Trust and shared goals in startups

Of the many wonderful things about starting Homebrew, possibly the most satisfying has been working with a partner, Hunter Walk, in whom I have absolute trust.  That trust stems from a longstanding relationship, a commitment to helping each other be successful and a shared vision for what we want Homebrew to be.  And it makes it possible for work to rarely feel like work.  Most importantly, that trust allows us to focus exclusively on the activity of the fund and being supportive of our partner companies.  No time, energy or resources are wasted on questioning each others motivations, actions, decisions or feedback.

All of this has reminded me how much trust is fundamental to the success of startups (Homebrew is our own startup after all).  I would argue that no characteristic impacts the productivity, motivation, camaraderie and longevity of a team more than trust.  But how do you assemble a team that trusts each other when trust is usually forged through shared experiences over time?  Culture, values, transparency and many other things certainly contribute to building trust.  But the foundation of trust in every startup I’ve ever seen have it is a shared goal.

Whether you call it the Why, a mission statement, a shared vision, a true north or a common understanding of why the company exists, there is no replacement for everyone on the team knowing why they collectively and individually come to work each day.  Startups are faced with many obstacles, unknowns and failures.  People have to wear many hats and pitch in across many different areas.  There’s often little, if any, time to coordinate activity, assign responsibility or formulate a plan of attack.  When your team has a shared goal it becomes infinitely easier to assume, and eventually know, that your teammates are doing the right thing.

In startups, it’s the job of the founder(s) to repeatedly communicate the shared goal of the company and to make sure that anyone joining the team understands and shares that goal as well.  At Homebrew, we prefer to work with mission-driven founders because they seem to do this innately.  As a result, they are often successful in building teams and cultures that are based on trust.  And these teams leverage that trust to become high-performing, making work feel nothing like work at all.

Avoiding failure in early stage hiring

Nearly a year into Homebrew, we’ve learned a great deal about startups, investing and ourselves.  And we’ve also reinforced many of the things we believed to be true about each of those things.  Probably least surprising (and most painful!) to us and the companies we meet is how challenging it is to hire in today’s ultra-competitive talent market.  While the immediate goal of startups is to get to product/market fit, the right team needs to be hired before that can happen.  And when demand outstrips supply of talent, it’s easy to take shortcuts and to make hiring mistakes, especially when it feels like people are the main constraint to moving forward with your business.  As a result, we spend an incredible amount of time with Homebrew family companies focused on helping with hiring, including trying to help avoid common hiring mistakes.  Unfortunately, it’s an absolute certainty that hiring mistakes will be made, but you can improve your chances of success by being mindful of a few simple things.

Here are what we believe to be the most common mistakes (in no particular order and not a comprehensive list) that founders and startup teams at the seed stage make in hiring their earliest employees. Please share your thoughts on these and other hiring mistakes that founders should be sure to avoid.  If you have hiring tips or tricks, we’d love to hear about those as well because hiring is an area in which everyone can always be learning and improving.

Choosing aptitude over attitude: It’s easy to believe that a highly skilled candidate who doesn’t fit the culture of your company or who can’t play well with others will still help you quickly tackle the problems you face.  But history shows that undervaluing attitude and overvaluing skill actually leads to more problems, less output and lower team morale.  Make sure your hiring process includes a thorough screen for culture fit and for an attitude that reflects the characteristics that you believe to be the foundation upon which you want to build your team, product and business.  The right attitude alone isn’t always sufficient, but it’s always necessary.  Aptitude alone is never sufficient.

Hiring specialists over “generalists”: Early in a company’s life, the reality is that nothing is certain, including which aspects of the product will be successful and which skills are needed on the team to scale beyond present day.  Accordingly, startups can’t afford to have team members that are only able to do one thing well and not stretch beyond that one thing.  I suggest that startups hire “T-shaped” generalists who have a superpower but also have the flexibility in thinking, curiosity and desire to take on more than only what they know incredibly well.  Early team members are ideally multi-tool athletes with a particular strength who can also fill positions of need whenever and wherever they are found.  Hiring people who only do one thing really well can limit your potential paths to success as well as make it more difficult for those team members to be successful themselves during the early phases of the business.

Being seduced by credentials: “But she worked at Google and Facebook! She was a Director so she’s obviously a total rockstar. We need to do everything we can to hire her!” It’s easy to be allured by high profile names and senior titles.  But at a startup you need people who can get shit done and who don’t wait for others to tell them what to do.  Having done it before can be tremendously valuable, but only if he or she has really done it before.  Don’t rely on recognizable company brands and lofty titles when hiring.  And be wary of candidates who seem to be escaping from a large company rather than running to a startup.  Ask the questions and do the work to find out what the candidate really delivered at his prior job, how he went about doing it and whether he has the potential to continue to grow.  Experience at the right company or in the right role can matter, but there is no substitute for making things happen and having the potential to excel in the future.

