can pick up on in 3 meetings spread out over 6 weeks, which is why I believe that raising VC is something you do over a long period of time, rather than just 2 months of the year. It’s best to meet VCs when you don’t need their money, so they can really get to know you.

In Part 1, I published the first five skills I look for in an entrepreneurs: tenacity, street smarts, resiliency, ability to pivot, and inspiration. I then elaborated on each of the topics in my blog series on VC startup advice.

You need the whole package

Through comment conversations with many of you I tried to emphasize that it isn’t enough to just have one attribute. Being tenacious without the mental flexibility to pivot based on market feedback is a disaster. Having street smarts with no inspirational ability to build teams can yield a great small business but will be difficult to scale into a large VC-backed business.

So we as VCs search for entrepreneurs/founders who have the whole package or as much of it as possible. Few people have it.

These are often amazingly talented people who are really strong in some of the skill areas and there is no shame in this. They often make great team members such as head of products, CTO, head of sales, CFO, etc. Great companies are comprised of great individual point people or functional leaders.

But when I’m looking to write my check I need to look in the eyes of the captain — the maestro who brings the whole orchestra together. And this is where the last post left off — inspiration.

6. Perspiration

Inspiration alone is not enough. We’ve all met inspirational leaders who talk the great talk. They get you all jazzed up after a company meeting but fail to get people to take action or to get things done themselves. Inspiration without perspiration is the equivalent of being a coach — not a CEO. Inspiration is part of what a VC provides, including goal setting, cheerleading, and challenging you. But the CEO needs to move the ball forward a few inches every day. Your VC can’t do that for you.

Celebrity CEOs

As a VC, I also see the apparently great leader who is a great public speaker and networker. He does the conference circuit but is somehow missing from running his company. Someone  else is left back at the ranch minding the shop. Worse yet, internal company decisions often aren’t made without the CEO around and in-fighting amongst the direct reports is not uncommon. Talk to any management team with a “celebrity seeking” CEO and you’ll see what I mean.

If you’re the guy at every conference don’t think that people don’t notice. I notice. I love hanging out with you. I’ll gladly drink a few beers with you. But when it comes time to cut checks I’m backing the guy who’s back at the office getting stuff done. I believe great leaders eschew the limelight in favor of building their companies. (before I get attacked in the comments section I’m not saying ZERO conferences — but you need to be selective.)

I would also say that I found some VCs can’t tell the difference because they haven’t been inside an early-stage company so these CEO’s are usually able to raise money. VC money does not equal success.

99% perspiration

The most poignant quote about perspiration comes from Thomas Edison, “Genius is one percent inspiration and ninety-nine percent perspiration.” For entrepreneurs it’s probably a healthy dose of both. I know you think a VC would take for granted that all entrepreneurs work hard but you can tell the difference between those that see their startup as merely a slightly longer version of their last big job and those that are maniacal and focused about what they’re doing.

My favorite example is Jason Nazar, the CEO of DocStoc. There’s no ‘off button’ on this guy. He’s always open for business. If I’m up super late trying to crank out work, I often get IM messages from Jason at 1am. He attends many social events in the LA scene but he seems to always go back to the office afterward. He’s at TechCrunch50 but he knows why he’s there, who he wants to meet, and what he wants out of those meetings. It’s not a boondoggle. It’s all part of his DocStoc obsession.

Starting a company isn’t a job

There was a recent TechCrunch UK article by an anonymous VC (yes, I think posting anonymously is chicken shit) that talked about the work ethic of European tech companies versus those Silicon Valley. I retweeted this article and got some people in Europe telling me it was unfair to stereotype this way. It’s not. The reality is that many Silicon Valley entrepreneurs/companies are more obsessive and maniacal about their businesses in a way that many others around the world are not. The local culture breeds it. I’m not saying it’s good or bad — it just IS. Europe isn’t the only place to garner criticism for not being driven enough. We get the same criticism in Los Angeles.

But that doesn’t have to be you. If you want a “job”, don’t be an entrepreneur. It’s not a job — it’s your life. I recently posted some VC startup advice about the need for entrepreneurs to have a bias toward action or JFDI (a play on the Nike slogan). Well the second sign I had on the wall of my first startup was SITE. Ask anybody who worked with me how seriously I took it. Sleep is the Enemy.

