Category Archives: Venture Capital

Homebrew’s investment interests: Vertical software

Posted on by

Homebrew’s first fund focuses on what we’re calling the “Bottom Up Economy.”  The Bottom Up Economy thesis states that as technology becomes more affordable, flexible and accessible, many industries that have not benefitted from or been impacted by technology historically will finally do so  Software is eating the world in many cases but also enabling the world in others.  Accordingly, we spend a great deal of time getting to know entrepreneurs and companies building software solutions that disrupt industries or enable the existing industry players to compete more effectively.  And we’ve already invested in companies serving several different areas, including legal services, mental health, logistics, communications, financial services and commercial construction.  Given our focus on vertically oriented software, I wanted to share a little bit about the attributes we like to see in those startups.

Teams with a unique POV: As my partner, Hunter Walk, has written, we’re excited by teams that aredisrupting industries with love (and just enough greed 🙂 ).  Teams that have experience in the domain tend to have a strong POV about what’s broken and how to fix it.  But often times the most unique insight can come from teams outside of their target industry who are approaching things with fresh eyes.  So we prefer to work with teams that can demonstrate domain expertise without the stagnation of assuming status quo is just the “way things are done”.  What’s critical is that the teams we invest in have an insight that many others either have not seen or don’t agree with.

Distribution focus: We tend not to invest in software companies that are 100% dependent on selling into theC-level via a direct salesforce.  Instead, we prefer a bottom-up entry point via individuals or teams within the enterprise or small business.  The startups that intrigue us have a well-articulated plan for how to get distribution of their software in the industry they are targeting, and most often that includes a strong likelihood for organic or viral growth. No matter how slick and easy-to-use your software is,if you build it they probably won’t come.

Long-term advantage: Nearly all software is replicable, so we look for companies that are likely to have long-term differentiation, ideally via customer or data network effects.  Network effects mean that the value of the software grows as more people use it either because it allows them to interact with more people in the context of their work or it helps collect and aggregate data that informs and improves their work.  The strongest network effects enable customers to benefit from product usage that occurs even outside of their companies (i.e. industry-wide).

Acute pain: VCs are notorious for categorizing things as an aspirin versus a vitamin or need-to-have versus nice-to-have.  But there is a good reason for this.  Unless software is helping addressing an acute pain or delivering value that can’t be ignored, it likely can’t attract the attention it needs to be used or purchased given the limited time of people and budgets of companies.  We like to see software that is addressing what is likely to be one of the top 3 hair-on-fire issues.  This kind of software has a better chance of drawing attention and dollars.

Widespread pain: In addition to the pain being acute, the pain needs to be felt by a lot of people.  This is important because companies need to be able to reach “venture scale”, usage and revenue that allows for a company to be valued many times higher than the value at which a VC firm invests.  For Homebrew, our goal is to invest in companies where we can see a path to returning the value of our entire fund ($35 million) from an investment in that company.  Both the total dollars invested and the price of investment have an impact on that math, but it generally means that we need to believe that the company can eventually generate $100 million in annual revenue.  That kind of scale requires a widespread feeling of acute pain.

Painless path to first dollar: It’s obviously easier to get someone to use something that is free than it is to get him or her to pay for something.  So we like to see products that are likely to have a painless path to the first dollar payment.  It becomes much easier to extract more economic value once the customer is convinced to pay for something because at that point she clearly sees some value in the product that is greater than what she is paying.  This typically means that there is a single person who has three characteristics: 1) she feels the acute pain personally 2) she has the budget needed to buy (can just put it on her company credit card) and 3) she can pilot the product easily (self-service sign-up, no IT involvement).

While we don’t have hard and fast rules or a checklist approach to evaluating investments, we always think about the criteria above when looking at opportunities in vertical software.  If you’re taking a vertically focused approach and have a story to tell that fits with our preferences and approach, don’t hesitate to get introduced to us or to reach out directly.