Rushing to fill a need: Every company has a position that has been open too long or that seems critical path to success.  So it seems justifiable to hire the candidate who is “good enough” or who can “do what we need right now”.  But once you capitulate on a hire that doesn’t quite meet the bar, it becomes easier to repeat that behavior.  Introducing a mediocre hire into a high-functioning team inevitably creates friction, reduces trust and slows down progress.  Waiting to make the right hire is always less expensive (in time, energy and money) than fixing the damage done by hiring someone just because there is a gap that needs to be filled right away.

Being stingy with equity: I believe that being generous with equity for early hires is critical for building a culture where every team member has a founder mindset, feels responsible to the company first and is fairly rewarded for taking early risk.  A proper vesting schedule ensures that these early hires only earn their equity if they are contributing significantly to the success of the company over the long term.  In addition, issuing larger amounts of equity is a far better way of compensating hires given startups are typically cash-constrained and need to focus on giving themselves as much time (i.e. cash runway) as possible to establish product/market fit.

Ignoring hiring mistakes: This one happens after the hire is already made but it remains true that most founders fire too slowly.  Founders find it really difficult to trust their gut instincts around an employee’s fit for the company because they originally did so much work to make sure that the hire was the right one.  Founders also tend to look at it as a personal failure if a hire doesn’t work out.  But it’s important to accept that absolutely no one bats a thousand when it comes to hiring.  If an employee has lost your trust, finds it difficult to work with others or proves unable to deliver results, make the decision to move on immediately.  In my experience, founders always fire six months too late, even though they sensed the right answer earlier.  Trust your intuition around your team and make the hard call because it will save you and your team many months of pain and expense.

Other mistakes that are worth mentioning include 1) introducing too much diversity of thinking too early 2) overselling and not being honest about the company and role during the hiring process and 3) giving senior titles (VP and C-level primarily) too early.  There are many hiring landmines, but most of them can be avoided with some careful thought and a well-defined hiring process.  Investing early in hiring right pays off in multiples down the road, and beyond making sure there is money in the bank, is the primary responsibility of founders.  In a market where talent is scarce and the best talent has lots of options, it’s difficult but critical to maintain a rigorous process and to not compromise on the qualities of the team that are important to you and your culture.

Know what you’ve learned, not what you’ve done

At Homebrew, Hunter and I are very focused on “Why” a founder has chosen to start a company and what motivates him or her to attack the specific problem or opportunity he or she sees.  But also important is the “how”, the approach the entrepreneur has taken to address the opportunity.  Often, when we starting talking about the “how”, we hear about a lot of different ideas being considered and experiments being run in an effort to find product/market fit.  But at the seed stage, entrepreneurs often focus only on what they’re doing without being equally attentive to what they’re learning.  “Being busy” by itself does not equate to building a company. You should be learning with every step so that you can find a scalable model of success.

Focusing on the key questions and how best to answer them

To create an organization that learns and doesn’t just do, I’m a big advocate of the scientific method approach to building product (and companies more generally).  The scientific method is a simple framework that can help startups focus, experiment, learn and iterate quickly and effectively. Below is a description of that method along with a simplified example of an experiment we ran at Twitter (not the actual data).

Purpose/Question – As obvious as it sounds, you need to start with the question you want to answer.  Surprisingly, lots of startups take the “see if the spaghetti sticks” approach, just putting something out in the world and then somehow gauging the response.  Without clarity around what question you want answered, it’s difficult to design the right experiment and to draw the right conclusions from the data you collect.  In particular, it’s critical to know what metrics are relevant to the question you’re trying to answer.

Example: How can we increase the sign up rate of users visiting the Twitter homepage?

Twitter homepage in April 2011:

Research – If you have a question, it makes sense to consider all of the potential answers, even if many of them are dismissed quickly.  Research, whether that’s talking to potential users, evaluating similar products, conducting simple surveys or brainstorming as a team, does a few things.  Research helps uncover unspoken assumptions about the answer, identify unexpected potential answers and inform the design of the right experiment.

Example: Ideas that emerged from user research, looking at site analytics and from team ideation included better descriptions of what Twitter is, a video that explains how to use Twitter, showing popular tweets, simplifying the homepage by removing trending topics, simplifying the homepage by removing the search box, etc.

