‘Twas the Night Before iPad
This is a wonderful age in which we live. Were Douglas Adams alive today, I wonder which piece of modern consumer electronic devices would draw his attention in the same manner as the widespread adoption of digital watches did at the time he wrote the Hitchhiker’s Guide.
My guess would be electronic toothbrushes, but thats just because I believe Mr. Adams would find the existence of the term ‘manual toothbrush’ deliciously absurd and ripe for lampooning. More likely, he would choose a device with a similar impact on the social landscape and similar ubiquity. The iPod, perhaps.
Its funny to look back and the impact that that one single device has had. As a music lover, its hard to divorce the concept of digital music from the player, itself. I wonder what the iPad will come to represent.
I’m not going to take this opportunity to make any wild predictions about the future–I’ll leave that to the fine editorial staffs at publications such as FastWiredCompanyCrunch. Rather, I’m going to take this opportunity to take a nostalgic look back and remember the electronic devices that have impacted my life.
In somewhat autobiographical order:
- The Walkman (road trips with my parents just got better for all parties involved)
- The Nintendo Entertainment System (up, up, down, down, left, right, left, right, B, A, B, A, Select, Start)
- The original Discman (which still works)
- The Palm Pilot (anyone remember how to write in Palm-script?)
- The Motorola StarTac (still the most reliable phone I’ve ever owned)
- The Palm V (my first purchase off eBay)
- Several crappy phones (honestly can’t remember what happened to the StarTac)
- A Blackberry (email on my phone? wild.)
- About a half dozen iPods of various shapes and sizes
- A Gen 1 iPhone (still in service)
And a look ahead to the device I most want to own in the future:
- A Hot Tub Time Machine (its a hot tub that travels through time)
In the spirit of the dawn of a new technical modality and in recognition that I will own an iPad when I can devise some sort of use case, no matter how preposterous, I have developed a way to celebrate April 3rd: The University Avenue iPad Drinking Game.
My thoughts are as follows:
Go to University Ave in Palo Alto, and find a bar with outdoor seating that is situated between the Apple Store and a coffee shop (Joya, for example).
- Every time someone passes by the bar with an iPad box / Apple Store bag reasonably assumed to contain an iPad, you take a drink of your beer.
- Every time someone walks directly from the Apple Store into a coffee shop within eyesight, you take two drinks.
- Every time someone walks directly from the Apple Store into the bar you are sitting in and begins to diddle with his new iPad, you take a shot.
- If you spot Steve Jobs, its Apple Martini time.
Who’s with me?
Darth Capitalist Theoretically in the Black
FOR IMMEDIATE RELEASE
Contact:
Andrew Shriner
DarthCapitalist.com
Palo Alto, CA — October 7th, 2009 — Darth Capitalist has just learned via Google Alerts that DarthCapitalist.com, the Internet’s 9,731,859th most popular destination, has an estimated worth of $248.20 according to WebsiteOutlook.com.
Apparently, if Darth Capitalist were to run advertising it would yield $0.34 per day. Given our hosting and domain costs and almost 3 months of operation, our IRR would be 8.01%.
“I would like to thank our dedicated team of production, editorial and research staff for their hard work and dedication in reaching this milestone in theoretical enterprise value,” said Andrew Shriner, founder of Darth Capitalist.
Given Darth Capitalist’s hypothetically cash flow positive balance sheet, it joins the ranks of FaceBook and other highly successful Silicon Valley digital media companies to have recently reached this milestone.
The Venture Capital Career Path
Its back to school time for MBA students and, for many, jobs and career plans are at the top of mind. Though there may not be as many opportunities in the venture capital industry today as there were in my graduating year (2007), those interested in working in the field should have an understanding of how venture capital firms view careers and career paths at the associate and senior associate levels.
I have already written about what backgrounds and prior experience are the best for success in the venture capital industry (the answer: it doesn’t really matter), but once you are in the door, where you go from there greatly depends on the culture of the firm you join and your ability to add value to the partnership.
