What makes a great VC?

I get asked this all the time.

Let me start by giving my definition of a great venture capitalist.

At the end of the day it’s someone who generates significant (actual) returns on invested capital, treats founders with care and respect, learns from their mistakes and is a pleasure to work with (works hard, committed to a portfolio company) and can do this work at this level over a long period of time.

My partner Santo is a good example. He led a number of Series A investments resulting in outsized winners (i.e. over 9 figures in proceeds) in each of our first three funds. The fourth fund is still early but I’ve seen his work and I have little doubt he will keep the streak going. And he treats founders directly and fairly. He has now backed 4 founders in this fund that he backed previously. And we are talking to another one right now.

There are plenty of great VCs by my definition above in other firms worth highlighting. Without a doubt that list includes Fred Wilson, Brad Feld, Josh Kopelman, Bill Gurley, and Mary Meeker. I should probably stop naming names because I’ll inevitably forget someone (but one thing for sure: any list that doesn’t factor in actual returns or cost basis isn’t useful).

So what are the common characteristics of these VCs?

Well here’s my take: it’s not necessarily someone with direct startup experience. Its not gender. It’s not where you went to school. It’s not pre-venture success. It’s not operating experience. It’s not where you were born and it’s not where you live.

My own observation is its more about endless curiosity, a passion for learning, a rigorous work ethic, an ability to connect and inspire, empathy, patience, and a natural ability to believe what others don’t – and of course some good luck along the way.

Opportunities lost in a sea of growth rounds

These days in startup land we see an enormous number of startups being seed financed by angel investors, seed funds, venture capitalists, hedge funds and celebrities.

This trend has been happening for many years now and has simply continued. More seed capital isn’t necessarily a bad thing and generally I’m happy about that. The alternative is problematic.

The more recent thing is the rise of growth rounds. In 2014 our industry saw more growth rounds than the actual number of business days.

The interim stage between the seed round and the growth round is happening at an accelerated and compressed pace.

Consider the Tumblr financing history.

Year 1: $700k
Year 2: $4M 
Year 3: $4M 
Year 5: $25MM 
Year 6: $75M

Take a look at the first three years. That financing history is rare these days for a promising company. In fact those first three years of financing history would look like a messed up company in today’s environment.

Today it would look more like this for a promising company.

Year 1: $4MM 
6 to 12 months later: $25-$50MM

The difference is dramatic.

Yes it means a Series A crunch for many startups. It also means more dilution and higher expectations.

But the thing I’m most concerned about are the startups that won’t get their next round done just because they aren’t on a rocket ship.

Some companies take time and patience. And I do worry we aren’t valuing or appreciating those startups well enough in this environment. It would be a mistake to overlook them and a loss for our industry.


With venture backed startups, its likely the company will need to raise additional capital after a seed or Series A financing. There have been exceptions for sure but that is the most likely outcome, typically be design.

I’ve encouraged founders to work backwards as a method to manage runway. 

One thing I wanted to point out this morning is how often a founder will raise less money in a financing than is available or being offered. They don’t love the amount of dilution happening, they can’t justify a higher valuation so end result less capital to protect ownership. I see it all the time. 

I can’t blame them. It can be jarring to see 15-25% of your equity going into investors hands. 

But in my experience, and in most cases things don’t go as planned. And while I’m proud of our investments with our first three funds having multiple returns, we have seen more than our share of startups that wish they had more runway. I would easily say the majority wish they had more runway. 

I realize this may sound self serving as an investor (e.g. “sell us more of your company”) All I can offer is my opinion and observation after seeing this in 80+ startups in our family of companies and many more companies we haven’t invested in.

Threading the needle rarely works.

I’ll end this post with one more piece of unsolicited advice :)

Raising more money doesn’t mean you have to necessarily deploy it any faster. 

“That will never work”

MG wrote a post yesterday about scoffing in the technology world. It’s a great read, especially going into the new iPhone and “iWatch” launch today.

It also reminded me of all the scoffing I’ve heard in my time as an investor these 9+ years. Things like: 

“User generated content can’t compete with professional content”

“Advertisers won’t put their ad next to user generated content”

“You can’t build a big company outside of Silicon Valley”

“You can’t hire great engineers in San Francisco”

“You can’t build a big business around photographs”

“We wanted flying cars and all we got were 140 characters”

“Digital goods are a fad”

“Social networks are a fad”

“Startups can’t build hardware”

“Why would someone want a blog”

“You can’t compete with Facebook”

“Nobody cares about virtual reality”

“You can’t build a real company with a $15k seed” (in reference to all the early scoffing about YC in the early days)

“You can’t build a big company in the music space”

“You can’t build a big company if you don’t charge for your software”

“Bitcoin will never work”

“You can’t build a big open source company”

It is a helpful reminder why I love this industry. 

