The Gig Economy

I love the Economist.  But, this article, given my everyday experience, doesn’t feel right – kinda like Robert Solow’s quote back in the ‘80’s, “You can see the computer age everywhere but in the productivity statistics.” (
My own view is that IT didn't really add to “white collar” productivity until (1) it became (widely) networked, (2) network connections were always-on and (3) computing/communications devices were always connected to the network.  Standalone PCs are better than typewriters, adding machines, mimeograph machines, etc., but not exponentially better – (one of my favorite quotes from an author I know illustrates this:  “Giving everyone a word processor will not significantly increase the number of great novels that get written.”).
Not sure what the analog is w/r/t the Gig Economy.

True or not, the good news is that it’s certainly not a widely-held belief in the investor community.

More on Tough Questions

In a recent post, I advised entrepreneurs seeking VC funding to think carefully about choosing their co-founders. I claimed this decision is often gotten wrong and that, not infrequently, one or more co-founders leave the company with an amount of founder’s equity disproportionate to their contribution (in the eyes of their co-founders). Finally, I noted that, in this situation, the “remaining” co-founders almost always bear the economic brunt.  How to avoid this? I wish I had a crisp, clean and clear answer. Like a lot of other important questions in life, however, the answers are messy, ambiguous and highly context-dependent. All of us, VC’s and entrepreneurs alike, wish we could just call up “Central Casting” and order “the perfect startup team”. But, of course, we can’t. That said, there are some useful ways to think about this situation, and, below, I’ve set out some guidelines that a VC will likely use in evaluating this aspect of a startup. I hope these will be helpful to entrepreneurs as they’re building out their co-founding teams. As I mentioned here, founders don’t always pick their co-founders with a beady, cold-eyed, calculating gaze, and with a tough-minded focus on who can actually make the biggest contribution to the Company over its lifetime. Instead, co-founders are often picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”. For any entrepreneur contemplating starting a company, there is an interesting and helpful analysis of this “choosing-who-to-work-with” phenomenon in a June 2005 Harvard Business Review article entitled “Competent Jerks, Lovable Fools, and the Formation of Social Networks”. If you don’t have access to a hard copy, you can purchase reprints online at:  .  Starting a company is an act of courage. It’s also tremendously complicated. Almost always, the elements that are “unique” to a particular startup are as important as the elements that are “common” across the universe of startups. As with any set of simple guidelines, the ones below should be considered with a grain of salt. When applying them to your startup, keep your common sense hat on tight at all times.  1. Incomplete Team vs. the Wrong Team Member?  A key question any founder seeking VC financing needs to answer is “How complete does my team have to be?” On the one hand, experienced teams with domain expertise covering the principal startup business functions (e.g., product development) are very attractive to VC’s. On the other hand (as I’ve previously posted), teams with the “wrong” people on board are less attractive. A person can be “wrong” for a Continue reading "More on Tough Questions"

Some Tough Questions Entrepreneurs Should Ask Themselves

If you want to raise money from VC’s, here’s a really tough, really important question you ought to ask yourself very early in the process: “How many co-founders should I have?” Having the wrong “answer” to this question can make your life difficult in some subtle (and odd) ways. Plus, unlike some miscalculations, here the wrong answer hurts only the founders, not the VC or later employees. Here’s how to look for the right answer. Although entrepreneurs are motivated by things in addition to money, money’s important to everyone I’ve ever met trying to start a company. Monetary rewards in a startup, as everyone knows, ultimately derive from ownership of stock (not salaries or bonuses). Since there can never be more than 100% of the founders’ stock available for allocation, every co-founder should focus on ensuring that the allocation best matches the realistic, expected contributions of each founder to the success of the Company.  In Silicon Valley (assume it’s the same in other startup regions), “founders” have a bunch of iconic attributes, some good, some bad. Although we don’t, we should have a statue dedicated to “The Startup Founder” prominently displayed somewhere in Silicon Valley. Founders are passionate about their businesses, and will run through brick walls to make them succeed. In large part, Silicon Valley’s success is attributable to this passion and “never-say-die” attitude. That’s the good part.  Founders are also “expensive” in terms of equity (usually, and sometimes even rightfully, to reward them for taking the risk in joining a startup). Founders are harder than normal employees to transition out of the Company (not legally, just emotionally: “How can we fire Fred? He’s a founder.) Just like most people (including VC’s), founders usually have skills and experiences that are narrower than they, themselves, believe (even sincerely). And finally, founders don’t always pick their co-founders with a beady, cold-eyed, highly calculating gaze with a tough-minded focus on who can actually make the biggest contribution to the Company. Often, co-founders are picked because they are friends, or like-minded, or “great people, the kind you’d pick if you were in a foxhole under fire”.  That’s the bad part.  Let me illustrate the problem with a hypothetical (though not uncommon) four-person startup.  Four friends decide to start a new company. After some jockeying (since they’re “peers” at their current company), they finally settle on the following titles, roles and percentages of the equity: (1) President and CEO (35%), (2) VP Marketing (25%), (3) VP Engineering (25%) and (4) VP Finance/CFO (15%). To them, it seems logical to have these four (eventually) important business functions covered by the founding team. Moreover, these responsibilities roughly match Continue reading "Some Tough Questions Entrepreneurs Should Ask Themselves"