At a high level, venture firms need two things: quality deal flow and limited partner dollars. Your success at a venture firm is determined by your ability to bring in one or the other. Let’s assume that you, a new associate, do not have deep LP connections that will help the firm raise its next fund (at your level this is a pretty safe bet). This means that your only play is to become very active in bringing new opportunities to the firm.
Excelling in the deal sourcing side of the business is critical, however your opportunity for upward mobility in the firm depends just as much on your sourcing successes as it does on how the firm thinks about associate career paths.
For the majority of venture firms, role compartmentalization is by far the most widely used model and offers little upward mobility from the associate or senior associate level. A quick look around the firm at the partner level will give you a good idea about how the firm views the role of junior level talent. The key question is: are there current partners and general partners who have worked their way up the upside-down pyramid of the firm?
For most the answer is no. At these shops, the associate is viewed largely as support staff for the partners and may involve very little sourcing responsibility at all, whereby mitigating the long-term impact an associate can have on fund performance and essentially creating a self-fulfilling prophecy of minimal associate-level impact.
But this isn’t always the case. Some firms, New Enterprise Associates, Bessemer and Battery Ventures to name a few, spend a great deal of time nurturing the young talent in their firms. Generational transition is a big issue that venture firms are dealing with at the moment, and the up or out model is becoming more popular, especially with the larger, more established shops keen to pass on institutional knowledge as the older generations retire.
There is little question that venture capital is a challenging industry to break into, and if you are passionate about the work, you should jump on any opportunity to enter the profession, regardless of the situation–you will find a way to make it work. But be aware the downside is that the skills you are developing as an associate are investment skills, not operational skills, and should you decide the life is not for you, there aren’t going to be many opportunities back in the corporate world that map to the skillset you’ve developed. Having a keen understanding of the expectations of the role and the opportunities for growth within the firm will go a long way to establishing a successful and sustainable venture capital career.
Top Five Signs the Venture Capital Recovery is Underway
“From a technical perspective, the recession is very likely over,” Ben Bernanke recently declared.
Here at Darth Capitalist, we are all relieved that the whole recession business is now behind us and we hope that amid record profits and forthcoming record bonuses, Goldman Sachs will remember that we have always liked them and our account and routing numbers are available upon request.
But what of the current state of venture capital? Nearly every day there is talk of broken models, shakeouts, closures, portfolio liquidations, and men trying to feed their families on management fees alone. Despite such horror stories, we here at Darth Capitalist have seen the signs that the venture capital recovery is indeed at hand. So without any further preamble…
Darth Capitalist Presents the Top Five Signs the Venture Capital Recovery is Underway:
5. Tesla delivers its 700th roadster on September 15th.
Although Bentley remains the official car of the superstar venture capitalist, the rank and file of the profession can’t be expected to ride their road bikes to breakfast meetings.
4. Private equity recruiting firm GLOCAP is looking to hire Associate Recruiters for their Venture Capital practice in San Francisco.
When the recruiters are recruiting recruiters for an industry, things must be on the mend.
3. Venture capitalists are cool again.
Just ask the Reservoir Dogs, er Foundry Group.
2. CalPERS increases asset allocation for its Alternate Investment Management program (read: private equity) from 10 to 14 percent.
It may be time for VCs to go back to the well. This time, its back to basics. Again. Seriously.
1. Obscene valuations are back!
In your face, Facebook! Step aside, Slide! Twitter gets $1B post money valuation on $100M in new funding from backers Insight Venture Partners and T. Rowe Price. Previously, Twitter raised more than $50M from Benchmark Capital, Institutional Ventures Partners, Spark Capital and Union Square Ventures.
In anticipation of the forthcoming golden age of venture capital, we at Darth Capitalist are celebrating with cautious optimism by lighting our cigars with $100 bills. Canadian.
