geekvc

I think I am a very positive person. Having grown up in rural Vermont, my wife often times describes me as an “optimistic farm boy.” I love innovation,  truly believe in the goodness of people and that the future will be better. So, why is it that I chose a profession that forces me to say “No” most of the time and moreover, encourages me to give critical feedback to energetic entrepreneurs that often verges on crapping all over their innovative ideas?

Few VCs would describe one of their main responsibilities as saying “No,” but in reality it is.In 2012 I reckon I officially said “No” to entrepreneurs about 99.8% of the time that they asked me for money (according to our internal deal log). And this doesn’t count the times at conferences, weddings, bar mitzvahs, soccer games and yes, sadly, even funerals, that I received informal pitches and wafted an air-biscuit of rejection in the idea’s general direction. I don’t want anyone to lament for me; as I know I have one of the best jobs on the planet, because everyday I get to meet with amazing people who seek to change the world, and I get to listen to their stories and plans. So in saying “No” so often, I want to make sure I say it well.

I think there are two critical elements to saying “No” well, while doing my job well:

1. Being right most of the time when I say it, and more importantly when I don’t;
2. Saying it in such a way that I show the respect due the receiving party.

First the easy part. As far as “No’s” go, it’s been a while since I looked at my own antiportfolio, but suffice it to say I have made some spectacular mistakes in “No’s” over the years. For the sake of illustration, I’d probably bookend my career at this point with Akamai and MakerBot as chief blunders. Saying “Yes” is harder than saying “No,” and for sure I have made a few mistakes on this dimension. (I’ll spare  the details). Ultimately, Venture Capital is a game of numbers, and a VC’s performance – the right “No’s” and right “Yes’s” –  needs to solve positively, or a VC no longer gets money to invest.

In part no doubt due to natural conflict aversion, the harder part for VCs appears to be saying “No” in a way that shows respect to an entrepreneur. The old way in VC was to never really say “No” at all, for fear of the repercussions: the entrepreneurs would become successful and hold the “No” against you in the future, or would tell their friends bad things about you. While I am sure there are many others, I have noticed two common strategies for delivering the “Soft No”:

• “the phone-tag game” – never actually connecting to deliver the news,
• “Dorothy and the Wizard of Oz” – creating a set of unattainable milestones only after which we’ll fund you,

What ever the meme, many VCs seem to do everything possible to avoid giving entrepreneurs the real reasons they’re turning them down. The rationale I have heard most often is that this avoids getting into a prolonged argument with the entrepreneur that could deteriorate and leave really hard feelings. I think this is baloney.

Personally, I feel that any entrepreneur who has the guts to present their idea out loud, whether primordial or well-formed, is taking the ultimate risk in putting themselves out there and deserves open feedback . I strive to respond to every single business idea pitched to me –  with honest reasons for saying “No” if that’s the outcome.  The feedback varies from the very light (“not a sector in which I am interested), to much more in-depth and specific to the particular business. It gets trickier when we pass on an investment because of unambiguous and confirmed negative feedback on personnel, as it is generally given under guarantee of non-attribution. Providing meaningful feedback without betraying confidential sources is quite difficult, especially if one doesn’t really know the entrepreneur well.

No one likes getting turned down.

At 5pm ET today, Crashlytics announced they had been acquired by Twitter. The entire Crashlytics team will remain intact and the Crashlytics product will continue to be developed. The founders will have significant roles within Twitter as well. While the purchase price was not disclosed, this was a tremendous outcome for the employees and investors.

There’s an old saying that great companies are bought and not sold. Crashlytics is a case in point. As a great example of a lean startup, they raised a $1M seed financing and a $5M Series A – and spent only 1/3 of it all by the time of the acquisition. On this funding, Wayne and Jeff built an amazing team, a revolutionary platform, a vibrant and addicted customer base of thousands and virally scaled their way onto hundreds of millions of mobile devices. In a little over a year.

When Twitter came knocking, we discovered that the teams and cultures matched remarkably well. It was clear that Twitter shared our vision for the future and together the opportunity to grow was just too good to pass up. I am very optimistic about the future of Crashlytics as part of Twitter, and grateful to work with this amazing team.

