Startups are hard. Don’t go it alone.

I suppose I shouldn’t be surprised that with the continuous growth in the number of startups (we’re seeing between 150 and 200 new seed opportunities per month at Homebrew), we’re also seeing a related trend in the growing number of companies being started by solo founders.  I’ve taken a particular interest in this because Hunter and I have a strong bias against investing in solo founders (although we have done it once so far).  This clear shift in the market caused me to reflect on why we prefer founding teams over founding individuals.  In fact, we prefer teams that have known each for a long time and ideally have worked together before.  While solo founders can absolutely build great companies, I think we’re right that having a founding team materially increases the chances for success.  Building a great company is hard enough.  It’s even harder to do it alone.  In no particular order, here’s why having co-founders can be helpful:

Idea validation: If you can’t convince someone else to join you in pursuing your idea, maybe it’s not worth pursuing.

Pressure to perform: Having a co-founder makes you responsible to someone else, which in turn puts pressure on you to deliver results, probably faster than you might otherwise.

Emotional outlet: In startups the highs can be high but the lows can be low.  And the inevitable trough of sorrow can be a lonely place.  Surviving the anxiety and emotion of a startup can be much easier when the burden is shared.  It’s great to see much more dialogue about the emotional challenges of being a founder.  One way of fighting depression and other forms of emotional distress is by having a co-founder with whom you can be open and honest about your fears, struggles and insecurities.

Skill diversity: No one person, no matter how brilliant, has all of the skills needed to make a startup successful. Having co-founders with complementary skills can make it much easier for each person to say no to everything but the tasks most critical to achieving success.

Hiring strength: Multiple people on the team means a broader network from which to recruit, a diversity of skills with which to evaluate candidates and a more pronounced culture for potential hires to experience.  Having co-founders just makes hiring easier.

Sounding board: Co-founders lie awake at night worrying about the same things as you. They’re just as committed to the mission as you. And they’re equally invested in seeing all parts of the company work as you.  And so they will challenge you, scold you and push you (and often hug you) unlike anyone else at the company can or will.

It’s important to note that having a co-founder just for the sake of having one, or randomly meeting one at a “dating” event, isn’t the answer.  Having the wrong co-founder can be more damaging than going to alone.  There’s lots more to say about finding the right co-founder(s), but it starts with having shared vision, shared experience, trust and complementary skills.  It means having alignment on goals, culture and values.  It doesn’t necessarily require equal equity or compensation, but it does mean early agreement on those things.  Finding the right co-founders can be challenging, but we strongly believe that the startups most likely to become the best companies are founded by teams that belong together.

Angelgate: Much ado about nothing

It seems that the hullabaloo over Angelgate is finally dying down but I’ve been in Austin the last couple of days and I was surprised to hear how curious people here are about all that has gone on in the echo chamber of the Valley. I’ve been sharing my not particularly unique perspectives (Mark Suster wrote a super post on the topic) with folks here and elsewhere so I thought I would publish them for a broader audience as well.

1)      If you think that some of the smartest angels in the industry were simple-minded enough to get together and attempt to collude in any real way, you just don’t understand how the angel and venture capital investing industries work. The reality is that it would be impossible to collude in a market where the supply of capital is so fragmented, especially for the best investment opportunities. Further, all it would take is one investor to break from the too large group of potential colluders to make it all fall apart. There is nothing unusual about investors getting together to talk about investment trends and overall market dynamics. That happens regularly, just as entrepreneurs regularly trade notes on the fundraising environment, firms, partners, etc. Move along, because there is nothing to see here.

2)      I agree with Ron Conway and Matt Cohler. There are professionals who invest mainly other people’s money, called venture capitalists, and there are professionals who invest their own money, called angels. These two groups have always existed, but historically there have been more similarities than differences. What has happened is that many of the “old school” VCs have gotten bigger and moved to writing larger checks in mainly growth and later stage companies or to investing only in businesses that have the potential to change industries and produce outsized returns. At the same time, the cost of starting companies has fallen and the exit environment for startups has increasingly shifted to outcomes of less than $100 million. All of this created a larger funding gap in the market than existed previously, opening the door for an entirely new generation of angels and venture capitalists (now called micro-VCs for some inexplicable reason). Markets have a natural tendency to fill gaps and that is exactly what has happened in the venture capital industry.

