I had an exchange with an entrepreneur last night that I couldn’t resist posting (I did resist including the guy’s name, however). It started with a relatively typical email. One which I wonder why I still receive but still get regularly. The entrepreneur writes:

Seth…..I’d like to pitch you on a start up. I need the help of someone like you. I haven’t filed any patents yet and I need a nda signed. can we do it?

I respond as I do for all requests like this by saying:

Hi [name redacted]. Like most VCs I don’t sign NDAs (see: https://www.sethlevine.com/wp/2008/01/why-i-dont-sign-ndas). Let me know if you’d still like to show me what you’re up to (totally understand if you feel it’s too sensitive).

Here’s what I received in response:

Seth….I’m reaching out to you here, lets get off this old cookie cutter vc "don’t sign nda’s" attitude, it’s only until the patents are filed. I believe I’ve got one of the biggest deals to come down the pike in years. This isn’t my first rodeo. Just FYI, no matter how hard you crunch the numbers, this is a 20+B per year deal. I already have demo software and I need you to help me put a team together, the money will come as soon as we are able to "show and tell" so to speak. Please reconsider.

Really? That’s how you’re engaging with me? I can’t imagine how you think this is a winning strategy. Am I supposed to be bowled over by how amazing this potential opportunity might be, change a cardinal rule of our business and through this series of emails think that you’d be a competent manager, effective advocate for your business and a good guy to work with?

The initial email is completely casual, full of mixed cases and grammatical errors. Oh, and totally un-researched. But the second response really takes the cake and what caused me to post this for the world to see. Of course you have one of the biggest deals ever. Clearly this isn’t your first rodeo. Certainly you’re playing in a $20BN market. And without question I’m just one of those cookie cutter VCs. Obviously I should change my attitude.

[BTW, in case you were wondering, I didn’t bother responding]

Brad has a lengthy post up describing how we think about seed investing at Foundry Group. In it, he describes our philosophy around seed investing and differentiates it from what others (but not everyone) in the market is doing. Importantly, he notes that:

our seed investments are not “options on the next round.”  We price our seed rounds as equity investments, always lead or co-lead … and treat them the same way we would a $10m investment… when we make a seed investment, it gets everyone’s attention.  We try hard not to smother it with love, but we recognize that we usually each have something unique to add to a seed investment and try to help accordingly.  As a result, we are all emotionally involved in the investment (a phrase you’ll see in later posts about this topic) which I believe is both beneficial to the entrepreneur and extremely important to the VC firm.

At the end of his post Brad lists out the companies in the Foundry portfolio that started as seed investments (AdMeld, Gnip, Lijit, Mandlebrot, Next Big Sound, Standing Cloud, and Trada). I thought it would be interesting (and illuminating) to describe the story of one or two of these investments as a way to put some color around how we think about seed investing.

With that pre-amble, let me describe the story of Trada – a company that helps businesses more effectively manage their search marketing campaigns via its marketplace through which paid search experts work collaboratively and competitively to maximize the effectiveness of Trada customers search marketing campaigns.

I’ve known the CEO of Trada, Niel Robertson, for almost 10 years. He’s founded several companies that our predecessor fund invested in (one of which was a huge success, one of which was not). The roots of Trada can be traced back to a series of conversations Niel and I started having months before the concept of Trada was born. They started with the idea that we wanted to work together on another company and some concepts about the operating philosophy of our relationship, the kind of company culture we wanted to build and the ideal pattern of communication that the two of us would have around the business. With the foundation of our operating philosophy intact we turned our attention to what this new business should do. I had been spending quite a bit of time looking at the online advertising market and suggested to Niel that, while the display market was large (and there were plenty of interesting businesses to be built there) I was particularly interested in trying to figure something out around search – which is a larger market than display and significantly concentrated with the search platforms (there were and are far fewer companies playing in the search ecosystem than in display). This mapped with some of the ideas Niel was thinking about as well and over a series of months we tossed around a number of different ideas in search marketing. Niel eloquently describes the birth of the idea behind Trada on the company’s blog (worth taking a look at and considering the varied genesis behind businesses).  To be clear, while there is a small group of us that are Trada founders, the idea of Trada is completely Niel’s. From the initial idea we worked together to validate the operating assumptions of the business – doing collaborative due diligence on the crowdsearch SEM marketplace that was the idea behind Trada.