But it’s also bittersweet. We are fortunate to work with world-class entrepreneurs on a daily basis. Startups, like Crashlytics, that take off with ferocious acceleration and trajectory are rare indeed, and selling always begs the question of what could have been on a standalone basis? I am not a big “regrets” guy, so I will forgo the opportunity to wax prophetically. I know big things are in store for this team and I look forward to working with them again down the road.

We wish the entire team and the whole of Twitter the best of luck!

BetterCloud announced its Series A financing led by Flybridge today and I couldn’t be more pleased to join their board of directors. We met BetterCloud in late 2012 through one of their seed investors who was a friend of my partner Chip Hazard’s. The stars seemed aligned and we quickly dove into diligence and worked to close the investment within a few weeks.

BetterCloud is the leading cloud app management platform with an initial focus on Google Apps. In the six months since their launch into Beta, they’ve grown from zero to more than 5.5 million user accounts under management and continue to grow at a feverish pace.

At the macro level the thesis for an investment in BetterCloud is simple: we are convinced the Cloud is the next inflection point for computing; the inevitable move has begun and it’s only a matter of time until it dominates all IT solutions from small to large enterprises. Several business-focused Cloud apps & platforms are growing explosively and have already taken great market share, including :

• Google Apps – leading cloud-based productivity suite estimated to be servicing 5M businesses / 50M users
• Salesforce.com – $2.5B rev run-rate, 100K+ customers, 2K partners, 150B transactions
• Workday – more than 325 enterprise customers, $134M in ‘12 rev, growing at 170% YoY
• Amazon Web Services – leading PaaS, $1B rev (est). 1TB objects, 100K’s customers

Historically, significant value has been created by developing complementary products that support and enhance new application platforms, and we have little doubt that the Cloud will provide the next big opportunity.

At the company level, as always, it’s all about the team. BetterCloud’s founders (David Politis and David Hardwick) are pioneers in the sector, having been early employees at CloudSherpas, the leading Google Apps services provider and reseller to small and medium sized businesses worldwide. They have worked closely with the early adopters of Google Apps and developed a great appreciation for the demands and challenges faced as enterprises migrate to the Cloud. One of the most important elements to me is their commitment to community engagement – BetterCloud has built an enthusiastic user community –  and this community has become a great source of feedback and inspiration for future features and products, as well as a great platform for viral spread of their services.

Over the long-term, the big-picture goal is for BetterCloud to help accelerate the adoption of cloud technology and platforms by giving businesses the tools they need to manage cloud migration and ongoing administration of cloud apps.

We are excited to welcome BetterCloud to the Flybridge family – it’s a great way to start 2013!

You can’t help notice the uptick in seed investing over the past five years. We’ve seen the rise of angels globally, and the creation of new genres of venture capital such as seed funds and micro-VCs. We’ve done seeds since the inception of Flybridge in 2002, but certainly the pace has increased substantially since 2007. It’s hard to know the exact number of seed deals committed industry-wide over the part 5 years; Price Waterhouse Coopers MoneyTree reports more than 1,700, but the number is likely far greater, since many companies don’t participate in the survey.

A popular approach to seed investing, and one that I followed for some time, is what I call the “Foothills” philosophy. Invest a small amount in a team that is focused on a defined niche – with expectations that with hard work, nurturing and good fortune, the team will conquer the niche – climb that first hill. And with luck, once that first hill has been scaled, another bigger one will lie in clear view, and maybe another bigger one beyond that, and so on. In this model, the thought is that a collection of more modest hills (niche markets) will sum to equal a big opportunity, or maybe, just maybe, a mountain (massive market) will reveal itself to yield a homerun.

The problem is that many times – ok, to be really cynical, most times – there are no more hills beyond the first, let alone any mountains in the distance. This results in many small seed startups pursuing market opportunities that will never be big enough to justify the so-called “Venture Capital Return” – markets that are sizable enough to grow standalone public companies, $B outcomes, revenues in the 100’s of $M, etc. etc.

Please don’t interpret this as an indictment of seed investing. Not at all. This is a VC-only perspective and mine to boot – and doesn’t necessarily apply to the lenses of angel investors, seed funds and micro-VCs, whose models are fundamentally different than ours. More “modest” outcomes ($10-50M in an acquisition) may work well for founders and these types of investors, where modest capital has been raised and ownership has not been diluted. But this approach doesn’t scale well and therefore doesn’t work for larger VC funds. The data show that the best VC returns are driven by investments in massive opportunities. You can’t hit a homerun unless you swing the bat at homerun pitches; “small ball” – walks, bunts, singles and doubles – usually lead to small outcomes. This is why I think the Foothills approach for VC seed investing doesn’t work.

