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Finishing what you start

One thing I’ve noticed since I started blogging is that starting a blog entry is a lot easier than finishing it. There are plenty of things to write about and I find it pretty easy to start a new blog (I usually do this in my head first and try to think it through before committing it to paper). It’s a lot harder to finish them, however. My blog draft file is full of ½ completed blogs that are waiting for me to finish up. I’ve been thinking about this a bunch recently and trying to figure out if this is specific to blogging (or any forming of putting thoughts to paper) or if it is just a part of the human condition – something that we generally don’t notice since we’re not often presenting our ideas in an organized format (or without getting immediate feedback). After considering this for a while and thinking about it as I sat through meetings and talked with people in the past weeks, I think that the answer is that this is not something that is specific to blogging at all. Humans as a general rule are pretty good about coming up with ideas, but pretty poor at thinking them all the way through. This isn’t necessarily a bad thing– feedback from others on partial ideas often helps us think them all the way through. That said, I think I’m going to try to effort to better think through (from start to finish) what I say before I jumpin with an idea.

January 23, 2005· 2 min read

Venture Capital Deal Algebra

I’m intending this blog to be a mixture of my personal thoughts on being a venture capitalist (and my travels through the maze of the VC world); thoughts on life more generally; and what I’ll call VC 101 tips and pointers. One of the things I’ve noticed (and this is something that I’m happy to say the TypePad statistics really do a nice job of, my rant about them last week aside . . .) is that my VC 101 posts get a lot of traffic (and cross-posting/track-backs that drive this traffic). The impetus for my starting this blog was to capture my personal thoughts on being a VC, however I want to be sure I mix up my content to attract a broader array of readers. So, I’m going to keep up with the VC 101 posts, since it seems like there’s a segment of people who read my blog that sincerely appreciate an insiders view on the mechanics of venture capital. Today’s post is on deal algebra. Basically it’s a run-down of deal valuation terms. When you live in the VC world and use these concepts regularly, you sometimes forget that they are not necessarily obvious in their meaning (which can lead to confusion down the road; not good when you are embarking on a new venture with an entrepreneur). We noticed this a few years back, and as part of a larger effort to gather information that would be helpful to our portfolio companies Dave Jilk created this summary of key VC deal terminology that we sent around to a bunch of our CEOs and other people we work with (note: I’ve made some edits to Dave’s original work mostly for length). VC Deal Terms: In a venture capital investment, the terminology and mathematics can seem confusing at first, particularly given that investors are able to calculate the relevant numbers in their heads. The concepts are actually not complicated, and with a few simple algebraic tips you will be able to do the math in your head as well. The essence of a venture capital transaction is that the investor puts cash in a company in return for newly-issued shares in the company. The state of affairs immediately prior to theinvestment is referred to as “pre-money,” and immediately after the transaction “post-money.” The value of the whole company before the transaction, called the “pre-money valuation” (and is similar to a market capitalization). This is just the share price times the number of shares outstanding before the transaction: Pre-money Valuation = Share Price * Pre-money Shares The total amount invested is just the share price times the number of shares purchased: Investment = Share Price * Shares Issued Unlike when you buy publicly traded shares, however, the shares purchased in a venture capital investment are new shares, leading to a change in the number of shares outstanding: Post-money Shares = Pre-money Shares + Shares Issued And because the only immediate effect of the transaction on the value of the company is to increase the amount of cash it has, the valuation after the transaction is just increased by the amount of that cash: Post-money Valuation = Pre-money Valuation + Investment The portion of the company owned by the investors after the deal will just be the number of shares they purchased divided by the total shares outstanding: Fraction Owned = Shares Issued /Post-money Shares Using some simple algebra (substitute from the earlier equations), we find out that there is another way to view this:Fraction Owned = Investment / Post-money Valuation= Investment / (Pre-money Valuation + Investment) So when an investor proposes an investment of $2 million at $3 million “pre” (short for pre-money valuation), this means that the investors will own 40% of the company after the transaction: …

January 20, 2005· 5 min read

Board Observer vs. Board Member

Venture capitalists generally participate in boards in one of two fashions – either as actual board members or as board observers (see Brad and Jason’s post on Term Sheets – Board of Directors — for more information on how we take positions on boards). As an associate at Mobius I was not able to take actual board seats, so I took the board observer position in the companies I worked with (note that generally this isn’t an official designation – although I have seen board agreements that require the venture firms to specifically designate the board observer; more commonly its just a seat at the board table reserved for someone from the venture firm other than the board member). As an observer I am an active participant in board meetings, but I don’t vote on any board matters and in some cases need to step out of meetings (typically to protect attorney/client privilege, which covers board members but not board observers). The boards I am involved with have all welcomed me into all of the regular and executive sessions of their meetings. Different firms treat the distinction between board observers and board members differently. At Mobius I am encouraged to be an active participant in the businesses I work with and I have never been shy about voicing my opinions at meetings. Other firms have a similar philosophy, but some feel that observers are just that – people who can attend meetings but should not participate. I’m planning a series of posts with some of the CEOs that I work with, so you can get a sense of how the relationship dynamic plays out. Stay tuned for that. …

January 18, 2005· 2 min read

Dr. King

I was thinking today (as I’m sure many people are) about the life and legacy of Dr. Martin Luther King Jr. One of my favorite quotes is from Dr. King (although I’m afraid to say that I couldn’t find it quoted directly on-line – apologies for not giving a direct link). To paraphrase is goes something like this: Those who have succeeded have yet to find something great enough at which to fail Like the story of throwing your hat over the wall, this quote inspires us to reach for great things. True in business and in life.