Success breeds competition — from around the world

For every person who comes into my office with a good idea I respond, “Don’t worry about your failure, worry about your success. If you fail, you move on. But if your good idea pops big time then, trust me, there will be three Ph.D.’s from Stanford sharing a cheap apartment in San Jose working around the clock to beat you. They’ll be eating Ramen or Taco Bell every night and saving their pennies to pour into the company.”

It may be unfair, but it’s the reality of capitalism. It’s the dynamic that drives innovation. In the future, the competition won’t only be in San Jose, but also in Shanghai, Seoul, and Bangalore. I only wish more people in the US Congress understood this as well as Brad Feld does. The Startup Visa is one of our most important innovation movements. You think China can’t build great Internet companies? Have you heard of TenCent? It’s more valuable than Facebook.

In conclusion, if you’re not prepared to be “all in”, then you’re not prepared to build a huge company. You think Marc Benioff built Salesforce.com into a multi-billion company by having a good idea? I can tell you from having been on the inside that even now this guy never shuts off. He’s driven. He creates the success at Salesforce.com. He’s a billionaire and he still works harder than many startups. Are you willing to go that hard for that long?

7. Appetite for risk

Entrepreneurs are risk takers. Not wild speculators, but pragmatic risk takers who have a blind belief that they will find a way to make things work. If you put on paper what it would take to be successful in your company, you’d never take the first step, which is why most people don’t. It is often called a “leap of faith” because you jump from safety into the abyss with only the blind faith that you’ll find a way.

If you won’t take the risk, why should I?

I know it sounds trite to say that entrepreneurs are risk takers so let me describe the normal, rational person who I meet on a regular basis. I was recently on TWiST with Jason Calacanis. A caller dialed in to ask us questions about his startup. He was from South America but living in Switzerland and had launched a startup while holding down a day job at a consulting firm (McKinsey if memory serves). He wanted to raise angel money. I told him to quit his job first. If he wasn’t prepared to do that he wasn’t a real entrepreneur.

I know that 80+% of the people listening to me must have thought that was the wrong advice. But to me if you’re not willing to quit and take a risk on yourself, then you’re not confident enough in your own idea and skills. Why should I be? If you’re idea is so amazing that it warrants my hard-earned angel money then why should I take a risk on you if you won’t take a risk on yourself?

The locked-up entrepreneur who wouldn’t jump

About a year ago I had lunch with a guy who I believe is an amazing entrepreneur. He had built and sold his first company and had good ideas for his second company. He gave me the 50,000 foot idea and he was convinced that this idea would be a monster. The problem was that he was still working out the lock-up period in his big company.

He and his partner told me about this new idea over the course of nearly a year. I finally called bullshit. If this idea was so big then why would they risk not being first to market, not building defensible IP for the sake of a few hundred thousand dollars extra in lock-up money at a big company? I think the mind of an entrepreneur would be far more paranoid about yielding his great next idea than protecting his last 20% payout on the last one. They finally quit. I’m enjoying watching their progress.

The MBA who wouldn’t jump

I run recruiting for my VC firm, GRP Partners. About 18 months ago in early 2008 we hired an analyst (pre-MBA), but wanted to wait until after Summer to hire a post-MBA associate. It was May. I received an unsolicited resume from a second-year MBA student at Stanford. He had exactly the skills I was looking for in an associate. I interviewed him on the phone and in person. I introduced him to my partners who liked him. But we weren’t ready to hire an associate yet so I offered him a summer internship. He told me that, as a second-year student, he could only accept a summer internship if I would guarantee him the job in the fall if he performed well. He wanted an assurance that if he performed well, we wouldn’t go through a recruiting process.

I told him I couldn’t guarantee that. If he was confident in his skills he should take the internship. I told him I couldn’t imagine that a guy performing really well on the inside had anything to worry about from a great resume and interview from somebody we didn’t really know. I told him to join and “become part of the furniture.” Without the guarantee, he turned me down. A few months later he called me back and said he would take the internship. I told him, “Sorry mate, it was a one-time offer. You had the door cracked open and should have taken it.”