But clearly seed investing is working across the industry, turning out some great companies and great outcomes – so what’s different in our approach? Continuing the hiking meme, I refer to our strategy as seeking “Basecamps.”

I’m looking for seed-stage startups that seek to conquer Mt. Everest – targeting a massive market they seek to own or disrupt, with conviction about where to setup their initial basecamp, and a set of plans/hypotheses on the routes to ascend – recognizing they may have to adjust or abandon paths based on the obstacles they encounter.

Knowing the giant goal looms in the distance helps nascent companies balance short-term tactical decisions with the longer-term strategic impact. For example, a decision about pricing structure for a first product may not seem too cataclysmic, but if it sets rock-bottom price expectations for all future releases, including ones with true value-added proprietary advantage, you may have inadvertently sunk the ship.

A huge market opportunity provides the basis for growing huge revenues, but also affords startups the latitude to make mistakes, without any single one likely to cripple the company. In today’s hyper competitive markets, when executing in a small sector, even small errors in execution can be fatal.

And finally, being able to articulate a view of a very large market opportunity becomes a competitive advantage in recruiting and retaining talent to a team. Charisma and passion are requisite skills for any successful startup, but world-class entrepreneurs of any genre (engineering, marketing, sales, etc) want to take on big challenges with the potential to change the world and make fortunes along the way. It’s hard enough to compete against incumbents with history and demonstrable momentum. It’s infinitely harder when there are obvious questions about a startup’s “nichiness.”

So as you are forging your plans for world domination, while focus is critical to maintain, keep Everest in your sights.

There’s been a tension in my life since the age of four, when my Red Sox Nation mother moved our family back to Vermont, leaving my Yankee Evil-Empire father’s (I’m a Mets guy) Brooklyn in the rear-view mirror. We’d venture back to NYC to visit family, and immediately upon graduation from college, I moved from Burlington VT to Gramercy Park. And then to Boston to join a startup. I met my future wife – until that point a lifelong resident of the Upper West Side — on a business trip to NYC.  I somehow managed to convince her to marry me and move to the Boston suburbs. Still trying to figure out how I managed that one.

So, when we made the commitment to open a Flybridge NYC office at the beginning of this year, it was only fitting that I would help lead the effort. This decision was an easy one given the exploding local tech community, the rise in our NYC deal flow, and the growing number of great Manhattan-based early stage companies in our portfolio.

We see NYC as a bona-fide startup center in its own right – for a number of core reasons:

1. Startup success stories – look to DoubleClick, Admeld, Right Media and Buddy Media  as examples of great venture returns that have and continue to spawn new startups.
2. Emerging leaders – companies like 10gen, Fab.com, FourSquare and Tumblr are industry leading category killers.
3.  Magnet for talent – NYC has always been a melting pot and a global magnet, and in the market for startups, new grads, immigrants and Wall St. defectors alike have joined the ranks.
4. Access to customers and partners – Manhattan is home to more Fortune 500 headquarters than any other city in the US in a variety of industries.
5. Community support  – Quintessentially NY is the extent and level of support in the tech community, with such groups as the NY Tech Meetup, NYC Entrepreneurial Fund, HackNY and a number of city-wide initiatives like the Academy for Software Engineering.
6. World class academia – Nearly 600 thousand students in more than sixty universities call NYC home – and more are moving in, such as Cornell, Technion, Carnegie Mellon and IIT.

Add to this mix a host of incubators and accelerators, and ample seed capital – all within 10 square miles on an Island – and NYC is poised to continue its growth. To support our own growth in NYC, we’ve built out our team. My colleague, Matt Witheiler, has moved to the city with his wife and I am very pleased to announce that we have hired our first associate in NY – Caitlin Strandberg, who joined us from LearnVest and previously Behance. We hope to contribute to the community in NYC by offering our experience as both entrepreneurs and investors through multiple cycles – to help the next crop of founders build great companies.

So while Boston continues to be an important center of gravity for Flybridge and the rest of our team remains in the Back Bay, I am looking forward to our adventures in Manhattan!

I received a few requests to post the “Mr. Bill Raises Venture Capital” segment from my Flybridge Summer Party 2011 Video.