3)      The not newsworthy truth of the venture market is that there is far more cooperation and camaraderie than some would have us believe. As an example, we at Battery have made over 20 seed investments in the past 2.5 years and in nearly every case those investments were made in partnership with angels, “micro-VCs” and/or “old school” VCs. As long as expectations are aligned at each step in a company’s development, there is no reason that this type of cooperation won’t continue even as the market adjusts to its realities.

4)      Raising money is not for everyone. I always tell entrepreneurs that one of your primary goals in any financing should be to maintain optionality. If you want to build a business that will generate great cash flow but not necessarily grow at an incredible rate (a so called lifestyle business….a pretty good one if you ask me) or that you can bootstrap to profitability, I would highly encourage you to do so. But if you’re going to raise money, know that there are consequences to doing so. All investors, angels and VCs alike, want to help entrepreneurs but they also want to make money. So know what the expectations of your investors are when you agree to take their money. Josh Kopelman likes to say that when considering financing, entrepreneurs have the choice of taking the local train (smaller amounts of money typically associated with angels) or the express train (larger amounts of money typically associated with VCs). If you choose the local train, you can likely get off (sell the company) at any stop along the way. But if you choose the express train, you’re on board for the entire ride. And that long, tumultuous ride isn’t for everyone. Be honest about your ambitions, both to yourself and to your investors. You’ll find that the differences between angels and VCs are truly merely about expectations and not whatever nonsense that many with selfish motives and grudges like to spew.

4 sources of long term differentiation and competitive advantage

Despite the slowdown in venture investing during most of last year, it seems like venture activity picked up significantly in Q4. The data is consistent with my own experience during the quarter, where I saw a huge increase in companies seeking financing, the return of multiple competitors for every investment opportunity and incredibly compressed fundraising processes. I fear that we’re returning to an investing and startup environment much like the one prior to October 2008. One impact of this behavior is that we’ll likely see, as before, the funding of many companies in the same market or with similar offerings (many people point to location-based social networking companies such as Foursquare, Gowalla, Booyah, etc. as a good example). That’s led me to try to outline what I think are the only ways for web technology companies to truly have long term differentiation. Clearly, with time and money, talented people render most software and user experiences alone indefensible. So how do Internet and digital media companies create sustainable competitive advantage? 

Network effects: Businesses with network effects have products or services that increase in value as more customers use them. When a network effects business achieves scale, it can have incredibly lasting differentiation because recreating that network poses significant challenges to competitors. Microsoft Office, eBay and Yelp are good examples of these types of products and services. Some network effects businesses can have both positive and negative network effects. For example, as many social media businesses grow in use, the volume of content to filter and absorb can become overwhelming.

Switching costs: Products or services that make it difficult or expensive to use an alternative product or service have switching costs. Creating this kind of lock-in is a true barrier for competition. DoubleClick’s DFA product is a great example of a product that had tremendous value because it was embedded in the agency online media buying process and was used by many people within agencies.

Scale: For a product or service, differentiation can be derived from scale in customer usage, capital expenditure or data. As an example, Google enjoys incredible differentiation and competitive advantage from all three sources. Hundreds of millions of people conduct billions of searches on Google each day, leading websites that want to integrate search to turn to the de facto standard in the industry. Google has spent untold sums of money on hundreds of thousands of machines in datacenters around the world to deliver the fastest, freshest and most relevant search results to its users. The hundreds of millions of clicks generated each day on search results provide Google with a vast quantity of data and insights that help improve search quality. Any new search competitor not only has to deliver a superior consumer search experience, but it also has to spend enormous amounts of money recreating the underlying infrastructure and data that makes Google such a powerful competitive force.

Culture/People: Given that web technology itself is largely indefensible, the greatest source of differentiation and competitive advantage is often execution, and that is predicated on people and the culture in which they operate. Whether it’s the culture of innovation at Google, the culture of customer happiness at Zappos or the culture of freedom and responsibility at Netflix, I’m certain that the management teams from those companies would point to the employees and the DNA of the organizations as the primary reasons for their success. I find that when the culture of a company is well-defined, it is usually a direct reflection of the founder(s) and their conscious decision to establish a well-defined company culture from the start. I only know of a few instances where the culture of an organization was either instilled in the organization at a later point in the company’s development or successfully recast by new leadership.

