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.

How to Diligence Your Investors (Crowdfunded or Not)

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

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 WilsonBrad 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.

Four truths about mobile products, user mindset and achieving scale

Like many others, I’m spending more and more time on my phone, and I’m not making more calls.  I’m getting information, buying stuff, collaborating with others and much more.  There are a handful of mobile apps that I use religiously to do these things.  Why do I use these specific apps as regularly as I do?  I suspect that the answer for me and for many others who have the same behavior (a few select apps used frequently) boils down to a few simple things.

Scale is the outgrowth of doing just one thing really well.  WhatsApp, Instagram and Shazam are great examples of products and companies that expertly address a single, well-defined need in a simple way that satisfies a large number of people.  They haven’t added tons of new features to address additional use cases or at least they didn’t begin to do that until they had already significant user scale.  A single-purpose app makes it easier for a user to remember why she should use that app at the moment that she has a specific need.

Users inherently have a tendency towards mental inertia.  Once a user begins thinking of an app as addressing a particular need, it’s really hard to get him to think about it or use it differently.  An app developer who adds lots of features to an app risks confusing users and detracting from the core use case that the app is meant to address.  Unlike the desktop web, where tabs, menus, filters, etc. can be used to add features, it’s likely that in the mobile world the only successful way to add features will be to build entirely separate apps (see Twitter’s Vine and Facebook’s Messenger), often under separate brands.  Can you think of a single app that you use that does many different things well?

Better isn’t good enough.  Once a user begins to think of an app as addressing a need well, it’s really hard to get him to switch to another app to address the same need, even if it does it “better” (see Facebook’s Poke vs. SnapChat).  It’s not enough to be better in mobile, you need to be first to get to scale or you need to be different to fight inertia (not to mention switching costs, network effects, etc.).  WhatsApp continues to thrive in the face of increasing competition because it was first to address a specific need well.  SnapChat and Instagram succeeded not only because they did only one thing extremely well, but also because they did something different from Facebook and Twitter.  They addressed entirely new use cases and didn’t settle for competing via marginal feature innovation (which seems often to be the case in the messaging category, as one example).

Great products unlock user acquisition.  How did Uber grow virally?  The challenges of mobile app discovery and distribution have been well documented. App store distribution, pay-per-install ads, incentivized referral programs, etc. all face obstacles in mobile.  If you don’t have a product that requires users to invite others to benefit from the app (i.e., Facebook), there is only one true answer to the distribution problem.  The best distribution strategy is to build a killer product that generates tremendous word-of-mouth.  Uber, HotelTonight and Mailbox are examples of mobile apps that delivered amazing user experiences that in turn led to viral growth via word-of-mouth.  More than ever before, being the first to deliver an elegant solution to a user problem can be the key to dominating distribution and hence an entire market.

Surprisingly, when I thought about the points above, it seemed that what is true in mobile has largely been true on the web as well.  While technology changes, human behavior is pretty ingrained.  The mind craves simplicity and consistency and resists complexity and change.  Mobile app developers who want to achieve scale will be well served by satisfying the mind.

Homebrew: The challenges and opportunities in starting up

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

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.

Shared Context in Product Development and the How of “Why”

Product development doesn’t come without its fair share of strong points of view, impassioned debates and occasional yelling.  These disagreements don’t result from team members wanting to do the wrong thing.  Instead, arguments about priorities, features and timeframes are typically caused by the lack of shared context about “why”.  Whether you’re a product manager, engineer or designer, if you’re the “decider”, your job is to make sure that everyone on the team has a clear understanding about why the goals, priorities and decisions are what they are from the very beginning of your work together.  Without shared context there can’t be shared purpose, shared risk or shared outcomes.  Here are some tips for making sure you and your team are operating from the same base knowledge and set of assumptions.

Don’t assume.  Even if you think that everyone knows the priorities, has been looking at the same data or been privy to the same conversations, don’t assume that the team has shared context.  Leaving it to each person to interpret conversations, make sense of data and draw their own conclusions inherently leads to misalignment and lack of buy-in regarding decisions.  Not surprisingly, as teams begin to work, the absence of shared context has severe costs – lost time and productivity, finger pointing and discouraged team members.

Write it down.  If you force yourself to write down the “Why” behind decisions that are being made, it will both clarify and improve your thinking.  You’ll be able to understand how others might react to the explanation of why and what issues they may have.  Sharing that written explanation of why with your team will allow all of you to have a common language with which to talk about problems, solutions and goals.  It will also provide a reference document that can be used by the team after the why has been discussed and you’re all no longer in the same room.

Repeat early and often.  The why is not something to be shared once and then be forgotten.  Talking about why at the very earliest points of product development lays the foundation for close collaboration and tight alignment.  Repeating the why during each step of the development process ensures that the team continues to have a common understanding and shared goals and allows the group to reaffirm or change the why as new data, requests and issues emerge.

Seek understanding, not agreement.  Assuming it’s clear that you’re the “decider” and that you’ve already gathered input from the team, the purpose of sharing the why is to help everyone understand the reasons for the decisions that are being made, not to have everyone agree that those are the right decisions.  That said, team members need to feel that their points of view were incorporated into the thinking that led to the why (writing it down helps provide evidence of being heard!).  The right outcome is to have a collaboration amongst team members based on shared context, not to be consensus-driven.

While establishing the why is critical in product development, it’s an equally important behavior in nearly all professional and personal contexts.  Next time you’re working on a project with your team, friends or spouse think about whether there is shared context and how setting that context might help you work together more effectively.