Of course coming up with the idea is the easy part. Executing against that idea is another matter. In this case neither Niel (nor I) had any interest in creating a traditional syndicate to fund the company. Instead we quickly put our heads together about a financing (we like to say it was over beers, but the truth is more mundane – we hammered out the details in a 10 minute conversation in the conference room of the Foundry office). We decided that we wanted to bring in some experts to help us with the business and together flew around pitching the business to a small handful of strategic angel investors to pull together a small syndicate that became the initial Trada investor base. Niel and I hammered out a second financing in similar fashion (again around the Foundry conference table, this time without the need for an angel roadshow). It’s a great example of how we like to work with entrepreneurs – especially those that we have a long history with. We like to be involved early (in this case before an idea for a business even existed) and we think of our angel investments as a down payment on a subsequent investment in the business (we’ realize that we need to give early businesses some time to develop).

More recently in Trada’s history we announced that Google has joined us in investing in the company. It’s hard to imagine a more strategic investor in a search business than Google and we’re extremely happy to have Rich Minor and the Google Ventures team on board.

We’ve come a long way with the business and strongly believe that there’s no better platform for small and medium sized businesses to leverage the power of search. If you’re a business or PPC agency spending $3k – $100k per month on search marketing, I’d encourage you to give them a try.

I spent the month of July up at our place in Granby, CO (just outside of Winter Park). My partner Brad has been a longtime fan of taking a month to work somewhere else, not travel and clear your head, but I’d never given it a try. And while I understand that not all jobs allow for this, I suspect that more people could do it (at least for a week or two) if they really wanted to.

Let me be clear that this wasn’t vacation. While I didn’t get on a plane for a month (which in and of itself felt like vacation), I was working full time – completely connected via email and phone. I actually intended to take a week of the month off, but with a number of financings closing and a Thursday full of board calls, my week off turned into about 2 days off instead. Other than those two days I was fully connected.

And the amazing thing about taking some time out of the office was how amazingly productive it was. I was completely caught up on email, totally connected to the happenings of the portfolio and my “to call” list shrunk down to zero. More importantly, I was able to spend a lot more time with my wife Greeley and our three kids (by far the biggest downside of my job is the time that it requires me to be away from my family).

While I recognize that time in the office is important I realized this summer that time out of the office is just as important. I’ll definitely be doing this again. And hopefully my pace of blogging will pick up this fall with some of the ideas bouncing around my head from July…

Clearly a hot topic in online ad-tech right now is the rise of exchange-based buying and the advent of real-time bidding platforms (RTB) that allow advertisers and publishers to transact on an impression by impression basis. Given all the focus on RTB I sometimes have to remind myself that true real-time trading is less than a year into its existence. And given its nascence, the landscape of companies (buy side platforms, sell side platforms, data providers, agencies, brands, publishers, etc.) that are playing a part in these exchanges is changing rapidly.

We’ve long been believers in audience based buying and selling of ad inventory. Our investment in Lijit is largely around this concept and more obviously, our work with AdMeld, which is a leader in the RTB world, falls squarely into this thesis. And while I’m not one for sweeping (and superlative) predictions around the future of the ad ecosystem (here I’m specifically not predicting the death of all ad networks), it’s clear from my vantage point that more and more inventory – both remnant and non-remnant – will be processed through real-time platforms. This leads to some interesting questions about how publishers will need to alter the decision making engines in their ad stacks and how blurry the line will become between premium and remnant inventory (there’s a continuum there that technology such as RTB is clearly stretching out; as an aside, we need to come up with a word for inventory that’s between house sold premium and what we traditionally called remnant).

Clearly the rise of sell side platforms such as AdMeld and AdEx needs to be matched by new thinking on the demand side. And while there are a number of companies creating DSP’s (including, of course, Invite Media who recently sold to Google) few (if any) were built from the ground up to exist in the exchange world as it’s currently evolved to. And as a result, the demand side as a whole seems to be lagging in its ability to handle the rapidly increasing scale and complexity of supply.