Too Big to Fail
One of the most fulfilling parts about blogging is reading the comments and thoughts submitted by everyone who helps make it a success. While on vacation and unplugged all of last week, I got some great notes and ideas from you guys that I am just now catching up on.
In the mean time, here is a little candy courtesy of Rajiv. It can be purchased as a t-shirt here.
On an unrelated note, I would like to take this opportunity to remind everyone that my birthday is fast approaching and I’m running dangerously low on Death Star t-shirts that employ economics humor.
What Background Makes the Best Venture Capitalists?
My father was in software sales. His advice to me: ‘Don’t be in software sales.’ A good friend of mine’s father was an attorney. His advice to his son: ‘Don’t be an attorney.’ Ask a venture capitalist who hasn’t founded a company what prior experience makes a top-notch venture capitalist, and he just might just tell you the opposite of his background. The grass is greener, so they say.
There has been a long-running debate in the venture and entrepreneurial communities about what is the best prior experience to be a successful venture capitalist. I have asked many entrepreneurs and venture capitalists their opinions on this matter, and the answers vary greatly. Is it the former entrepreneurs? The former C-level execs? The HBS Baker scholars? The guys who left the venture and startup worlds to spend 18 months at Microsoft (read: me)?
Dan Primack of peHUB wrote a little piece on this question a few weeks ago where he looked at the Midas 100 List and classified them as C-suite guys, low-level operators, and non-operators (bankers, consultants, etc.). His results were that 54 lacked operating experience, and of the remaining 46 operators, 21 were at the C-level. His conclusion: inconclusive.
I’m not going to begin to dive into questions of methodology and subjectivity, but in the words of a former mentor of mine, ‘venture capital is a funny profession.’ What he meant was that it takes all kinds of skills, all kinds of backgrounds and years to find out if you’re any good.
I recall Michael Moritz of Sequoia once remarked that since he has spent his career fighting fires, it must make him a fireman. To me, that is the soul of the successful venture capitalist: you do what is necessary to put out the fire, and how you found yourself in the middle of the blaze is irrelevant.
Thinking of Joining a Startup? Then Think Like a Venture Capitalist.
Guy Kawasaki is an interesting fellow. When I was finishing up business school, a few classmates and I asked to meet with him in his offices at Garage Ventures, and Mr. Kawasaki was kind enough to humor us. The author, entrepreneur, venture capitalist, and recreational hockey player is a little like a jovial force of nature that has difficulty sitting still in its chair.
And he writes. A lot. There has to be a dedicated server over at Twitter just to handle his throughput. His recent 10 Questions to Ask Before You Join a Startup is a good article, and in the spirit of the collaborative conversation of the web, I thought I’d add my perspective.
If you are considering joining a startup team, you need to think like a venture capitalist. After all you are making the ultimate investment–yourself.
Early stage venture capitalists are in the business of managing risk, and for startups that risk primarily occurs in four areas:
- Market Risk – Will this company’s product or service succeed in the marketplace?
- Technology Risk – Will this company be able to successfully build this product or service?
- Management Risk – Will this team be able to get the company to the next level or beyond?
- Financial Risk – Are they significantly capitalized to achieve the milestones of this funding round?
When you are evaluating an opportunity with a startup, you should frame your questions with the same thoughts in mind. I should probably point out that some of these are “hardball” questions (such as the cap table one), and it is probably best to wait until after you have received the job offer to ask them.
So without further preamble, here is the Darth Capitalist guide to the 10 Questions You Should Ask Before Joining a Startup.
Financial Risk:
1. How much money is in the bank and what is the monthly burn rate?
Mr. Kawasaki and I agree wholeheartedly here. The point is to find out how much time is on the clock. Divide the cash position by the monthly burn rate and you know how much time you have. Keep in mind that if the company is ramping up the hiring, the burn rate will increase. You might want to discount the number of months remaining by about 20%.