Hypothesis – What do you believe to be true?  That is the essence of your hypothesis.  And proving or disproving that statement is the goal around which your experiment should be designed.  Any test run without a hypothesis is unlikely to lead to learnings that impact product direction in the correct way because the experiment likely doesn’t have a control for what you believe to be true.

Example: Simplifying the homepage to focus on sign up by removing the search box will increase the sign up rate.

Experiment – This is what most startups focus on but only in the sense that experimentation means putting something out in the world.  More important than the idea of experimenting is the design of the experiment.  Simply put, you need to know what question you’re trying to answer, which answer you believe to be correct and which variables you believe impact that answer.

Example: Show the homepage without the search box to a randomly selected, statistically significant sample of users and compare the sign up rate to users that see the existing homepage during the same period of time.

Analysis – The reality in most product experiments is that you can’t isolate or control all of the variables, so it’s important to not be a slave to the data.  Data from the experiment usually needs to be considered one input into product thinking and not the answer in and of itself.  Accordingly, it’s critical to be honest about what the data does and does not say in relation to the hypothesis and question at hand.

Example: The sign up rate increased by 12% without the search box. But by removing the search box did we lose sign ups from people who searched and then signed up from the search results page?

Conclusion – In organizations both small and large, nothing is more important than providing the proper context for product decisions.  So when you arrive at conclusions from your experiment, be sure to share them quickly, clearly and repeatedly.  Was the hypothesis proven or disproven?  Did the outcome result in more questions and experiments or answers that you feel comfortable moving forward with? Communicate what you intend to do in reaction to the conclusions and start the scientific method process all over again.

Example: At Twitter, results from experiments and planned next steps were summarized and emailed to an internal mailing list for anyone in the company to review.  When changes went into production, another email was sent outlining the changes.  

The homepage that resulted from this experiment and several others was launched in December 2011.

Here is the current homepage:

Next time you’re working on experimenting and iterating to get to product market fit, remember the scientific method.  If you remember to have a hypothesis and to design an experiment that tests that hypothesis cleanly, you’ll be learning and not just experimenting.

Better isn’t good enough

I previously wrote about what I think is required for a successful mobile product.  With all of the activity in the social messaging/communications/networking category (Whisper, Confide, Secret and Wut being the latest buzzed about apps), I thought I’d dig into one of the key points I made, which I believe is even more true in this category.  It’s not good enough to be better, you have to be different ─ in a way that helps address an entirely different use or possibly a similar use case dramatically differently.

In the case of messaging, it’s not enough to innovate along an existing dimension.  You need to create an entirely new product dimension.  It’s clear when you look at the breakout messaging apps that they clearly did something different relative to the apps that came before them, and in most cases that helped those apps address different user needs.  Facebook popularized status updates within a private network.  Twitter made status updates public (changing who sees the update).  Instagram made status updates visual (changing the format of the update).  WhatsApp made status updates (via SMS) free.  Snapchat made status updates ephemeral (changing the permanence of updates).  And what of the apps that were hyped and have seemingly gone away?  What new dimensions did Path, Frontback and MessageMe introduce?

Of the “hot” new apps, it remains to be seen which will pass the test of time.  Whisper makes public status updates anonymous (changing who sent the update).  Confide has made text status updates private and ephemeral.  Secret has made the anonymous status update visible only to a semi-private group.  Wut has anonymous, private and ephemeral status updates(?).  Are any of these apps introducing new dimensions that address different use cases or needs?  Fortunately, or possibly unfortunately, social messaging companies doesn’t typically fit our Bottom Up Economy thesis.  So we don’t have to bet which of these products will become the next Facebook, Twitter or Instagram.  But if I had to bet, I’d pick the one that does the most different thing best.  Because better just isn’t good enough when launching a product.

Homebrew’s 1%: The VC Metrics Behind Investing in One of Every 100 Companies We Meet

Most VCs spend a significant amount of their time generating and evaluating new investment opportunities.  When Hunter and I started our Homebrew seed fund last year, one of the common questions from potential LPs was “How will you generate deal flow?”  Our hypothesis at the time was that we would generate investment opportunities from four primary sources: our personal networks, other investors, inbound thematic leads and proactive outreach.  Now that we’ve closed out 2013 we thought it would be useful to share our data in hopes that entrepreneurs who want to get in front of us or other VCs can learn a few lessons about how VC deal flow works.  So here’s a look into our pipeline for 2013 (note: this isn’t 100% accurate as we certainly missed tracking every single opportunity we reviewed and every meeting we took).