When choosing what investments to make, I try to keep these sources of differentiation top of mind. It’s easy to get caught up in the appeal of a sexy new consumer application or a seemingly novel approach to a business problem. But lasting, significant equity value is often only created when one or more of these differentiating factors are at play. Are there other sources of differentiation that you would add to the list?

Tips for product management success

I work with several early stage companies that are spending all of their time and energy focused on building great products that address real customerpain. To me, this is the most exciting time in a startup’s development. Starting from a blank page and creating something that will hopefully be in the hands of many satisfied users is both an imposing and thrilling challenge. My product management experience has given me several key insights (I think!) into what contributes to the success of a product manager. I’ll share a couple of those thoughts below and hopefully publish additional ideas over time.

I don’t think that you can be truly successful as a product manager if you haven’t experienced the customer or user’s pain firsthand.  Being close to the customer can provide unique insight into product requirements, and even more importantly, can shed light on what is not required in the product at all. Often times, customers and users will say that they want X or Y feature, but that is only what they think they want. What they need is a specific problem to be solved. Having lived with that problem can provide a product manager with the insight required to identify a true solution. All customer and user feedback is not created equal and knowing which feedback to incorporate into product plans is a necessary skill for any product manager.

A successful product manager also knows that he or she is not an engineer. Trust the engineers to do what they do and involve them early and often in product thinking. If the product manager and the management team have hired strong developers, technical leads, etc., they will not only figure out how to build the product correctly but they will help make the end product markedly better. Many product managers don’t have the confidence in themselves or in engineering to avoid micro-managing and over-documenting. But I’ve found that allowing the engineering team members to own what they are expert in leads to greater confidence in the product manager, more collaborative teams and more efficient product development. It also just makes being a product manager a lot easier!

(Thanks to Hiten Shah from KISSmetrics for inspiring this post.)

Four essential characteristics of entrepreneurs

Despite the fact that my New York Giants failed to make a repeat trip to the Super Bowl, being the diehard football fan that I am, I wasn’t going to miss the Big Game. Whether or not it was the greatest Super Bowl of all time (it wasn’t), one thing that stood out to me was the way in which both teams rallied when they were down and how it took the effort of every player on each team to deliver success. It was clear that no individual player wanted to let down his team by not doing his individual job well.

It strikes me that we’re seeing the same thing play out in the world of startups right now. The companies that are continuing to make progress notwithstanding the challenges in the funding environment and the broader market are the ones with teams that are committed both to the mission of the company and to each other. I would argue that a quality team is the most important factor in the success of a startup, but never is the quality of a team more important than in a down market. After all, there are no unique ideas, only unique execution and execution is the difference between success and failure given the current economic situation.

So what are the characteristics of a successful entrepreneur or team?  I don’t know that I have the right answer to that question, but here are the things that I look for when making investments. First is passion. Is the team genuinely excited about the business and the problem that it is addressing? Is it committed to solving the problem and building a sustainable business? Passion is a requirement given that there are so many ups and downs in the life of a startup. Second is flexibility. Rarely is the initial approach to solving a problem or attacking a market the right approach. Entrepreneurs and teams that can’t react to messages from and changes in the market are likely to continue marching down a path that leads to a dead end. Third is expertise. It’s important to note that expertise isn’t defined as years of prior experience building a company or product. I deem expertise to be the possession of unique insight that sheds light on an acute pain and the salve for that pain. In other words, what is it that makes the team uniquely qualified to solve the problem that they have identified? Finally comes integrity. The relationship between an investor and a team of entrepreneurs is often compared to a marriage, and the comparison is only a slight exaggeration. Trust, honesty and candor are the foundations of the entrepreneur-investor relationship. Without those building blocks, the inevitable ups and downs of the corporate marriage are impossible to withstand.