The ability to handle this massive transaction volume is what first attracted us to Triggit, a company we announced an investment in today (see the Triggit blog, AdExchanger, MediaPost and TechCrunch). However it was their application of additional technology to this supply to allow advertisers and agencies to run more effective campaigns that really made the company stand out.

Triggit was the first DSP to develop a self service interface which allows buyers to plan and schedule campaigns across exchanges. Triggit has also been a leader in enabling advertisers to better target audience by allowing them to append both third and (importantly) first party data to their transaction decision engine. The Triggit team – lead by Zach and Susan Coelius and Ryan Tecco – is fantastic. Both in their ability to push the limits of technology in the DSP world as well as their ability to work with leading agencies and Fortune 500 marketers to enable their exchange buying. We’re joined in this investment with Spark Capital’s Santo Politi, with whom I’ve developed a close relationship over the past several years.

We’re thrilled to have Triggit in the Foundry family.

This seems like an appropriate topic against the backdrop of my recent post on becoming more of a data driven organization. When you expose data, you expose not just those areas of your business that are doing well, but also those that aren’t. And this brings up an interesting question:

Does your organization embrace failure or only reward success?

Specifically, do you encourage people to create challenging goals and give them credit for the work they did trying to achieve them, or do you (implicitly or explicitly) encourage people to sandbag and as a result “overachieve”? The answer to this question may be more nuanced than you originally think once you sit down to consider it. In fact, most people in our society are programmed to reward overachievement rather than an effort that falls short of achieving a really high goal. But the behavior this can encourage is counter-productive to many business activities. And while we may pay lip-service to the “setting lofty goals” idea, the reality is that most companies don’t work this way. They have engineering deadlines, sales goals, etc and rather than creating a culture of setting aggressive targets and trying like hell to get there, they prefer the greater certainty and achievement of “managing expectations”. Failure is something to be defended against (and if you do fall short, there’s always a reason that’s not your fault).

Thank about it. And maybe change the way you manage your organization.

If you followed this blog last year, you know that my quest to hit United 1K status ended with a December 26th trip from Denver to Washington DC. I left the house around 7:00am that morning and returned home that evening at 6:00pm, happily tweeting about the 30 miles I had to spare. And while I never want to make 1K again (that’s just too many miles to fly – especially back and forth from Denver to the east and west coasts, and in particular considering that I probably had another 20k miles on other airlines last year as well) I was pretty pleased with my achievement.

Fast forward about two weeks. I’m on my way to CES in early January. My (United) flight has already been delayed by two hours. They’ve loaded the plane, allowed us to sit on the tarmac and then pulled us back off the plane to try to locate a new aircraft. I’m four hours into my travel day and I haven’t gone anywhere and it’s not clear that I’ll be getting out at all. I’m sitting in the gate area downloading email when I receive the following from “United Mileage Plus” with the subject line “My Mileage Plus — Your updated account balance, 2009 Error in Calculation”:

Seth Levine Member

Dear Seth Levine, On behalf of United Airlines we wanted to thank you for your business and your continued support during these difficult economic times.  I am writing to you with regard to your current Mileage Plus account and an computer error we experienced last December. Several thousand 1K Members’ Elite Qualifying Miles (EQM) balances were incorrectly reported due to a processing error.  Fortunately we have corrected this and our systems are now accurate.  As a result your December 31, 2009 EQM balance was: 93,356 miles We understand that this balance disqualifies you from the 1K Membership level, however due to the fact that we had a reporting error, we would like to extend an opportunity for you to travel by January 31, 2010 to achieve 100,000 EQM.  At that point your 1K Membership status will be restored Below is your December 31, 2009 mileage summary. For more information, simply visit the My Mileage Plus home page now. My Mileage Summary                                                              Premier Executive Account Summary Account Number:                                        XXXXXXXX Current Membership Level:                       Premier Executive Current Redeemable Miles Balance:        144,996 2009 Elite Qualifying Liles (EQM):            93,356 2009 Elite Qualifying Segments (EQS):      55.5 Lifetime United Flight Miles:                      552,760 Redeemable miles expiration date:          Jun 30, 2011 Again, on behalf of United Airlines we are very sorry for this error and any inconvenience it may cause you.  We hope you will take advantage of our extension offer by January 31, 2010 to achieve your 1K Membership status. We look forward to seeing you on another United Airlines flight soon. Sincerely, Ted Peters VP Customer Relations