Was I too harsh? I don’t think so. I want our associate to have empathy for the customers we serve — our portfolio companies. If the person I hired wasn’t cut from the same cloth as an entrepreneur, then how could I expect him to be able to see inside the mind of entrepreneurs?

My leap into venture capital

I joined GRP Partners in 2007 before they raised their current fund (we closed a $200 million fund in March 2009). They told me not to join until after the fund-raising was done. I told them it was now or never. “Once you’re done raising a fund you’ll hire anybody you want! I want to join now while there’s risk. I’ll help you raise the fund. And I’ll take the risk. Pay me half salary until the fund is closed. I’ll pay my own moving costs and if we don’t raise the fund you owe me nothing.”

I figured that the alternative was that I start my third company with no salary and all risk. I had nothing to lose! And so it was. If I was willing to take risks to get into VC then how could I accept an associate who had no cojones? And how can I fund you if you don’t?

To be continued in Part 3 with competitiveness, decisiveness, and more. If you like this post, check out Mark’s blog and his tweets @msuster. If you want an intro to Mark, send me an email. I’ll put you in touch if there’s a fit. – Nivi

Emotions at work

Nivi · January 4th, 2010

“Some managers are uncomfortable with expressing emotion about their dreams, but it’s the passion and emotion that will attract and motivate others.”

– Jim Collins

“People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

– Maya Angelou

(Both quotes are from The Presentation Secrets of Steve Jobs by Carmine Gallo.)

I’ve started reading Emotions Revealed by Paul Ekman, a consultant to the television series Lie to Me. It’s an excellent and accessible catalog of emotions. For example, Ekman describes the differences between 10 or so different kinds of enjoyable emotions: sensory pleasures, contentment, excitement, relief, wonder…

It’s a good complement to The Definitive Book of Body Language (a fun and easy read), which you can find in our bookstore.

How to re-negotiate with your customers — and not lose a single one

Nivi · January 3rd, 2010

Mark Suster, entrepreneur turned VC at GRP Partners:

“When I was at BuildOnline (my first company) and things went ‘pear shaped’ we called all of our customers and said, ‘I know that we signed contracts with you. The reality is that the market has changed and I need to change to the new realities. We committed to product features. I can’t ship those as promised. I’m sorry. Do you like our product & service? Yes? Ok, thank you. Listen, I know that if you like what we do then you’ll want a healthy supplier/partner. I need to be able to earn a profit and with the contracts we’ve signed I cannot. I either need to cut product development staff (and therefore can’t ship products as promised) or I need to be able to charge you slightly more for our service or for features you want to see so that I can make ends meet. Help me understand which you prefer.’ I lost zero customers. In fact, we built tighter relationships. I had no choice and as they say, ‘necessity is the mother of all invention.'”

From What Makes an Entrepreneur (2/11) – Street Smarts. You can also find my favorite negotiation book, Bargaining for Advantage, in our bookstore.

The Arrogant VC: Why VCs are disliked by entrepreneurs, Part 2

Guest Author · January 2nd, 2010

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. – Nivi

In Part 1 of The Arrogant VC, I discussed 4 reasons why VCs are disliked by entrepreneurs:

  1. Poor first impressions
  2. Getting strung along or left at the altar
  3. Getting a raw deal
  4. Great (but misguided) Expectations

This post contains 4 more reasons why VCs are disliked by entrepreneurs. Both of these posts contain direct quotes from entrepreneurs with real, hands-on experience with (often prominent) VC’s, sometimes through multiple companies and fundraising.

5. Unwanted advice, poor communication, and lack of operational sense

“While VCs are always happy to dish out advice, this feels disingenuous from people who have never actually built a company or had a knockout success as an investor. Learning from mistakes is far less useful than emulating success.” One entrepreneur goes further in accusing VC’s of seeing everything through the lens of money: “Often times they have zero operational experience (how to launch a company/product or manage customers), don’t understand marketing beyond just building their own brand, and see money as their ticket for everything.”

VC’s are often ex-lawyers or bankers and some have a tendency to feel safe with “experienced suits” that sometimes do nothing but drive the burn rate up and compound cash-flows problems. Entrepreneurs are often “driven, creative types who want out of larger organizations,” whose traits map poorly to those of many VC’s. Ultimately, since many of them don’t understand the businesses deeply, they “try to make up [for] this particular information asymmetry with legal enforcement.”