Trust and shared goals in startups

Posted on by

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

Posted on by

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.

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

Posted on by

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

Posted on by

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

Posted on by

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.

How to Diligence Your Investors (Crowdfunded or Not)

Posted on by

The investment world is buzzing about AngelList (Disclosure: I’m an individual investor in the company) and the impact that it will have on angels and VCs, However, part of the conversation that has been missing is the impact on startups. The obvious benefit is that there will be more options for startups to raise capital quickly and easily. But the potential downside is that choosing the right set of investors for a company may become much harder for entrepreneurs. While an abundance of capital options is wonderful, choosing investors should be based upon more than just valuation and dollars invested. After all, an investor is a long term partner for your business and the process of choosing the right partner should reflect the ongoing nature of this relationship. Startups spend hours upon hours vetting potential employees, abiding by the mantra of hiring slowly and firing quickly. Why wouldn’t even more diligence be conducted on potential investors — people who can’t be fired and actually often have the power to fire you! Here’s how to diligence potential investors:

References

Ask to talk to current and past portfolio company founders and CEOs. Be sure to talk to a couple from companies that failed. And definitely leverage your network to reach out to a couple references that the investor did not provide herself. Would the entrepreneurs take the investor’s money again? When there was bad news, how did the entrepreneur feel when telling the investor and how did the investor react? Ask for at least one instance when the investor helped with a critical company challenge and what specifically she did to help. If possible, consider talking to angels or VCs that the investor has worked with previously.

The Airport Test

You’re traveling with your investor and your flight is unexpectedly canceled. You’re stuck at the airport for the next few hours. Would you look forward to the time together or would you instantly fill with dread? A similar test is the Beer Test. At the end of a long day, would you enjoy grabbing a beer with the investor? Spend significant amounts of time with the investor, both inside and outside of the office, to answer these questions. The goal of these tests is to figure out whether you like and trust the investor. A good investor is going to be your toughest critic, your biggest cheerleader, your best salesperson and your most compassionate psychiatrist. You’d better be irrationally comfortable with that person and his passion, integrity and values before taking his money.

Expectation alignment

When choosing an investor you’re choosing a partner to help you build your business. Just as you would make sure you have alignment of expectations with a cofounder, you need to do the same with investors. What does the investor see as the key milestones before the next financing? What kind of financial outcome is the investor expecting? How frequently and in what ways does the investor expect to interact with you? Asking questions and sharing your perspectives ensures that there are no surprises for either side down the road and also helps set the stage for an honest, direct, collaborative relationship.

Personal stories

At Homebrew, we love hearing how entrepreneurs have gotten to where they are and the “Why” behind the founding of their companies. Similarly, we advise entrepreneurs that they should know the personal stories of their investors. You’re going to be working with your investors very closely and you’ll get to know each other both personally and professionally. Find out if you have common ground upon which to build a long relationship. Why is he an investor? How did he end up being one? What does he like most and least about being an investor? How does he think he can add value to your company?

Getting to know your investor well before the investment is critical because a financing is not a single, moment-in-time transaction but a long-term commitment to each other. The relationship after funding should feel like a continuation of the relationship pre-funding and not like something different now that the courtship period is over. As an entrepreneur, you’re adding to your team every time you choose an investor. Keep in mind that there is much more to consider than what can be captured in a term sheet.

The Value of a Board at the Seed Stage

Posted on by

For most startup founders, the idea of creating a board of directors early in the company’s life is as welcome as spending a week at Burning Man without water or sunscreen. Thinking about boards makes entrepreneurs imagine instituting process-laden corporate governance, spending hours drafting lengthy board presentations and potentially losing control of their startups — how un-Zuck! In reality, every startup is legally required to have a board (assuming it’s a C-Corp or S-Corp). But there is ongoing debate about whether that board should include anyone other than the founder(s). An outside Director, specifically one representing investors, is tremendously valuable for seed stage companies. Here’s why:

Establishing a Cadence

Much like sprints in agile software development, setting up a regularly occurring board meeting at the seed stage establishes a cadence for the work of building the company. A scheduled board meeting can also help address another common problem experienced by startups — figuring out how and when to properly leverage your investors and advisers. Board meetings become checkpoints for founders to ask for assistance from an investor and to seek feedback on developments at the company. It doesn’t matter whether the board meetings happen monthly, every six weeks or quarterly. What’s important is that a cadence gets set and that the meetings are used in ways that are productive for the team.