Success = Co-founder vs. Failure = "Early Employee"

Have you ever noticed, that, after the fact, successful companies have many "co-founders", while failed startups have only "early employees". I first noticed this phenomenon when I was a VC, back in the early/mid-2000's.   PayPal had just completed the first "mega" acquisition of the winter (the price was ~$1.5 Billion -- pocket change, it seems, in today's frothy M&A environment).  As typically happens after acquisitions like this, the PayPal employees began to trickle out of eBay over the next year or so.  This occurred for all of the usual reasons that plague post-acquisition integration:  financial reasons (becoming fully vested, etc.), as well as a mismatch between the cultures of the two companies that began to wear on both sides. In this diaspora, some went into venture capital, some "retired" and, among a number of other pursuits, some went on to start new companies. As these startups began to pitch the VC community, a number of them came through my firm.  I began to notice that anyone who had worked at PayPal in the first year of its existence identified themselves as a "Co-founder".  Through coincidence, I happen to know a lot about the actual facts of the founding of PayPal (actually, two separate companies that, after a year or so, merged to become the "PayPal" that we all remember today).  So, I knew that most of the claimants were, in the charitable cases, puffing, and, in some cases, simply misrepresenting the facts.  The human desire to bask in reflected glory is deep and longstanding, but it always lowered my estimation of the person who falsely made the claim.  Normally, it was enough of a reason for me to pass, and move on to the next company. Surprisingly to many people, and unlike seemingly similar terms, such as "Chairman", "CEO", "Board Member", "VP Marketing", the term "Founder" has no legal significance.  It's not mentioned in any corporation law or regulation, and no legal penalty attaches to its mis-use.  No legal obligations flow from calling oneself a founder (unlike the legal job categories listed above).  So, naturally, one would expect "title-inflation" to occur here -- and it does. The history of Facebook is a more recent object lesson in this phenomenon.

The caution offered here is that Silicon Valley, for better or worse, is a small town, and the early histories of many companies, especially the successful ones, are well-known.  It doesn't help, and can harm, your chances of getting financed by falsely claiming co-founder status.

Managing Your Board of Directors — Great Advice, From Someone Who’s Good at It

Here is some advice for CEO's from a good friend of mine, John Kernan.  John has been a successful serial entrepreneur for 40 or more years.  John has, over the years, run companies that have been wildly successful, as well as a couple that have failed.  Over this long career, John developed a set of "rules" that help a CEO keep his (or her) board focused on helping move the Company forward. I've worked with CEO's for more than 35 years, as a lawyer, as a VC and, nowadays, as a "Sherpa", and John is the best CEO I've ever met at "managing" his board of directors.  In today's world, the term "managing", when used  in connection with an information-intensive process (like CEO/Board relations), frequently takes on a negative connotation.  I mean something different and positive. What the 10 rules listed below are aimed at doing is helping the CEO use the Board of Directors in a way that best helps the Company make progress -- not by hiding information (you'll see below John's advice on dealing with bad news), but by being aware that one's board of directors, like any group of human beings, can be organized in a way that is constructive -- or not.  Successful CEO's realize this and proactively try to get their boards to operate in a way that best helps the Company -- it will not come as a surprise to anyone that Boards don't necessarily self-organize into highly efficient, constructive, high-powered and helpful groups of advisers. Here's his take on how to do this. 1. NEVER have the board meeting "at" the board meeting.  ALWAYS call every director a few days before the meeting and run every important issue by them to get their input, Also update them on company performance, especially the bad news, and let them "beat you up" privately. That way, the meeting can focus in a constructive fashion on problem-solving and building the Company for the future.  2. Maximum PowerPoint show is four slides from any presenter, especially yourself. This should be the limit of director interest in detail.  3. Provide complete access for the board to everyone and everything in the Company. They will rarely use it, but it's a great comfort to them to know you are not trying to hide anything.  4. Have your key team members do almost all the presentations. It gives them exposure and allows you to make sage comments along with the rest of the board. A perfect board meeting is when 10% of the talking is done by the CEO, 60% by the team, and 30% by the directors.  5. Continue reading "Managing Your Board of Directors — Great Advice, From Someone Who’s Good at It"