2. What are the financing milestones?
When venture capitalists invest, they are actually buying something with the money. There will be a set of milestones that will enable the company to get to profitability or the next financing round. If the company doesn’t hit those milestones with their current cash position, the likelihood of a follow-on round is pretty slim. Have a discussion about those goals and how they map to the company’s priorities.
3. When will you need to do another round?
This is more of a gut check with the company leadership. Map the response to this question with your own calculations from questions 1 and 2. All three of these need to sync. If they don’t, then you should have grave concerns about how well the company’s leadership has thought through their financial, staffing, project management and sales plans.
4. May I see the cap table?
This is the mother of all hardball questions. The capitalization table is the snapshot of the company’s equity ownership. This will tell you the number of shares outstanding in the company and who owns what. You will be able to see what percent of the company your equity compensation equals as well as how much is owned by the investors and founders and how much is set aside in the employee pool. The employee pool reserve is important because it offers insight into the hiring plans that the company has. At the very least, you need to know what percentage of the company your option allocation equals, otherwise those options are just a meaningless number.
Market Risk:
5. What is the size of the market?
The market will make or break the company. This is the most important piece to understand. You need to know how company leadership views the market and the company’s place in it. This will also speak to future plans for product diversification and growth. It is critical that you and the leadership team are strategically aligned on this point, and if you aren’t, have a conversation to understand why.
6. What is the sales pitch?
In any economy, not just today’s, if the product or service doesn’t provide tangible value to the customer or partner, it won’t sell. Period. There has to be a compelling reason why organizations will partner with you, develop on your platform, buy your product, advertise with you, etc. It all comes down to ROI. If the value proposition is a soft sell such as “enhance user experience” and “foster community,” head for the door. Fast.
7. What are the revenue streams?
One revenue stream is nice, more are better. As you surely know, businesses ebb and flow and the ones that can draw revenue from multiple sources are going to be better poised to smooth out the peaks and valleys of business cycles.
8. What are the unit economics?
This is key to knowing the drivers of the business. How much does it cost to acquire a customer, a visitor or a registered user and what is their lifetime value? What are the switching costs for a customer once they are a client or participant? If these questions can’t be answered by the leadership team, this is a major red flag unless this is what you are being hired to figure out.
Technology Risk:
9. Does the technology scale?
This is the flip side of the unit economics coin. How much does it cost to produce your product or provide your service? How many users or customers does the current architecture / procedures support? This is important because reengineering underlying support infrastructure can be extremely costly, especially if the business development / sales team is outpacing implementation and creating backlog. This will result in unhappy customers and unrecognizable revenue.
Management Risk:
10. Does the company have an office manager?
I’m serious. Even in a 10 person startup there needs to be a thoughtful division of labor. If the CEO is ordering pens and refilling the refrigerator with Diet Cokes, his/her priorities are way out of synch with the needs of the company. This is a good proxy for evaluating the overall judgement and priorities of the leadership team.
Gates to Build Weather Machine, Sort Of
I love this news item. Bill Gates has filed a patent for a system to neutralize hurricanes. The science goes a little like this: Hurricanes are powered by water vapor evaporated from the water’s surface. The water condenses, warms the air and in the absence of wind shear, a low pressure system forms and wind begins to swirl. The theory is that if the water can be prevented from evaporating, the hurricane’s power plant shuts down.
In collaboration with Nathan Myhrvold, former Microsoft CTO, founder of Intellectual Ventures, and all-around smart guy, Mr. Gates proposes a system that will pump cold water from the ocean’s depths and use it to lower the temperature of the water’s surface. Apparently, reducing the surface temperature by 4.5 degrees at the eye of a hurricane would be enough to deactivate it.
The technical and logistic complexity would surely be high, but the economic and human savings of preventing another Katrina are compelling. But what I like almost as much as the potential to save human lives is the sheer ambitiousness of it all. I have often spoken to friends of my plans to amass a great fortune and then invest it in the development of lightsaber technology, but apparently I’ve been thinking small.