I’m already steaming about United because of the delay and here I find out that my little trip to DC was all for naught – I’m still 7,000 miles away from my 1K goal. And I had checked probably 3 times with United about my account balance (making sure all of my December flights were in the system, checking to see if there were any other ways for me to get the miles w/o having to take a vacation day trip, etc.). I can’t believe they had it wrong. I tweet about the note. I tell the people around me at the airport what just happened. But I decide to wait until I cool down to actually call United and tell them when I think about their “computer error”. I’m sure that I’ll talk my way back to 1K, but if I call them right now I’ll just end up yelling at them and likely won’t make any friends in customer service.

Eventually my flight takes off and as it turns out I land at about the same time as my partner Brad, so I send him an email to wait for me so we can ride to our hotel together. We sit down in the car and he turns to me to ask if I had called United yet. But with a curious smirk on his face. I tell him I hadn’t – that I was too mad at the time to do it but was planning to do so from the hotel. I guess he felt sorry for me after such a bad travel day, because he looked at me and said: “yah. that was actually me and pete” referring to Pete Sheinbaum, CEO of Mandelbrot Project (and email expert from his days running Daily Candy). Kelly Collins from Foundry had also been in on the act (she has my United creds so they could log in to get the exact mileage amounts). They had planned to tell me later, but he couldn’t let it go any further. I actually didn’t believe him. Of course it had never occurred to me that this was anything but legitimate. And as it slowly sunk in that I had been utterly and completely taken, I literally couldn’t stop laughing.

Brad, Pete and Kelly really really got me.

And I’m still plotting my revenge…

I had planned to title this post “If you have a data intensive business, don’t forget to look at your data.”  But when I thought about, really all businesses are (or should be) data-intensive. And as a result all businesses should be obsessed with the data their systems generate. Measure. Track. Analyze. Adjust.

Years ago I remember sitting in ServiceMagic board meetings when Rodney or Mike (the co-founders) would pull out a Blackberry and announce: “in the 45 minutes since this meeting began, we’ve made 62,135 dollars and 37 cents!” They were obsessed with their system data and they had designed their platform from the very start to allow them to pull out any and all data they wanted. They had access not just to revenue data, but to leads, customer contacts, call center calls, sales funnel changes, site visitors, marketing spend, etc – really anything that had an impact on their company. As a quant-geek myself, I really appreciated what went into the design of their systems that would allow them to surface these operating metrics so easily (not to mention the mindset of Rodney and Mike to insist that they had access to this information at all times).

Fast forward to today and many of our companies have a similar attitude towards the data that drive their business. From the daily digests that report progress on key metrics, to obsessively watching data to look for early warning signs of system problems that their operations alerting hasn’t caught, to posting key operating and engineering data in the lobby of the office, these companies realize that the patterns revealed in the data around their companies will help make them more successful. Several of our particularly data intensive businesses have hired business analysts whose entire job function is to comb through databases and pull out interesting stats and trends. In one of my favorite examples, one of our portfolio companies includes not just business metrics on their lobby data-monitor but also tracks the latest engineering build and bug list. In another of our companies weekly meetings they’ve instituted a “data first” policy, where each department lead reports on their key metrics (against the plan for that week). There’s plenty of time to talk about the meaning behind the data, but by reporting the metrics first the company 1) reinforces it’s data-driven culture and 2) gets the entire company on the same page about what they are tracking and how they’re doing.

Love your data. They’ll love you back!

Our Glue conference is finally upon us. The agenda and speakers are locked down and all the final details are being attended to. We have a great group of speakers lined up this year across a number of different tracks:

The  ”Hacking Identity” track  – which highlights user managed access (Eve Maler), federated provisioning (Nishant Kaushik), XAuth (Chris Messina), and Webfinger (Brad Fitzpatrick) and follows it up with a discussion moderated by Ian Glazer (of Burton Group, now Gartner).

“Integrating Drizzle” with Eric Day from Rackspace. Rackspace brought most of the Drizzle guys on board when the Sun-Oracle merger happened. I’m anxious to learn more.

“On Hadoop” with Todd Lipcon from Cloudera. Hadoop is about as dominant as it gets at the moment, and I profess to knowing far less about it than I should. You?