January 17, 2005· 1 min read

The Power of Branding

Ross and Dave sent this link over to me today. Parody – a strong sign of flattery. Clearly Apple has marketing down – we could all take a lesson. . . https://www.gizmodo.com/gadgets/images/iProduct.gif

January 14, 2005· 1 min read

I need better user statistics

I just set up FeedBurner on my site to start tracking readers. I should have done this a long time ago (where long time = 7 days ago when I started my blog). I’m pretty bummed with the stats that are available on TypePad. By pretty bummed, I mean that the stats are essentially useless. They don’t have any information on click-through nor do they tell me either what aggregators are hitting my site (although I can see a little of this in the referrers section, which is pretty much the only part of their statistics that I find useful) and they definitely don’t tell me how many underlying readers there are for my site because they can’t surface information on how many customers each aggregator is pulling for. I’m going to write a future post on the vanity of blogging, but suffice it to say for the moment that I (and most bloggers that I know) check my stats pretty regularly. Its not that I’m specifically trying to vie for a large audience (although it’s nice to know that the work I put into my site is being seen by others), but I’m still interested in how many people are reading what I’m putting out there. …

January 13, 2005· 3 min read

Go Sox!

One of the things I’ve been thinking about as I’ve been sitting down to write is the balance I’d like in my blog. My intention was to write a professional blog, but with a personal twist –not a blog just about the mechanics of being a VC, but my personal observations of the VC world and my growth as a venture capitalist. A few people have written in and reminded me not to forget about writing some posts about me with the idea that my VC observations will be more meaningful if I occasionally write posts that have nothing to do with being a VC, but give some background about how I got here and what else is important to me. …

January 13, 2005· 3 min read

Financial Models – Too Much Information?

At Mobius Venture Capital, as in many venture firms, we don’t have analysts (people whose primary responsibility is to run models, cap tables and the like). As a result, each of us does most of our own financial modeling. I actually like this set-up, because it makes sure that I’m both directly responsible for my work and am up to speed on the financials of each of the companies I work with. Reviewing financial models is not the largest part of my job, but is an important part of what I do – for screening new investments; tracking portfolio company performance as well as analyzing follow-on investments into companies in which we already have a financial interest. In the course of reviewing many many many such models, something rather counter-intuitive has struck me: most financial models are too detailed. That’s right – most models have too much information in them; too many assumptions; too many inputs; and are too hard to follow. Now, don’t get me wrong – there is definitely a place and time for a detailed line item budget (say for a rolling 12 month operating plan). That said, trying to detail out line item projections over a 5 year period I think makes models less rather than more useful. When I was in college I really enjoyed theoretical economics. One of the classes that I liked the most was Econometrics. As a relatively green econ student, I remember that my inclination (and that of my classmates) when building econometric models was to put in as much data as possible – the theory being that more data wouldn’t harm the model and would potentially help it. Our professor, Gary Krueger, pounded into us that this was in fact not the case – weak data hurt your model and taking out mediocre variables actually strengthened the veracity of the output (the garbage in/garbage out theory – although he had more colorful way of describing it at the time). I think a lot of modelers fall into a similar trap as me and my classmates first did – instead of simplifying their business to a reasonable and manageable number of inputs and variables, they attempt to put every complexity of their company into the model. …

January 12, 2005· 4 min read

The Adventure Reference

A number of people have written in and correctly identified the Adventure reference of my blog title. Here’s the full reference and why I chose it as the title for my ramblings. When I was a kid I used to love playing “Adventure” (written by Will Crowther and Don Woods back in the late 70’s). My dad worked for Digital Equipment Corporation, so I was rarely without a computer of some sort (terminals in those days; first with a 300 baud modem and eventually a super speedy 2400 baud model that didn’t even require you to insert your phone receiver into two plastic cup things to make the connection – you could actually plug your phone line directly into the modem!). I also had basically unlimited VAX time since I could log into an account my dad set up for me pretty much any time from home. I liked computers and spent a lot of time trying to write up rudimentary BASIC code and, of course, playing Adventure. I eventually mapped out the entire adventure world (I still have the pencil written map in a box of memorabilia from my childhood). …

January 10, 2005· 4 min read

Cover your wells!

This isn’t a post on venture capital or anything else related to business but rather something much closer to home . . . If you have a window well, please make sure it is covered. My wife and I have two dogs, one of whom is a 12 year old yellow lab named Beau. Beau is quite possibly the sweetest dog ever born (I’m of the belief that every person gets to have one truly exceptional dog in their lifetimes – Beau is this dog for us). Beau wandered away the other night. We couldn’t find him for several hours. I finally started checking the window wells in some of the adjacent houses and found him in an uncovered well at a house down the block that is under construction. It was dark and the window well was flush with the ground – I almost fell in myself. Beau was pretty seriously hurt. Friday we thought things were over for him (he couldn’t walk at all), but now things are looking a little better as he’s regained use of his front legs and some use of his back legs. He’s taking steroids and we’re hoping that his back/spinal chord was bruised (in which case he’ll regain much of his abilities) and not broken (which would be very very bad news). While the accident was clearly my fault (he wandered off and should not have been in a position to fall into the well), I have a couple of observations: …

January 9, 2005· 3 min read