While this isn’t a comprehensive list of what I believe makes an entrepreneur or team successful, these are some of the absolutely critical characteristics. And I would expect that any startup team should be looking for the same qualities in its investors. I’m blessed to work with a group of entrepreneurs whom I am proud to call both great partners and friends. I have absolute confidence that these teams will be able to execute well during the current economic downturn and emerge much stronger and better positioned than the competition. Watching the Super Bowl, it was clear that each player had the same faith in his teammates, even when it looked like the game was over. I hope that the same can be said about the Giants a year from now!

P.S. Many thanks to those of you who sent your thoughts and prayers my way upon hearing about the passing of my father-in-law. Supporting him and my family through his battle with cancer was a major reason that I’ve been remiss in blogging for so long.

Quick hits: Target, ad networks and the Super Bowl

I’ve been remiss in posting on some fascinating things that have taken place in the digital media industry over the past month. Fortunately, the two major reasons there has been a delay are because of closing an investment that we announced early this week and because of my total engrossment in the transformation of my New York Giants from playoff afterthoughts to Super Bowl Champions (which I’ll comment on below). I’ll do better going forward (I hope). Without further ado…..

Target and customer dialogue: Last month, Amy Jussel of published a blog post in which she shared an opinion about a recent Target billboard advertisement. She also called Target several times, to which Target responded in an email by saying that “Target does not participate with non-traditional media outlets.” Now whether you agree with Amy’s perspective or not, I think we can agree that corporations are doomed if their response to feedback from customers, in any form, is to dismiss it outright. If Amy had written a letter or sent an email, would Target have responded similarly? My guess is only if the customer service representative wanted to lose his or her job. The impact of customer service on word-of-mouth, brand perception and profits can’t be overestimated, particularly in a digital world where switching costs are negligible and customer acquisition costs can be sky high. Emerging companies like Satisfaction and Bazaarvoice (a Battery portfolio company) are focusing on the dialogue between and amongst brands and their customers to create new commerce and service opportunities. Leveraging consumers’ increasingly visible and explicit perception of brands and products in this way is just beginning. In addition, we’ve already seen that the empowering of consumers via digital media can save television shows and change company policy. Undoubtedly, we will eventually see an online consumer uprising that results in a tumbling stock price and executive job losses. The companies that fail to take advantage of the availability of consumer data and to engage in an open dialogue with customers do so at their own peril.

OnMediaNYC and ad networks: I had the pleasure of speaking at the OnMediaNYC conference at the end of January. One of the major things that struck me coming out of the conference is the incredible challenge that advertisers and agencies face in sifting through all of the various media outlets and ad networks now vying for their ad dollars. And that is exactly why scale matters so much. With multi-million dollar budgets to deploy and limited human and research resources, advertisers and agencies can only purchase media in so many places. And the simple rule of thumb is to pay attention to the outlets that can provide them with the most reach. Until there are better research, buying and analytical tools (if you know of any, send them my way!) for them, advertisers and agencies will only spend time with the largest publishers and networks. The challenge then for the publishers and networks is to achieve the scale necessary to rise above the noise and get the attention of potential buyers. Too many of the ad networks that I saw at OnMediaNYC focused on nifty targeting technologies and whiz bang ad formats. Very few talked about how they intend to achieve the scale necessary to have advertisers and agencies even spend time learning about their approaches. There are well over 300 ad networks in the market today, but I expect that there will be far fewer that achieve the scale needed to survive over the long term.

New York Giants, Super Bowl Champions, and teams: As a life-long Giants fan, I was fortunate to attend not only one of the great games in Super Bowl history, but also a game that ended in an unbelievable victory by my favorite team. There are lessons for business to be drawn from many parts of life, but as I left the stadium that night I was struck by a particular message. It sounds flowery and obvious, but it’s worth reminding ourselves that a team of individuals committed to each other and to a common goal always have a fighting chance, even in the face of naysayers and accepted theory. As venture capitalists, we tend to place a great deal of emphasis on the teams with which we partner. The Giants’ Super Bowl victory reminded me that there is a reason that we seek traits like focus, persistence and commitment in our entrepreneurs and that we strive to give them the same in return. In our business, often times market opportunities are not obvious to outsiders or simple to address. But a determined team that believes in its abilities can sometimes achieve outstanding results, even while those on the outside criticize its ideas and approaches. Just ask the Giants.


Super Bowl XLII