Some VC’s are not that shy about it. One partner in a tier I fund described his role in this way: “Industry experience is not that important. I see my role on a board as to challenge every decision the management makes.” Here’s a variant on the same theme: “I don’t give a s**t about the company’s strategy, my job is to come here once a month and check what you are doing with my money.” QED.

6. Different objectives and time frames

“It takes patience and time to build a great business, and target returns and time frames (e.g. five times in five years) can get in the way. On the other side, entrepreneurs burn out and blow up all the time, so it’s tough to keep both sides aligned and together for a long time.”

Sigurd says “short investor time frames to meaningful exits means forcing businesses to scale too much and too fast (and offsetting this risk through a portfolio approach), whereas the entrepreneur must offset the market and product risk by slower movement and something akin to agile development.” David agrees on this natural misalignment of interests: “VCs need home runs, and entrepreneurs need singles at least on their first couple of companies.”

The going really gets tough when entrepreneurs lose their original sponsor. “The new guy is either too junior, does not know the business, or feels he has the right to wash his hands of the mess left by his departing partner.”

7. Arrogance and lack of empathy

At the end of the day, most entrepreneurs completely understand that objectives are not always aligned and that VC’s work for funds that need to return capital. What they have trouble with regardless, are “double standards“. One entrepreneur who has raised money multiple times says, “A lot of VCs do things no regular employee would dare to do but are largely unaccountable for those behaviors: forgetting about board meetings, showing up 20 minutes late, bullying the team or CEO, being generally unavailable, paying no attention in meetings because they are arranging a golf game on their BlackBerry, failing to read the board pack before the meeting, so the actual meeting is remedial in nature.” the message seems to be, “Don’t treat me the way I see fit to treat you.”

Net-net, VC’s are too often “out of touch with the reality of entrepreneurs.” “They are often times elitist, clashing with the very scrapiness of their entrepreneurs.” Arrogance is the word. “I was told forcefully ‘you will fail’ and that I should join another startup… funded by the very same VC.” “I spent 4 years in poverty ignoring my family and my friends to get the company to this point, and now they want me to vest my shares.” Yet another: “I have mortgaged my house, I have spent all my money, my family lives on pizza coupons and now you are telling me you want customers and a live product to boot? Why don’t I call you back when I have gone public, bozo. You call yourself a risk taker? You want 30% of my company when all the risk has been taken out?” (I added the pizza coupon piece for effect, but you get the idea).

Finally, entrepreneurs feel VC’s are “crap at sharing the wealth,” recognizing “how tough it is to create value” or “properly re-incentivising managers who gave up many years of their lives, effectively abusing a position of power and often manipulating entrepreneurs by threatening their reputation.”

Bottom line: “VC’s really don’t take any personal risk but expect everyone else to…”

Add to this some “dumb practices” such as demanding board remuneration and monitoring fees or “submitting ridiculous expenses” to complete a picture that betrays a complete lack of empathy.

8. Dark Side of the Force

Finally, some ugly business behaviour. A fairly common practice seems to be what you might call “slow strangulation”, whether by design or not. “An equity investor will knowingly under-capitalize your startup only to gain control of it once the opportunity manifests itself by use of a wash-out round; milestone financing and abusive board control are used for similar tactics. As a consequence, myself and others now prefer to bootstrap/self-fund rather than taking any amount of early-stage capital that will not *clearly* take the company to the next level.”

This is a common gripe with smaller funds, who have badly under-performing portfolios and little follow-on reserves, and who fall back on such slow strangulation of businesses they fund by trickling money, gradually washing every one else out, and hoping that 50% ownership for little money invested will somehow pay back for the rest of their portfolio. Smaller regional, government-backed funds get a particularly bad rep in this area. Lacking experience and confidence, they rely on punishing paperwork and self-anointed gurus to help them through the hard process of building successful companies.

Entrepreneurs have come forth with other dubious practices, including outright lying about the state of the business when refinancing, disclosing confidential information or personal confidences, negotiating on behalf of management and forcing deals through, making a mockery of governance rules. One systemic problem appears to be a failure to represent the interests of the company in board meetings, but rather short-term investor interests. “This is a plague on the industry and makes the board worse than useless to the company.”