Stepping Back and Getting Perspective

When your hair’s on fire each and every day as an entrepreneur, it’s easy to spend all of your time firefighting. A board meeting offers a fantastic opportunity to escape the day-to-day and spend some time thinking about the company’s overall goals and primary strategic issues. It’s too easy to just say that you’ll find time to talk about these things or to block “thinking time” on your calendar that never quite seems to happen. We’ve found that actually having time scheduled with someone to whom you feel responsible provides an opportunity to step back from the business and leads to regular and thoughtful conversations about issues that are critical to the business long term. Otherwise, those issues might go ignored for too long or are often impacted by decisions and actions taken in the near term.

Practicing for Later

A successful Series A financing usually comes along with a relatively large investment amount, a new board member (often two, if the board gets expanded to five, to let the founders keep “control”) and higher expectations for the company. Given all of that, why would a founder want the pressure of learning how to plan for and run a board meeting for the first time when there is even more to be done at the company? Creating a board early gives the founders the opportunity to learn all of this earlier in the company’s life, and when the board likely has a tolerance for some jitters and iteration. It’s no different than practicing your fundraising pitch before going out to raise money. Managing board meetings is a skill like any other. Learning early what model works for the company so that board meetings are useful and not burdensome sets the founders up for success when more is on the line.

Having an Accountable Investor

We often advise entrepreneurs as they construct their seed rounds that they should make sure there is at least one investor who has serious skin in the game and feels accountable to the founders and the company. The best way of ensuring this is by adding an investor to the board. Legally, that investor becomes a fiduciary of the company and has a responsibility to help the team make sound legal and financial decisions. The right investor-board member will not just be responsive to founders, he or she will be proactively helpful as the team works to build the business. Founders who choose well might find that board meetings become something to look forward to, rather than dread, because the board member truly acts as a member of the team, providing support and constructive feedback.

So now that you’ve created a board with an investor Director, how do you get the most of our your board meeting at the seed stage? The key is to use the board meeting as a working session rather than a meeting to simply report progress. Board meetings should be valuable to the company, so the agenda should be set by the founders. The founders should lead a discussion about the three or four most important operational or strategic issues facing the company and seek advice and feedback, but not decisions. In addition, each board member should leave the meeting with two or three pieces of homework, follow-up items for which he or she is responsible within an agreed-upon timeframe. More tips for running great board meetings can be found from true experts like Fred Wilson, Brad Feld and Ted Wang. Keep in mind that the size and composition of the board will change over time, and many seed stage investors will likely step off the board after a Series B financing or later.

When we make a seed investment at Homebrew, we certainly make a significant financial commitment. But more importantly, we’re also committing our time, mental energy, relationships, expertise, advice and personalities (for better or worse!). We want to be involved and to help the founding teams build the companies that they envision by meaningfully contributing to the probability, scale or velocity of their success.

When we invest, we require that we receive a board seat and that at least a three-member board be formed. Typically, the other seats are occupied by two of the founders, or by the founder and an independent third party Director. If your lead investor doesn’t want to take a board seat, you should be asking yourself why. We’d bet that the teams and companies that do add an investor to the board at the seed stage will benefit greatly.