Three sessions on scalability and the cloud stack — from Bradford Stephens (Hadoop, HBase, Zookeeper), Oren Teich (of Heroku, on scaling apps), and Sebastian Stadil (Scalr).

The good news for those of you who haven’t signed up yet is that it’s not too late! Seriously – you have plenty of options. There are still reasonably priced flights from both coasts to Denver. And if you live in CO, you have even less of an excuse not to be there. Sign up before hand – you can still use “seth12” to get 10% off the ticket price, but there will be NO DISCOUNTS AT THE DOOR.

See you at Glue!

My partner Jason has an impassioned post up about the carried interest debate currently taking place in Congress. No matter how you feel about Congress’ efforts to change the tax classification of VC profits from capital gains to ordinary income it’s worth a read (and keeping an open mind).

Obviously this issue is important to me and to all VCs. And while I know there are differences of opinions on the subject (clearly given the intense debate going on right now) I think Jason does a nice job of talking through the personal (this feels overstepping), professional (there are other markets where innovation is taking place where investor are actually being completely exempt from taxes that will draw talent away from the US) and legal (how do you differentiate between a VCs partnership interest from other partnership interests not subject to the proposed tax change?) arguments against the tripling of tax on the long term profits of investors.

While I wouldn’t say that I’m a “fan” of government, I’ve always been of the mind that some level of government safety-net is appropriate. I’m even, generally speaking, ok with a progressive income tax and as a relatively high wage earner understand that I have a certain burden living in our society to pay a much greater share of the overall tax burden. I point this out not to get into a political debate about the benefits of taxes, the proper level of tax  or even the correct taxing system but to be clear that my views on carried interest are not part of some larger agenda around reforming the tax system or eliminating it all together.

I have many of the same concerns that Jason outlines in his blog post about the move to change the tax treatment on carried interest. I’ve even considered whether the change will either shorten or radically change my own career path.

But as a capitalist and a realist I’d simply point out that taxes shape behavior. Our tax code has examples of this everywhere. Want people to buy houses? Allow them to write off their home mortgage (but don’t let them write off credit card debt – we don’t want consumers to have too much of that…). Want people to give to charity? All them to write that off too. Want to encourage longer-term investing? Tax that at a lower rate than short term investing. Need to encourage people to save for retirement? That’s a good one for tax exemption. Invest in education? Check on that one two.

My point is that tax code changes have real world economic and behavioral consequences. And the consequence of tripling the tax on the carried interest of investors will be decreased investment, less innovation and fewer jobs (and I would guess an overall reduction in tax receipts given the 2nd and 3rd order effects of the measure – which completely defeats the purpose of the proposal which is 100% to raise revenue and “fund” the extension of other tax initiatives).

The US currently leads the world in the innovation economy. From our universities, to our entrepreneurial ecosystem, from the belief that it’s ok to step out and try, even if you fail, to our system for nurturing and funding companies, we have a huge global competitive advantage in innovation that has lead to some of the greatest advances in modern society coming from within the US. Venture Capitalists have been an important part of this trend (companies that are or were once VC backed account for 11% of the US workforce and over 20 of US GDP).

The sky is not falling and the day after the tax code is changed (if we’re not successful in convincing lawmakers what a bad idea this is), little will be different in my job or in the jobs of most investors (although no doubt the lawyers will be hard at work figuring out new investment structures). But there is no doubt in my mind that this massive alteration in how we tax the work of a group of people who nurture and fund innovation in the US will radically change the long term trajectory of the our country’s innovation economy. With the focus on job growth and job creation and with countries like China and India knocking at our door trying to be the growth engines for the next millennium’s global economy, is now the time to put shackles around the building blocks of what’s allowed the US to lead the world in technological innovation? I, for one, surely don’t think so.

One of the great joys of working with entrepreneurs is the energy, enthusiasm and aspiration they bring to their businesses.

But don’t forget to consider your business for what it is, not what you hope it will be.

Which is to say that there’s a balance between planning for the future and recognizing where you are today. And striking this balance is part of what makes a great entrepreneur – the ability to consider in all aspects of your business (sales, product development, engineering, etc.) the right mix of practical current reality and future aspiration.