Entrepreneurs: Are You Lost? How To Tell Where You Are in the VC Fundraising Process

As in many other situations involving asymmetric power relationships, VC’s (who usually have the power) like to preserve optionality with startups in which they’re interested (as I wrote here).  That is, VCs generally will try to keep interesting deals “on the hook” until they have to make a decision (usually driven primarily by the concern that other VC’s are converging on the deal).  From the VC’s POV, this is eminently rational.  Why make a risky decision (i.e., whether to invest) until you have to – waiting may allow more data to emerge that will inform/improve your decision.  Accordingly, VCs, good ones anyway, become quite skilled at saying things, whether or not true, that make entrepreneurs think there’s serious interest in their deal. For the entrepreneur, this frequently leads to disappointment. Experienced entrepreneurs know that they cannot rely on anything a VC says about where the VC really stands.  As I wrote here, the only way to tell if a VC is interested in your deal is whether they are re-arranging their schedule to work on your deal.  If you're not pushing other stuff off their calendar, you're making no progress.  Whenever a VC misses a deadline in getting back to you, it’s a bad sign.  In general, given how time-consuming the fundraising process is,  the entrepreneur should consider that VC a “pass”, and focus fundraising efforts elsewhere. As an aside, in the roughly 20 years I spent as a lawyer representing entrepreneurs, I used to tell my clients that the worst curse they could inveigh against a competitor was that the competitor had to seek venture financing.  That guaranteed that the management team of the competitor would have to take their eye off the ball for 3-6 months. Even “scheduling-altering behavior” by the VC, however, is not always a good indicator of an eventual offer.  Many deals evoke an initial burst of activity by a VC (especially if the deal is perceived as “hot”), only to have the activity level fade and turn into a “pass”.  Not infrequently, in my experience in representing entrepreneurs as their lawyer, the last thing an entrepreneur may hear from a VC before “We’re going to pass.” is “Would you consider raising a bigger round, so we could write a bigger check?”.  The only certain way (as I wrote here) for entrepreneurs to know their deal is closing: when the VC’s wire transfer hits their account.  Until then, best to remain skeptical, and keep plugging.

Further aside:  VC’s often (indeed, most often for the vast majority of VCs) “communicate” that they’re not interested in an entrepreneur’s deal Continue reading "Entrepreneurs: Are You Lost? How To Tell Where You Are in the VC Fundraising Process"

"On Demand" Eating the World of Music, Too.

It's now a truism, or a cliche, to mention how the "On-Demand" economy is eating the world of personal services (Uber, Lyft, AirBnB, Task Rabbit, Postmates, Instacart and dozens of others).  Among a bunch of other reasons, millennials don't want to own things in the same way that we, their parents, did/do.  What is lesser remarked, but equally disruptive to a huge market, is that, as noted here in the Financial Times, the "On Demand" business model is also eating the music world - streaming has now outpaced downloads, with disruptive repercussions for an already beleaguered industry.

1998 — 1999 are Calling and They Want their Wild Abandon Back!

I love Tesla, and am a huge fan of Elon Musk (a former client from my lawyer days). But, reading this in a place like the FT (as opposed to (the long defunct) "Industry Standard", as well as "Upside", "Red Herring", "Wired") made the hair on the back of my neck stand up in alarm -- I thought I was having LSD flashbacks to 1998 - 1999, when statements like these (this one from today's FT) were thrown about with abandon:

  "Still, if you try to be rational, you are missing a big point in Mr Musk’s favour. Silicon Valley is currently obsessed with cars. More than that, those who mutter about the lessons of the last dotcom crash could be missing out on the next Amazon. If you had written off Jeff Bezos’ hubris, you would have missed one of the great investments of our age. You buy Tesla today so that in years to come, you can say you were there."