Homebrew: The challenges and opportunities in starting up

Posted on by

We think of Homebrew as our startup (it just happens to be one that writes checks instead of code). And we’ve definitely had to deal with the typical startup challenges while getting Homebrew off the ground, including fundraising. While cloud services, open source software and engineering outsourcing/offshoring have driven down the costs of starting a technology company, I’ve been dismayed at how little impact technology has had on aspects of company-building that have nothing to do with the the traditional technology stack, such as obtaining credit, finding office space and buying insurance. There is still tremendous opportunity to improve the costs and efficiency of creating businesses, especially small businesses that are part of the Bottom Up Economy. We’ve learned this first hand over the past few months.

I thought it would be interesting to outline all of the things that we had to do and the dollars we had to spend to get Homebrew to a point where we could focus on our “product”, investing in entrepreneurs who are enabling the Bottom Up Economy. I found that with each of the items, there is room for startups to provide a better, faster, cheaper solutions. If you’re working to address any of these opportunities, we’d love to hear from you. Here is a long but not completely exhaustive list:

– Fund formation. Legal work, including for our fundraising (akin to company formation and fundraising for startups), took us 100 days, required countless state and federal forms and cost us about $125k in legal fees (yikes!). And because we’re a VC, we had to purchase a special type of insurance called Venture Capital Asset Protection, which protects us in case we get sued while performing our duties as board directors of the companies we invest in. We obtained our policy through a broker and pay about $15k annually to cover us. Finally, we conducted a trademark search and registered our name, which required using a separate trademark lawyer and incurred about $3k in fees. While fund formation is clearly a high class problem, small businesses usually need to complete similar steps when starting up. They need to incorporate, register the business, seek trademark protection and get liability insurance. While we had the benefits of time and resources, most startups don’t. Yet, beyond a now dated LegalZoom, little seems to have been done to decrease the cost and complexity for new businesses.

– Office space. It took us two real estate agents and about 7 months to find and move into our offices (3200 sqft at a bit over $10k per month). The good news is that in most commercial real estate markets, San Francisco included, tenants don’t pay broker fees (lots of startups don’t seem to know this….hire an agent!). However, landlords can make you jump through hoops, including providing financial statements, certificates of incorporation, etc., to sign a lease. As a startup much of this is hard, if not impossible, to provide. But it doesn’t end there, once you find office space you need to find a real estate lawyer to review your lease agreement (cost us about $2000) and get lease insurance ($2700 through an insurance broker). In both cases, we relied on our real estate agent to recommend a service provider as there wasn’t any good way of “shopping” for one. Is there anyone out there working on a Zillow or Trulia for commercial real estate?

– Office outfitting. Furniture, internet service, janitorial service, utilities, electricians, movers, painters, food and drink. These things add up, even if you’re just opting for IKEA and Costco. And they take time because there are no good sources for identifying providers, for comparing pricing and quality or for scheduling.  Even with the help of friends, all of this took countless hours, appointments and emails.  The most frustrating was furniture, which took 4-8 weeks (and counting!) for delivery with no regular visibility into a delivery status. And we know we’re not alone in struggling through these items because we hear about them regularly from founders and small business owners we meet.

– Hiring. For small businesses, hiring is still done through personal networks, walk-ins or Craigslist. Given that we were looking for more than just an employee, a true founding member of the Homebrew family, we relied exclusively on our personal networks. The process didn’t cost money but it took 5 months of interviews, reference checks and social outings to vet candidates. We were fortunate that all of that time and energy resulted in finding a great Director of Operations. Unfortunately, for small businesses, they rarely have the luxury of that much time to find a qualified employee.

