Calling BS

Vanity Fair recently published a expose on Theranos.  It is worth reading.  Like a mini “page turner” novel.

It reminded me of one of my personal themes in investing:  “if you don’t understand the technology then don’t invest.”  The understanding can definitely be acquired.  In fact, I rarely understand the technology when we first meet with a company.  But over our months of due diligence the understanding grows.  And sometimes my partners’ understanding is a good proxy.  BTW, understanding does not mean being an expert.

So, how about these words that Vanity Fair wrote about Elizabeth Holmes, the CEO of Theranos:  “She took the money on the condition that she would not divulge to investors how her technology actually worked, and that she had final say and control over every aspect of her company.”   All I can say is OMG.   Are you kidding me?  Who would invest into a black hole and control freak?  Not sure what else to say.  Granted that this is all hearsay.  I have no proof that this is what actually happened.  All I will say is that if you get whiffs of this type of attitude you should run the other way.   And now that I think about it more, we actually did get caught in a similar situation once, but by no means as blatant.  It is not working out well!!

The Vanity Fair article also offered up an interesting synopsis of venture capital:

“It generally works like this: the venture capitalists (who are mostly white men) don’t really know what they’re doing with any certainty—it’s impossible, after all, to truly predict the next big thing—so they bet a little bit on every company that they can with the hope that one of them hits it big. The entrepreneurs (also mostly white men) often work on a lot of meaningless stuff, like using code to deliver frozen yogurt more expeditiously or apps that let you say “Yo!” (and only “Yo!”) to your friends. The entrepreneurs generally glorify their efforts by saying that their innovation could change the world, which tends to appease the venture capitalists, because they can also pretend they’re not there only to make money. And this also helps seduce the tech press (also largely comprised of white men), which is often ready to play a game of access in exchange for a few more page views of their story about the company that is trying to change the world by getting frozen yogurt to customers more expeditiously. The financial rewards speak for themselves. Silicon Valley, which is 50 square miles, has created more wealth than any place in human history. In the end, it isn’t in anyone’s interest to call bullshit.”

My reaction that synopsis, which definitely made me chuckle:

  1.  The white men comments are true.  Change is happening at a slow pace.
  2. Good VCs typically do know what they are doing, but some are so full of themselves that they come across as very pompous.  But most VCs I deal with are good people with lots of brain power.
  3. Most companies I see are not working on meaningless stuff.  But we focus on upstate NY!!
  4. There is nothing wrong with a “Change the World” CEO as long as they are realistic and focus on building a big company that will make money.
  5. VC is definitely about making money.
  6. It is in EVERYONE’S interest to call bullshit.  Please do just that all the time!


Rule 409A – Again

I first wrote about Rule 409A back in September 2011.  Here is the post, which focused mostly on how 409A valuations are used for stock option purposes.  BTW, I continue to think that as applied to private companies 409A is a terrible rule.  And I think that early stage companies should take the risk and not use 409A valuations.  As companies move to later stages and have meaningful revenues and profits then 409A valuations begin to make more sense.

I would like to add another Rule 409A thought.  Here goes:  please do NOT think that the 409A valuation has any bearing or meaningful relationship to how a VC will value your company.   Said another way, a 409A valuation is meaningless to how VCs negotiate pre-money valuations for their investments.  The 409A valuation is not based in VC reality.  Sure, you might say that VCs have warped senses of reality.  I can understand that!  Regardless, don’t dig yourself any credibility holes by trying to use the 409A valuation as a negotiating tactic.

To repeat what I wrote in my earlier post, I think that 409A valuations routinely work to the detriment of employees.  Stock options prices for startups should be as low as possible.  The government would end up collecting more tax on successful exits and the employees should be delighted to pay more tax on their larger gains!

Thanks, and enjoy the weekend.

VC IQ Test – Have Fun!

I thought it might be interesting to pose a question and see who gets the right answer.  The facts leading up to the question are a little complex, but I think the question is an easy one.