Mr. Gates has certainly proven to be an conscientious steward of his personal wealth. Rather than eating California Condor egg omelets and using the works of Carl Fabergé for target practice, he has been thoughtfully attacking some of the world’s largest problems. That being said, in the future I hope to see his name attached to patent applications for (in order of importance):
- Lightsabers
- A Time Machine
- Warp Technology
- A way to prevent any more Terminator movies from being made
But for the time being I’ll have to be satisfied that when a butterfly flaps its wings in the Amazon, Mr. Gates may have something to say about what happens next.
Venture Capital and the Dark Side
Not such a long time ago in a Manhattan studio far, far away from Silicon Valley, technology legend Marc Andreessen in an interview on the Charlie Rose Show smiled as he acknowledged he’s “crossing over to the dark side.”
The three time entrepreneur and active angel investor, in partnership with longtime collaborator Ben Horowitz, has just closed a $300M first fund focused on technology companies in Silicon Valley under the shingle Andreessen Horowitz.
This is not the first time venture capital has been referred to as the ‘dark side,’ but the term has enjoyed a resurgence in technology media headlines of late as Mr. Andreessen has been doing the publicity rounds promoting the new fund.
Though the timing is fortunate for this author, the name Darth Capitalist is less a nod to Mr. Andreessen’s remarks but more an expression of a sentiment sometimes associated with an industry whose incentives and practices are often not well understood by entrepreneurs and the general public, alike.
Venture capital is not the dark side of entrepreneurship, it is an enabler of all that is right with capitalism and the pursuit of progress. As a successful entrepreneur several times over, Mr. Andreessen is intimately familiar with the challenges that can occur between investor and entrepreneur. The dark side is not venture capital as a whole, the dark side is the misalignment that can occur between an investment principal operating within a structure aimed at generating returns and an agent tasked with tactical execution.
As practitioners under such conditions, venture capitalists endure monikers ranging from the benign ‘vulture capitalist’ to the more worrisome inclusion in the “systematic risk” of the “shadow banking sector” by the SEC, Treasury and Federal Reserve. Of which the former is cute and perhaps occasionally justified, and the latter completely ridiculous.
The name Darth Capitalist is intended to be tongue-in-cheek–a little self effacing humor at a time when the venture industry as a whole is facing some tough realities apart from the challenges of day to day business. Near-illiquid markets for venture-backed exits and the closure of underperforming partnerships have all happened before–this is merely the ebb and flow that occurs in any industry.
The Rebel Alliance
In the summer of 2008, The Economist ran a cover story on the trouble with the LBO industry complete with an illustration of a Magritte-esque anonymous business man in a suit marching off a precipice, BlackBerry in hand. The article spoke of big funds and even bigger egos leading to obscene valuations and oppressive debt loads. Certainly venture capital is guilty of the same crimes, less the debt and the suits.
Though such a picture isn’t flattering, it is unlikely that much will, or should, change at the macro level. The venture model is not broken, venture capital does not present a danger to the financial system, the industry is merely in a state of transition. Taking a step off the precipice into the unknown isn’t uncommon, but risk management is the name of the game.
In a letter to James Madison, Thomas Jefferson wrote, “a little rebellion now and then is a good thing.” Venture capitalists make their living by enabling such rebellions, be they technological (cloud computing) or social (Facebook). Shifts in market forces create opportunity for some while leaving others behind to circle the drain. Venture capitalists must learn to adapt to the realities of their marketplace, much as they would expect a company in their portfolio to do.
And as with any rebellion, opportunities for new entrants to make an impact are created. Mr. Andreessen, welcome to the eternal optimism of institutional venture capital, where managing the uncertainties of the rebellion and bringing light to the dark side is your new day to day responsibility. You have my permission to print “Marc Andreessen, Darth Capitalist” on your business card.
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