Four things

I get asked with regular frequency what I look for as an early stage investor.

For me it’s four things.

  1. Are the founders extraordinary
  2. Do I love the product
  3. Is the vision compelling
  4. If I wasn’t a VC, would I want to work for the founders at the startup

That’s basically it.

These four things have served me well. The times I’ve made mistakes in this business is when I’ve wandered from it.

Our new investment — Trello

One of the best things about making software for consumers is the complete lack of gatekeeper risk (unless of course you consider net neutrality issues but let’s leave that aside for time being. You already know how i feel about that )

Make great software and the end user can decide if they want it or not. The decision maker and the end user is the same person.

We take this for granted but as many folks know this hasn’t been the case in companies (enterprise), or education or finance and other such markets. In these markets we have typically seen a decision maker who is different than the end user.

This creates a number of issues that impact the design, care and distribution of the product. It also gives rise to a natural gatekeeper.

Back in the day you would hear things like “I can’t use that product because our IT team won’t support it”.

A number of products have been introduced that have enabled their employees to go rogue in effect. And that is a good thing.

End users at companies are basically are making their own decisions. They bought iPhones and brought them to the office. They signed up for dropbox and brought it to the office. 

I did that with gmail shortly after we started Spark. We began with MS Exchange and after a year or so I went rogue and moved myself to gmail. Shortly after the rest of the team moved as well.

Trello is a mighty fine example of this. Trello is the best way for anyone to work together on a project. Any project. It’s beautiful, fast and simple. Oh, it’s free too.

I signed up for Trello on my own. I didn’t have to take a “webinar” or ask a sales person to demo it to me. I didn’t have to ask someone to install it and I didn’t need anyone’s permission. Others at Spark made their own decision and suddenly we had Trello boards for all sorts of projects like our annual limited partner meeting, candidates we are recruiting, investments we are considering, marketing initiatives and more.

I also have boards are also linked to folks outside of Spark. And Trello works mighty fine in single player mode as I keep a few Trello boards that I keep just for me. 

Trello was built by our friends at Fog Creek. The same place that created and spun out Stack Exchange.

We are proud investors in Stack and when we saw Trello we became inspired to get involved. A product aimed at end users in any environment without gatekeepers, with natural network effects and one we love using everyday.

But one of my most important criteria is whether I would want to work at this company if I wasn’t a VC.

I would.

It’s such a pleasure to have the opportunity to work with cofounders Michael Pryor and Joel Spolsky again along with Neil Rimer at Index who co-led this Series A with Spark. It’s an awesome team and I’m delighted to be part of it.

Go try out Trello for iOS, Android or your good old desktop browser. You’ll love it.

* * * 

Update: Read Joel’s post about the Trello backstory here, Michael has a post and the WSJ wrote about the new funding as well.  

Let’s get rid of employee non compete agreements once and for all

This morning Governor Deval Patrick will make it clear he is seeking an end to employee non compete agreements in our state

Employee non compete agreements are not enforceable and are deemed illegal in California. Yet the opposite is true in MA. They are used and enforced. And because of this they stifle innovation and terribly problematic. 

Here are the issues:

1. The opposition likes the status quo because it’s a often a tool for wage suppression

2. These agreements encourage new grads to leave the state. Bright minds come and get educated at MIT. They specialize in things like speech recognitoin or robotics. There is a high probability their first job out of school won’t be their last. Knowing this, do they take a job locally where they will be locked up in a broad non compete that follows them or do they take a job in the bay area and have freedom if things don’t work out with their first employer. 

3. Non competes stifle innovation because the companies can’t hire the best talent. Silicon Valley companies hire the best people without limitation. It’s a big problem if you can’t hire the best and brightest.

4. Non competes are not the same thing as non solicitation and confidentiality agreements. I’m amazed at how often the opposition will try to bundle these altogether. That is nonsense. I’m an advocate for confidentiality and non solicitation agreements. They are enforced in California and yet allow for innovation and mobility. 