– Health insurance. Our Director of Operations is an employee so the State of California requires us to carry workers’ compensation insurance. Again, we worked through a broker and obtained a policy that costs us $240 annually for one employee. We also needed health insurance for our team. This was possibly the most painful experience that we had even though we worked through a broker. The list of reasons why is too long to delineate but it includes: 1) not being able to obtain insurance without 6 weeks of payroll 2) needing to provide proof of insurance for one employee who opted out of coverage (?!?) 3) completing over 16 different forms for only two covered employees 4) having to provide partnership agreements, ownership structure and our Certificate of Formation for who knows what reasons 5) requiring a paper check for payment of the first month’s premium to initiate coverage and 6) taking over 3 months from start to finish (our insurance finally kicked in on 8/1). And all of this is for a process that is completely opaque and results in what we hope is good insurance given the $2500 per month to cover two employees and their families. The vast majority of small businesses rely on insurance brokers for finding and maintaining health care coverage and no doubt face the same questions and frustrations we did.

– Banking. As a startup in Silicon Valley there are plenty of banks that will service you, so finding a bank is not a problem. However, the process of actually opening an account takes countless paper forms and hours of back and forth with the bank. And if you want a business credit card, good luck. Homebrew is a $35 million fund with large institutional investors and we still couldn’t qualify for a credit card with reasonable limits and fees from a number of banks. After six weeks, we were finally approved for a card from Amex on the back of my personal credit card history. Imagine the pain if you’re a small business on Main Street!

– Payroll. Maybe the easiest thing we did because of our outsourced CFO and ZenPayroll (wish we could have invested but Homebrew didn’t exist then!). Most small businesses still rely on ADP or Paychex but it’s great to see a better solution available.

– Web Presence. Finding and negotiating for a web domain, designing a logo, building a website that works well on mobile, choosing a web host and setting up various online identities (blog, Twitter, Facebook, LinkedIn, AngelList) takes time and can cost significant amounts of money. We have the benefit of having worked in technology for years (and it still wasn’t painless), but for a small business that wants to have a meaningful online and social media presence, the resources available to help understand its needs, find options and learn how to use them, are still incredibly disparate and unclear. The number of options available are limitless but the information needed to make intelligent decisions is rarely available.

– Infrastructure. We’re a completely cloud-based company so we use Google Apps for email, Google Docs for document creation, DropBox as our file system and Base for CRM. Selecting a CRM system was the most difficult of these choices because there are so many options in the market and no good way to compare them. We also chose to buy a printer/scanner/copier because as much as we want to be a paperless office, it’s hard to avoid paper completely in our business. Fortunately, we didn’t need a POS system, merchant account, accounting system (our outsourced CFO uses Xero), etc. like many small businesses do because I think I would have pulled the little that remains of my hair out trying to figure all of that out.

As a fund, we had the luxury of raising our money upfront and having ample time to work through these issues as there was no clock ticking. But for small businesses, the costs and the time taken away from selling and serving customers can mean the difference between success and shutting the doors. There is so much friction involved in the process of establishing a new business and relatively little has been done to make it easier. We hope that Homebrew can play a part in changing that. Over the past few months, we’ve put in place a lot of the foundation to support entrepreneurs participating in the Bottom Up Economy. We’re going to share as much as we can along the way – both the good and the bad – to be transparent about our work and to encourage more innovation in support of the Bottom Up Economy.

Homebrew is open for business

Posted on by

I’m thrilled to launch Homebrew today.  And even more excited to be doing it with my dear friend and now work-wife Hunter Walk.  Homebrew is truly the outgrowth of our experiences, observations and passions.  Maybe surprisingly, after Twitter, it wasn’t easy to decide to return to investing when there is so much startup activity and there are so many fast-growing companies.  But with Homebrew we saw the chance to construct something of our own design that blends the best of investing and operating in support of creating companies of lasting value.  The combination of an opportunity to serve entrepreneurs differently (and hopefully better) by working with them very closely on product, organizational and strategic issues and the ability to do it with a great partner made the decision for me.

Homebrew is our startup and our goal is to establish product-market fit with entrepreneurs as our customers; helping them build the companies that they envision. We’re creating a long-lasting platform for people who care about the Bottom Up Economy.  And we hope you’ll do us the favor of sharing in what we brew.

Homebrew is open for business.