First, the high level funnel metrics:

  • 885 opportunities evaluated (100%)
  • 399 first meetings or calls (45%)
  • 71 further diligence, defined as second meeting or greater (8%)
  • 11 investment offers made (1.2%)
  • 9 investments closed (1.0%)

Let’s breakdown where our opportunities came from:

  • 55% from entrepreneurs and executives in our network
  • 16% from other investors (includes angels, VCs, accelerators, etc.)
  • 4% from service providers (legal, finance, etc.)
  • 25% from other sources (inbound, proactive outreach or ideation)

And what about the 71 opportunities where we dove deeper?

  • 41 from entrepreneurs and executives in our network
  • 25 from other investors
  • 5 from other sources

Finally, here are the sources for the companies we wanted to invest in:

  • 9 from entrepreneurs and executives in our network
  • 1 from another investor
  • 1 from another source

Our Takeaways

When we reviewed this funnel there were a few things that jumped out at us.  First, our hypothesis about where opportunities would come from was largely confirmed.  Second, we were surprised by the percentage of our opportunities that come from “Other Sources”. However, upon reflection, we realized that the 25% came about by design.  At Homebrew, we actually review and respond to nearly every opportunity that comes to us via a credible or thoughtful email.  Why do we do this even when the data suggests that those opportunities tend not to become investments?  Because we appreciate that Silicon Valley is a tightly networked community and that not everyone has access to that network.  While we focus on SF and NY, we understand that innovation and talented entrepreneurs can emerge anywhere. That belief is embedded in our Bottom Up Economy thesis.  The other reason for the high percentage is that given our thematic focus, we try to be proactive about reaching out to entrepreneurs thinking about or companies operating in markets that we are excited about. We are thrilled to work with entrepreneurs who are early in their thinking.  For us, it’s incredibly rewarding to help formulate, refine or even test ideas.  And we anticipate doing even more of that going forward.  The final takeaway from the data for us was that we aren’t yet seeing as many high quality opportunities from other investors as we would like.  We’ve participated in syndicates with many notable institutional and angel investors but it’s also possible that we haven’t done enough to educate other investors about who we are and how we can be great partners.  We have a plan for tackling this in 2014.

Lessons for Entrepreneurs

Warm introductions are critical.  Unfortunately, the reality is that most VCs can’t or aren’t willing to spend the time needed to review opportunities that come over the transom given how few ever turn into investments.  So it’s not new news, but your best bet as an entrepreneur is to find some way to get a warm introduction to potential investors.

The best cold intro has data or a demo.  If you’re going to send an email to Homebrew, we’re most interested when you can share data or a demo.  Talking about an idea that you have or seeking general advice about entrepreneurism doesn’t give us enough context to engage.

Expect to hear “no”.  As the data suggests, somewhere around 1% of companies we see receive funding from us.  And that number (1%-2%) holds true for most venture firms we know.  As an entrepreneur raising capital, it can feel like the world is against you and you alone.  But the truth is that everyone hears no and everyone hears it often.  It’s not personal, so keep fighting for that “yes”.

No second chances for first impressions.  We end up speaking to or meeting with less than 50% of the companies we are introduced to.  And we spend more time with less than 20% of the companies we meet or speak to once.  What message you deliver in that introduction or first interaction matters a great deal (admittedly unfairly so).  Seek feedback on your messaging or your pitch before sharing it with potential investors.  Prepare for meetings by listing and answering all of the questions you have about your business, because investors are likely to ask the same ones.  Research your audience by using their website, social media posts and their existing portfolio to understand more about how they might think about your business.  While we’ll share more of our thoughts in the future, Mark Suster has an oldie but goodie on how to prepare for a VC meeting.

Thanks to all of the entrepreneurs who gave us the opportunity to know them in 2013!  We’re able to share this data because of your interest in working with Homebrew.

How to Make It Easy for VCs to Make Introductions

One of the joys of what we do at Homebrew is having the opportunity to meets hundreds of entrepreneurs and startups, often times outside of the context of a potential investment.  We think it’s our responsibility and privilege to be able to help people and companies in whatever way we can, even when we’re not investing in them.  Sometimes that’s just brutally honest feedback.  At other times it can be an insight or tip based on our own operational and career experiences.  But often we are able to help by making introductions to other people who might be potential hires, employers, investors, partners, customers, etc.  Unfortunately, I’m surprised by how often one of the following happens when we offer to make introductions:

No ask.  The person or company doesn’t have any idea about what introductions might be helpful.  If you’re meeting a VC, someone whose job it is to build and maintain relationships, go into the meeting with the assumption that you’ll have the opportunity to ask for a connection to someone who can impact your business.  Have a wishlist of specific people or companies.  See who the VC is connected to on LinkedIn, interacts with on Twitter or has worked with in the past.  Don’t make the VC do the work of thinking of specific names in the meeting.  He or she is even less likely to think of names once you’ve all left the room.