Advice on Hiring

Don’t hire people about whom you have doubts.  One will make plenty of hiring mistakes during one's business career by hiring people about whom one had no doubts, but who, nevertheless, don’t work out.  But, the failure rate on people about whom you have doubts is far higher.

Trust your doubts, especially as you gain hiring experience.  The best "gut" is fallible -- one will hire people who surprise one by not working out -- but still one's best guide.

Startups and VCs — The Secret Arena of Competition

Every startup seeking financing from VCs faces two kinds of competition: known and unknown. Known:  Every startup pitch should have a "Competition" slide, in which it lists and (briefly) describes the bases of competition and the companies with whom it competes in the market it's trying to exploit.  There are two main variations on how to present this: (1) a "magic quadrant" with two dimensions of competition that result in the startup being alone (or a good distance away from the other listed competitors) in the upper right quadrant, or (2) a matrix with competitor's names down/across one axis, and features/attributes across the other, with all the good features/attributes for the startup filled in or checked, and the features/attributes for the competitors mostly not.  VCs, occasionally, chuckle at particularly creative competition slides, but do pay attention to them as a part of the IQ test they implicitly administer to entrepreneurs throughout the due diligence process. So, Entrepreneurs, you should absolutely have a competition slide, and you should be honest in the depiction of your competitors.   VCs, because they see so many deals, usually have a good sense of the competitive landscape, so overly creative attempts to downplay competition can work against you.  Unknown:  Equally importantly, however, there is an invisible set of competitors that you may never come to know.  These are all the other startups on your VC's desk competing for the VC's attention.  All, or certainly most, may never compete with you in the market (or even other areas of invisible competition, such as for talent, PR/press coverage, rental space, etc.), but you need to out-compete them, nevertheless, or you won't get financing. VCs spend a lot of their time getting pitched.  Because VCs are human, even the best, kindest hearted, ones get jaded, or, at least, inured to the process over time. This means that you need to grab their attention early in the process of engaging with them, from the minute you are introduced (as noted here, you will always need a warm introduction to the VC to be considered at all), through the first presentation you make to them.  Elsewhere, I have called this "Create the Aha Moment Early", and urged entrepreneurs to be active in their descriptions of their businesses.

So, be aware of the two different fields of competition. They both require careful thought and preparation.

Entrepreneurs: Make Sure You Prepare Your Customers for Reference Calls

Practice varies, but quite often the last two due diligence items a VC will want to do before offering a term sheet are (1) personal references and (2) customer references.  These should be done last because it's easy to "burn out" the person(s) giving the reference(s), and, so, entrepreneurs should not deplete that resource unless the prospective investor has done all their other due diligence and is on  the verge of making an offer.  That is, the entrepreneur should get the VC to commit that these are the last two due diligence items they intend to do (other than legal due diligence, which is always done after a term sheet is proferred). There are certainly risks in personal reference calls going badly, but most people in the business world have made, and given, reference calls, so I'm not going to spend any time on that topic. Customer reference calls, however, can go off the rails if not prepared for properly, and here are some tips on how to maximize the chances they go well. Person Seeking the Reference:  It is entirely within the bounds of propriety for the entrepreneur to review the questions that the VC plans to ask of the customer reference.  The entrepreneur should note that the VC is free to request to ask anything the VC wants.  The entrepreneur's choice is to comply, negotiate away the question (very unlikely and risky from a "makes the VC nervous" perspective) or get money from someone else.  But, that said, the entrepreneur should understand what the VC is planning to ask about so the entrepreneur can prepare the customer for the call. Customer Giving the Reference:
  • Things That Can Go Wrong: It's important to realize that, for many customers, this might be the first time they've ever done a "customer" reference call for a vendor who's seeking financing.  It can seem mysterious and ambiguous; at the very least, there's not a widespread understanding of the purpose of the call.  Here are some examples:
  •  "I need to appear smart":  Often, the customer employee will feel the need to appear smart to the VC.  Probably, this is part standard human reaction to a situation in which it's easy to feel like you're being "tested" on your knowledge of the vendor, their product and the industry, exacerbated by some nebulous sense that the VC must be important (or else, why would the vendor have asked me to do the call?).  In any event, I have seen this movie, and it usually involves the customer employee struggling to appear "even-handed" in their evaluation of the product, so Continue reading "Entrepreneurs: Make Sure You Prepare Your Customers for Reference Calls"