1.  Company AB is an existing operating company that is doing well.  Company XY is also an existing operating company that is doing well.  Both AB and XY have venture investors.  AB and XY are in the same industry “Z”, but have complementary product offerings.

2.  Private equity firm LM wants to do a roll up of AB and XY to form a larger company with a broader range of product offerings in industry Z.

3.  The plan is for private equity firm LM to make an offer to buy company XY.  The structure of the offer is not irrelevant, but assume it would be a stock purchase.  LM’s offer would be made through company AB, so that it feels like LM/AB are making  the offer together with the end game being that AB’s management team would run the combined AB/XY company.

4.  To finance the offer, private equity firm LM would first make an equity cash investment in AB.  Then AB would use a big chunk of the investment cash to buy company XY.  Company XY’s stockholders would thus be cashed out (and hopefully happy).  At the end of the day, Company AB would own Company XY (they would likely do a legal merger) and the shareholders of Company AB, which now includes the private equity firm LM due to its equity investment in AB, own the combined companies.

5.  Let’s assume that private equity firm LM invested $22 million in company AB in step 4 above.  Let’s assume that $19 million of that is used to buy company XY (so $3 million of fresh cash is left in the combined company to fuel ongoing operations).

Question:  as an existing investor in company AB what is the #1 most important fact not disclosed above that I need to know to figure out whether or not I am in favor of this proposed deal?

Leave your answers in the comments.

Boards at Startups

I just came across a super series of easy to understand videos on startup boards of directors.  Brad Feld (Foundry Group) teamed up with the Kauffman Founders School and created about 35 minutes of content arranged in 7 relatively short video segments.  Brad wrote about this today is his own blog.

It is worth viewing for anyone that has a board of directors or is considering forming one (for those in the very very very early stages).   The videos are here on the Kauffman Founders School site.   In fact, the site contains links to video series on a number of relevant startup topics (finance, leadership, selling, marketing, etc.).  Easy viewing.

It is over 40 degrees and sunny here in Ithaca today.  I saw some students in shorts!

Revenue Model: The Path of Least Resistance

I have heard many times that if a startup company CEO cannot easily and quickly explain his/her pricing model to a customer that the startup company is doomed.  This probably applies to “non-startups” too.  In any event, I agree.

Related to pricing is how a company plans to make money off a customer.  The easy case – customer is buying a good or service and pays for it then and there.  Slightly more complicated – customer is buying a service and paying for it monthly (i.e., a SaaS revenue model).  Even more complicated – customer is paying based on use hurdles.  Regardless, the company better be able to easily explain the pricing structure to the customer.

We recently had a company in the CVF portfolio, GiveGab, that changed its pricing model.  And the change has been very well received so far (and we hope that will continue with major scaling).  The original model had the company implementing either (i) a SaaS model or a (ii) custom build model.  The custom build model was tough as it was being sold to larger organizations that move slowly.  The SaaS model was tough because many of the potential customers (non-profits) had previously used other SaaS software solutions (in this case for volunteer management) with a mixed bag of results.  GiveGab knew something had to change.

The answer in GiveGab’s case was the path of least resistance.  How about getting paid by the customer only when the customer gets paid?  In this case that meant a donation revenue model.  GiveGab’s customers pride themselves on cultivating volunteers.  This critically increases support (financial and otherwise) for the non-profit.  GiveGab came to understand this quickly and built in donation management into its volunteer management platform.  The message to the GiveGab customer was simple:  we have the best volunteer management system, we want you to use it for free and only pay us for donation processing (something that most non-profits do anyway).  This is a great approach.  The customer pays for a transaction that it is used to paying for already.  But it does so on a volunteer management system that is awesome.  A win-win all around!  The customer gets more and GiveGab gets scale.

Bottom line:  think about the path of least resistance when it comes to a revenue model.  Take that path if possible!