VCs on Series A Valuation

May 30, 2014

venture-capitalI had the pleasure of attending a daylong symposium at Dartmouth College last week, Dartmouth Ventures. One of the panels featured these prominent VCs speaking about “Financing 102- After a Seed Round.”

Ned Hill, Managing Director- Mercury Fund

Steve Bloch, General Partner- Canaan Partners

Liam Donohue, General Partner- .406 Ventures


This was a fairly cut and dried panel except a few things stuck out:

On the subject of how to find the right valuation, I was expecting to hear “the market sets the price” and “we look at similar transactions” and the other basic VC valuation tools. However, what I heard was a discussion about “What’s fair?” “How much money the company needs” and “backing into the right ownership.”

Of course, the right ownership is up for debate and the subject of much friction between investors and entrepreneurs. The implied definition of “right” in this case was high enough to provide meaningful incentive for the entrepreneur but also low enough to provide a large stake and significant returns for the venture fund.

The other really interesting part during the discussion of valuation and the preferences that investors get through their Preferred Stock. One VC talked about the idea that “management has an implicit preference” relative to the investors and other stockholders. This refers to the “Liquidation Preference” that virtually all VCs insist on- namely, that they get their money back out before the common shareholders.

The concept of an “implicit preference” (and this is somewhat advanced for 1st time entrepreneurs) is that in a liquidation or exit scenario, the management team needs to be taken care of. So as much as the VCs rights allow them to get their money first, potentially taking all of the exit price, this doesn’t really happen in practice. The buyer will take care of management, often making them whole, since management is needed to run the company and extract the value for the acquirer. This “implicit preference” of management could trump the actual legal preference that the VC gets through Preferred Stock.

The implication from the VC panel was seemed to be that founders don’t have nearly as much downside as it would seem on paper. And that the VCs felt justified in asking for somewhat lower valuations, and higher ownership positions, as a result.

What do you think?


Is it a new era or noblesse oblige?

August 16, 2013

In the last week, we have seen 2 major newspaper companies, The Boston Globe and The Washington Post, acquired by wealthy business people.  John Henry in the case of the Boston Globe and Jeff Bezos with The Washington Post.

The revenue declines, struggles to retain readers, and high cost structure of the print newspaper business have been well documented and I won’t go into them here. But in trying to turn around these businesses, there are not obvious examples to follow, so it’s a bit of a Brave New World.

Can these owners make money in the news business (I won’t call them “newspapers” anymore) with original news content, through a digital-only or “digital primary” business model? What areas of news or content will they try to dominate? How important is the brand? The Post has an incredible brand in politics, The Boston Globe does in local sports and local news, but there are so many more competing options for Globe readers these days.

Where will the revenue come from? Not from classifieds, not anymore, not even online. What Monster and Autotrader did to newspaper print classifieds, Indeed and Craigslist did to Monster and the online classified business. That toothpaste is out of the tube…

It would seem as though there should be revenue available through local search and buying intent, helping local small businesses reach large swaths of local consumers. News companies still have large groups of local consumers reaching their online properties, but they monetize this audience through banner advertising that is not targeted and has very low CPM.

One thing Bezos knows is personalization, and that is good for news companies because they do such a poor job of it today. As a fairly regular reader, I get lots of banners and they are pretty generic. I almost never notice or click them.

Bezos is an amazing innovator. But how much of that can he push as an owner rather then CEO?

News organizations should be able to make this equation work- Local business relationships + local info + deep personalization = local commerce That business model agenda would help The Post, but not Amazon, since it competes with local merchants. So we’ll see how Bezos’ manages this conflict, or even if he views it as one.

With John Henry, he has proven to wring extra revenue out of the RedSox so we can expect he’ll try to do the same with the Globe. But owning the team, a cable channel and the major news company is a conflict in it’s own right. Maybe the play is with advertisers, to give them multiple channels. It will be interesting to see how the Globe and the Red Sox co-exist and also how NESN factors in.

Of course, all of this could simply be a case of noblesse oblige regarding  these news institutions.

The “Hoosiers” Guide to Startup Success

November 13, 2012

ImageBasketball season is upon us. I am a big basketball fan and I also coach my kids’ teams, so I am pretty attuned to the change of sports seasons. As both a coach and a fan of the college and pro games, I am pretty psyched.

As a coach, I am starting to think about what my practice plans will be, the offense and defense, how to teach and drill but still keep it fun.

One of the great things about basketball is that the game has flow and rhythm, it is not just a series of plays that start and stop like football and baseball. One of the keys for me in coaching is to teach the kids how to read and react to situations to keep things flowing. Most baskets are not scored from the initial play but from a reaction to the defense or by being opportunistic, like getting an offensive rebound.

As I reflected on it, I was struck by the similarities between basketball and startup success:

You need a great team to achieve success.

Stars make it much easier to win, but only if they blend in to the rest of the team. (See the 2008 Celtics team for proof of that)

You can win without stars (or beat teams of stars) if you execute perfectly. The movie Hoosiers shows us that.

No matter how good your plays or your plan, reacting to the situation is more important. Plan B, C, D and beyond are crucial. This is why the best offenses are not about running a play, they are about a framework for scoring. Plays and systems are just guides, ultimately you need to think on your feet and react in the moment.

All teams need to play offense and defense. Strategic planning is often about thinking “what if” enough times.

All players can improve skills and fundamentals to help the team win. Teams get better when individual players get better.

Tenacity and scrappiness can take you a very long way. In basketball, rebounding and getting a loose ball often make the difference in winning. In startups, you get told “no” a lot more than yes—from customers, investors, friends, you name it. But the most successful entrepreneurs power through all that.

Is it Morning or Evening?

June 13, 2012

Is it Morning or Evening?