5. The opposition will shout that this will hurt their business but they have been unable to suggest why silicon valley tech companies can thrive without non competes. Why do east coast VCs fund west coast startups if non competes are so harmful. The answer: non competes aren’t harmful….in fact that leads to a new point — banning non competes hurt company culture.

6. Non compete agreements hurt company culture. Imagine running a company where your employees are only at the company because they signed a non compete agreement. Every day those employees wish they were someplace else. And their employer doesn’t have to inspire them because they know the burden to leave is too high. Also managers will treat employees better if they know they can leave

7. Non competes are often vague and broad. If challenged maybe a judge will throw it out but VCs aren’t interested in dealing with litigation. We want to support new ideas not deal with courts. Boston VCs have tremendous capital under management. Much more than NYC VCs. Yet we invest mostly out of this state. We see founders all the time that want funding but we aren’t prepared to deal with legal risk so we pass on those opportunities.

8. Chilling effect. It is well known that companies like EMC will go after former employees for violating their non compete agreement. It creates a chilling effect where people are less likely to challenge it even if they want to pursue a market that EMC is weaker in or doesn’t participate in. 

With respect, we need to do less to protect companies like EMC and figure out ways to create 100 new EMCs in our state. 

After living in California for 10 years and investing for nearly the same amount of time from across the country, it is clear to me and many others that employee non compete agreements are stifling innovation in the state of Massachusetts. 

I’ve been passionate about this issue for a long time and shared my thoughts on this blog several years back. I’m proud of our Governor and members of the state legislature that were brave enough to take a stand on this issue. Thank you. 

I’m also proud of our portfolio company RunKeeper. As of this week they are no longer requiring employees to sign these agreements and past agreements are essentially being thrown out. My heartfelt respect and gratitude to the founder and CEO Jason Jacobs. I hope we see others follow Jason’s lead.

And last but certainly not least, a big shout out to Jeff Bussgang who is a partner at Flybridge. Jeff has been tirelessly advocate for open innovation and bringing an end to employee non compete agreements. Well done sir. 

So now we need you to act and do your part. If you live in the state of MA, call your local rep and let them know you stand with the Governor and on the side of open innovation.

Don’t break the bronco

Folks that join an early stage company or invest in early stage companies are both drawn to the same thing: an idea that is so compelling along with a founder/founders that are equally or even more compelling. 

But here’s the thing: the very best founders aren’t normal, not by a country mile. They are creative, ambitious, and likely crazy. It’s not that they have a high tolerance for risk, it’s just that they can’t imagine the alternative.

At the same time we are drawn to these folks we (employees and investors) expect these very same founders to become or act in a way that isn’t who they are. And in most cases, thankfully so. 

Board members can fall prey to this trap. They see a successful CEO in another portfolio company and they want (expect) the other CEO to replicate that behavior almost exactly. But forcing the founder to do things they aren’t is a recipe for a very unhappy/frustrated leader which does more damage than previously anticipated. 

Life isn’t perfect and no human is perfect either. The question is does the founder’s greatness exceed some of the human flaws. You can’t have it all. 

It is true, if you are going to scale as a founder/CEO you need to grow and improve your leadership skills. But at the same time, it’s our responsibility (team and boards) to avoid breaking the bronco.

We need to provide feedback and help supplement/support the CEO but not dilute or nuke the natural gifts that helped create the company in the first place. 

Some thoughts on hiring in the early days of a startup

It’s intensely difficult to hire great people in the early days of a startup. There is substantial risk and so much to be proven. 

The most common challenge is that large companies can offer significantly larger salaries and equity that has little downside valuation risk (either because company is stable and/or they are granting RSUs)

So a common thing I hear from founders when discussing recruiting is: “How can I hire when big company xyz is offering so much?”

The answer: those candidates aren’t the ones you are looking for at this stage. 

There is no way you are going to win a price war. Those candidates are looking for less risk (and less upside). It’s not a judgement thing but it is most certainly a fit thing. 

The people you want to hire is a lot about a) belief in what you building and your culture in addition to b) timing in their own personal lives. You have a lot to do with the first part and very little to do with the second part.

The best way to recruit is to build a fantastic culture and pay attention to the why behind your company.

The other method I like a lot is to hire from your early community of users. Those early users are supporting your company with their most precious thing: their time. So if the chemistry is great, bring them on your team. Their heart is in the right place and you will need that to survive the invariable bumps along the way.

So don’t get too down if the person you were trying to hire takes a job at 2x the salary at Google. They weren’t your person anyway.