No follow-up.  Many meetings end after we’ve identified a few introductions that Hunter or I would be willing to make.  It’s shockingly common for us to never receive a follow up email or call asking us to actually make those introductions.  The right introduction or two can have a material impact on our business or career, so make sure you take advantage of any opportunities to be connected with the right people.  Follow-up within 24 hours and remind the VC which introductions were offered.

No content.  In cases where there is follow-up, we typically get only a note reminding us and thanking us for the coming introductions.  Ideally, most VCs would like to get something that they can pass along as context for the introduction, whether it be a short blurb that describes the reason for the introduction, or even better, an actual email to the person being introduced that can simply be forwarded.  Take control when you have the opportunity to deliver your message to the person you want.  Given the VC the tools he or she needs to deliver your message as easily and as quickly as possible.

The point of all of this is to seize the opportunity to leverage a VCs network.  VCs are busy and already notorious for poor follow-up after meetings.  They’re time-constrained and juggling many different things at once (I promise we’re pretty good at follow-up at Homebrew!).  And while VCs shouldn’t get a free pass because they’re busy, you can benefit a great deal if you make it easy for them to help you.  Have specific asks.  Follow up via email.  Do the work for them.  You’ll find that almost all VCs are willing to help.  And they’re more likely to actually do so if you make it easy for them.

Chemistry and emotional resonance are key to co-investor relationships too

Fred Wilson and Bijan Sabet recently wrote really wonderful posts about how important personal chemistry and the ability to imagine working at the company are when making an investment in a startup.  I couldn’t agree more with both of them.  When I recall investments I’ve made over the course of my career, the common thread is that the teams and ideas had “emotional resonance” for me.  There was something about the teams and opportunities that spoke to my heart as much as my mind – to such an extent that I wished for them to succeed badly enough to be irrationally optimistic about their odds of success.  I think it’s rare for an investor to make a commitment of his or her time and capital when that emotional resonance is missing.

At Homebrew, that feeling often comes when I hear that the Why behind the founding of a company comes from a very personal place (read about the Why behind our portfolio partners on our blog).  It’s easy to get excited about working with mission-driven founders.  Having the opportunity to partner with them as they build the companies they envision is a true joy.  That emotional resonance leads to tight alignment with the founders’ vision, goals and preferences and a fantastic relationship because our feelings of success are inseparable from their success in building their companies.

A solid working relationship between a VC and founders depends on this alignment, as well as mutual trust and respect.  While most entrepreneurs may take that as a given, they often don’t appreciate that it’s just as important for the relationship between the two or more VCs that are jointly investing in a startup.  When raising capital from more than one VC, particularly where the VCs are investing similar amounts of money, it’s critical that the founders make sure that the VCs are aligned with them and each other and also have mutual trust and respect.  Otherwise, they can expect that disagreements between investors will make an already difficult startup road that much rockier.  So how can you check if your potential investors are on the same page?

Talk about it: Have conversations together and separately with the VCs about everything from near-term milestones to financing strategy to long term vision.  The more you hear how the VCs are thinking about your business the more data you’ll have to determine whether they have a shared perspective.

Make them talk: Good investors will want to build a relationship with co-investors before committing capital because alignment, trust and respect amongst all parties should be as important to them as it is to you.  No one should want to go into a set of relationships expecting that there is likely to be discord.

Negotiate: As you’re working through the terms of your financing, you’ll most certainly have to negotiate with each VC separately.  Inevitably, you’ll have have to talk about issues where the the VCs differ with each other and/or with you.  How much are the VCs trying to understand your preferences versus attempting to position themselves favorably against each other?  Are they open to talking through issues with the other VC?  Negotiations can reveal a lot about how the VCs will work together and with you after the investment is completed.
Personal chemistry, the desire to work together and emotional resonance are just as important when selecting co-investors as it is when selecting a team to invest in or a choosing a single VC investor.  Don’t make the mistake of assuming that your co-investors are aligned or accepting that they don’t necessarily share the same perspectives.  It’s hard enough to build a company when everyone is working well together.  It becomes much harder when the people who have significant influence on the company (investors and founders alike) don’t have a shared definition of success.