In the last few weeks, two VCs that I respect have published blog posts with vastly different views of the start-up world. On the optimistic side, Mark Suster, General Partner at GRP Partners, argues that “It’s morning in Venture Capital.” On the pessimistic side, Jo Tango, founder and General Partner at Kepha Partners, points out that we are likely at a market peak given that start-ups are hot among the MBA crowd.

Suster is actually refuting the “VC model is broken” analysis of the venture industry. He argues that conditions over the last 10 years were anomalous, and that returns for the venture industry should be strong again. (Hence, “It’s Morning in Venture Capital”). Suster’s primary arguments are that the number of start-ups, the number of online consumers (20x higher), the improvement in exit environment, the proliferation of wireless and broadband create an incredible environment for startup value creation. Further, he highlights that various digital interactions and apps are “payment ready” and that we’re all socially linked as additional accelerators.

According to Suster, it is the best time in history for innovation and technology venture capital.

Jo Tango, on the other hand, takes the contrarian point of view regarding start-ups. Although he does not provide much data, he points to the ebbs and flows of MBA interest in start-ups that can occur, most specifically during the last boom and bust of 1999 and 2000. Basically, because start-ups are cool, and MBA interest is sky-high, it must be a bad time. “When MBAs find a space ‘hot,’ you’re near a market peak.” He warns prospective founders to be prepared to take drastic measures.

These two VCs are not arguing the exact same point and counterpoint, but the positions are not hard to juxtapose. After all, if it’s a great time to be a VC, it should be a great time to be an entrepreneur.

There is certainly an element of truth in both blogs. The market forces that Suster cites are very powerful, and he didn’t even touch on the drive to modernize enterprise systems with more user friendly technology (Salesforce, Box, Google, iPads, BYO mobile, etc.). Then again, the proliferation of start-ups, the rise in valuations, and the mediocre performance of many Internet IPOs should provide a dampening effect and could even portend a peak.

I think we should push for an online debate…

Announcing Bullhorn Reach

February 11, 2011

I am very pleased to announce our latest innovation at Bullhorn, Bullhorn Reach. Reach helps recruiters leverage their social network connections and search engines to recruit talent and develop new client business. Even if you’re not a recruiter, if you do any hiring, you should check it out.

We have had some users in a private beta program testing it out and we are now opening the beta. You can sign up for a FREE account by clicking here. After you’ve signed up, we’ll ask you to spread the word. If you get three other people to sign up, we’ll expedite your account activation and you’re in. Don’t worry, everyone will get in but we’re adding people a bit at a time to make sure they have a great experience.

There are some pretty amazing features in there even if you’re not in a agency. The Articles function lets you publish interesting content out to all your social networks at once. Reach Radar provides you with insight into your social network

If you’re on the fence about signing up, here’s what a few early Bullhorn Reach beta users have to say:

“I love Bullhorn Reach” – Daren Pedley, Thornley Corporate Solutions Ltd. (UK)

“I LOVE this feature!!!!” – Roni from New York, on Reach Radar

“I am receiving several great candidates every day through Bullhorn Reach via Facebook and Twitter” – J.K. from rom New Jersey

“I received 4 job orders with Bullhorn Reach!” – Recruiter from Nevada

Tweet for Service

August 26, 2010

I had heard about companies (particularly Comcast) monitoring social media for customer or prospect complaints, but had never experienced it personally until this week.

Bank of America had canceled my debit/ATM card because a merchant had some kind of data breach. Unfortunately, they did not inform me of the cancellation, nor had they sent me a replacement card. So I called customer service to bitch and also tweeted about my crappy experience. Within an hour or so, I got a reply from BofA_Help via Twitter asking if they could assist. They requested that I DM them with my name and phone and they called me the next day (the original interaction was on a Sunday). Although I had already resolved the issue with the telephone customer service people the day before, the Twitter help people listened responsively and then sent me a gift card for my troubles.

If only the rest of Bank of America’s service was as responsive or as good.

(For their part, BofA claims that they informed me of the cancellation by mail and sent me a new card by mail. I did not receive either one. They could not explain why they do not inform a customer of a data breach or impending cancellation by email or phone.)

The Day the Music Died

August 14, 2009

With total apologies to Don McLean and complete recognition of the hyperbole of the title, I am quite sad that WBCN died this week. The station was dying a long slow inevitable death for the last decade since its purchase by radio conglomerate CBS.

This matters to me because WBCN was the station of my youth, and most Bostonians over 40 would agree. That it happened in the same week as John Hughes death was all the more poignant.

From a business perspective, rather than a musical or emotional one, it is quite interesting to analyze. BCN was the dominant rock and roll station in Boston, and one of the best rock stations in the country. BCN played all types of rock, from the Stones of the 60s to Aerosmith of the 70s to the Clash of the 80s, and BCN did it without labels or corporate play lists.

And when CBS bought it, it used traditional targeting and demographic analysis to force WBCN to change formats. You see, CBS already owned a “classic rock” station in Boston and quite a bit of what BCN played was classic rock. Of course, when BCN started playing it, there were no such definitions. But in the competition for advertisers, classic rock was the pure “boomer” demographic and “alternative” rock was the Gen X/Y demographic. So BCN was forced to change.

The problem with this is that CBS completely misread the Boston radio market and those of us who loved WBCN and its totally eclectic rock music. If it was good rock, they played it. So like most others, I stopped listening. And then the ratings fell until finally the station was killed off.

In the final days, WBCN played its old format with many of its old DJs. And like many others, I listened and thought, “If they played this all the time, I would still be listening to BCN.”

It’s too bad that one of the great radio stations had to die because corporate radio bureaucrats were too stupid to realize they needed to apply something other than their national cookie cutter to WBCN and the Boston market.

Shine On You Crazy Diamond