Another entrepreneur identifies what he calls “classic VC tricks” such as “firing the team just before an acquisition, term sheet bombs, hiding or obscuring key information, manipulating the team to try to change ownership or board composition, changing deal terms just before closing.” He adds: “These destroy alignment and trust, and without some alignment and trust the necessary working relationship and motivation is destroyed.”

The worst I got related to VC’s pushing to recover shares from the heirs of a deceased co-founder under a reverse vesting provision. As the contributor put it, “it will take a lot of good karma from a lot of VC’s to make up for this one.” I was stunned.

Conclusion

Last words to entrepreneurs from Rory Bernard: “Choose your VC’s with care. Good ones transform your business, bad ones wreck it.”

And to VC’s: “tread softly, remember that in a position of power, you can do many sensible things but a few stupid ones and end up with a ‘George Bush’ problem, and as a result the approval rating of Dubya.”

If you like this post, check out Fred’s blog and his tweets @fdestin. If you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

The Billy Mays method of picking startups

Nivi · December 30th, 2009

David Anderson, VC and supply chain master:

“Billy is perhaps best known for his Oxi Clean commercials, where one softball size ball of detergent, chucked into your washing machine and forgotten, will do 25 loads of laundry. Simple messages, great customer testimonials and products that really worked were Billy’s forte. He rejected perhaps 99% of the hundreds of inventors/companies that approached him, choosing only those products that met his three key metrics. And he and his inventors made millions in the process…

“Address clear customer needs: Billy wanted products that anyone could use, not just a select market segment–who does not have dirty clothes (Oxi Clean)? Needs a knife to cook (Samurai Shark)? Want shiny clean floors (Orange Glo)? or, my favorite, who has ever wished they could permanently cement their mother (or father)-in-law to a chair (mighty putty)?

“Have believable customer testimonials: Billy did not use actors, but recruited users who were true believers. Who could not like the housewives who had orgasms over their newly waxed floors?”

(Italics mark my emphasis.)

That’s a great set of requirements for picking startups: simple messages, great customer testimonials, and products that really work — that anyone can use. (You can also take the opposite approach on the “products that anyone can use” requirement.)

Bonus: Also see David’s post on Hiring the Right Sales Guy:

“So what’s the best type of sales guy for a start up? To be honest, none of the above. The founders are the best sales guys, supported by the correct marketing and sales support technology, processes and people. They know their solutions and vision best and should be the one who lead the charge in the marketplace.

“Instead of hiring a very expensive super sales guy, for example, use your board members to get introductions at target customers. That’s a prime role for board members and should be a key criteria in choosing them. Want C-Level introductions? Try cold calling at 8am in the morning when the C-levels get in early to check their emails. Need a group of specialists to sell the solution?  Assemble the team from current employees to make the pitch. Everyone should be a sales person in a start up.”

This is consistent with Steve Blank’s advice that founders should be on the customer development team and, if necessary, complemented by a ‘sales closer’.

Chris Dixon: How much seed money should I raise?

Nivi · December 29th, 2009

Chris Dixon, serial entrepreneur and seed-stage investor:

“… You should try to answer the question: what is the biggest risk your startup is facing in the upcoming year and how can you eliminate that risk?  You should come up with your own answer but you should also talk to lots of smart people to get their take (yet another reason not to keep your idea secret).

“For consumer internet companies, eliminating the biggest risk almost always means getting ‘traction’ — user growth, engagement, etc. Traction is also what you want if you are targeting SMBs (small/medium businesses). For online advertising companies you probably want revenues. If you are selling to enterprises you probably want to have a handful of credible beta customers.

“The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone [emphasis added]. Building a product is only accretive in cases where there is significant technical risk — e.g. you are building a new search engine or semiconductor.”

Read the rest of Chris’ What’s the right amount of seed money to raise? Also see our post, How do we set the valuation for a seed round?

If I had to stuff my answer to this question into one sentence, I would say: “As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.” Raising as much as possible is especially wise for founders who aren’t experienced at developing and executing operating plans.