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Business Lessons by Kleiner Perkins (Part IV): Straight Talk for Startups – Randy Komisar

I promised more about Straight Talk for Startups in my previous post which was describing the book first part. After Mastering the Fundamentals, which is indeed a fundamental must-read, his part II about Selecting the Right Investors is as good.

But before describing these 13 new rules, let me jump directly to rule #100: Learn the rules by heart so you know when to break them.
“Apprentices work furiously to learn the rules; journeymen proudly perfect the rules; but masters forget the rules. So it’s been since the Middle Ages, and venture capital and entrepreneurship are no different. The venture capital world is minting more and more apprentices, while the masters, like Tom perkins, are few and far between.
The rules in this book are battled-tested. Acquainting yourself with them will help you spot issues before they arise. Intuition is not just fast thinking from the gut; it is good judgement informed by knowledge.
Most rules are made for the average situation; they are meant to be broken when circumstances require. Our rules are no diffeent. Let these rules serve as touchstones to guide you own difficult decisions along the way, not millstones to bug you down. Only you can decide which rules to apply, bend, or ignore as you face your own novel problems and opportunities.
You may well find a rule or two that you adamantly disagree with. If we have encouraged you to examine your own experience and arrive at a considered but contraditocry conclusion, then we have done our job. Just don’t mistake an exceptional event for a guiding principle.
We are seldom able to achieve exactly what we want in business. Compromise is not a dirty word. But you will do better in the end if you acquaint yourself with what others have done before. You know best, so be fearless, trust your intuition, and make you own rules ocne you’ve mastered these.”

And here are rules 29 to 41:
#29: Don’t accept money from strangers
#30: Incubators are good for finding investors, nor for developing businesses
#31: Avoid venture capital unless you absolutely need it
#32: If you choose venture capital, pick the right type of investors
#33: Conduct detailed due diligence on your investors
#34: Personal wealth ≠ good investing
#35: Choose investors who think like operators
#36: Deal directly with the decision makers
#37: Find stable investors
#38: Select investors who can help future financings
#39: Investor syndicates need to be managed
#40: Capital-intensive venture require deep financial pockets
#41: Strategic investors pose unique challenges

I do not know if I will add a post about this book but these two should have been enough to convince you of the quality of Straight Talk for Startups.

Business Lessons by Kleiner Perkins (Part III): Straight Talk for Startups – Randy Komisar

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With subtitle 100 Insider Rules for Beating the Odds–From Mastering the Fundamentals to Selecting Investors, Fundraising, Managing Boards, and Achieving Liquidity, Randy Komisar has an ambitious goal in writing his new book Straight Talk for Startups and he executes!

Komisar is a Silicon Valley veteran (and brilliant) investor. I have already mentioned here his previous books The Monk and The Riddle and Getting to Plan B, as well as many of his advice. In his new book, he is trying to give precious advice because “entrepreneurs today don’t have the luxury of learning by trail and error.” [page xix of the introduction]. The Times They Are A-Changin’ and the stakes are just too high…So Komisar gives “the crucial things, like creating two financial plans, not one; hiring part-time epxerts rather than full-time trainees; knowing what to measure and the pitfalls of doing it too early: and the criticality of unit economics and working capital.” [Page 1]. I have to admit I was a little surprised with reading the previous sentence, but after discovering the next first rules, Komisar convinced me again.

If you do not have any time for reading the book, which would be a real pity, at least have a look at his 100 rules. Here are the first 28 form his Part 1 – Mastering the fundamentals:
#1: starting a venture has never been easier, succeeding has never been harder
#2: try to act normal
#3: aim for an order-of-magnitude improvement
#4: start small, but be ambitious
#5: most failures result from poor execution, not unsuccessful innovation
#6: the best ideas originate with founders who are users
#7: don’t scale your technology until it works
#8: manage with maniacal focus
#9: target fast-growing, dynamic markets
#10: never hire the second best
#11: conduct your hiring as if you were an airline pilot
#12: a part-time expert is preferable to a full-time seat filler
#13: maage your team like a jazz band
#14: instead of a free lunch, provide meaningful work
#15: teams of professionals with a common mission make the most attractive investments
#16: use your financials to tell your story
#17: create two business plans: an execution élan and an aspirational plan
#18: know your financial numbers and their interdependencies by heart
#19: net income is an opinion,, but cash flow is a fact
#20: unit economics tell you whether you have a business
#21: manage working capital as if it were your only source of funds
#22: exercise the strictest financial discipline
#23: always be frugal!
#24: to get where you are going, you need to know where you are going
#25: measurements comes with pitfalls
#26: operational setbacks require swift and deep cutbacks
#27: save surprises for birthdays, not for you stakeholders
#28: strategic pivots offer silver linings

It is a great complement to Measure What Matters and the proof (if what was needed) of how great great venture capitalists are…!

More to come.

Business Lessons by Kleiner Perkins (Part II): Bill Campbell by John Doerr

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My Part II should have been about Komisar’s Straight Talk for Startups, but it will be my Part III. I just finished Measure what Matters, the topic of my Part I, and I must admit I was impressed to the point I needed to have a Part II dedicated to it again.

I was impressed by the last chapter dedicated to “Coach” Bill Campbell. It is a very moving portrait of one of the least known celebrities of Silicon Valley. The Coach, the coach of Steve Jobs and the Google triumvirate, Page, Brin and Schmidt and of so many others.

I was also impressed by the subtlety of the message about OKRs. So difficult to explain as it may take a life to digest them. But the book is really enlightening. OKRs have four ingredients, focus, transparency, accountability and ambition (the BHAG – Big Hairy Audacious Goal). It is scary and at the same time generous. I think any leader should read that book…

Business Lessons by Kleiner Perkins (Part I): Measure What Matters – John Doerr

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Kleiner Perkins is a, not to say the VC brand name – but there is also Sequoia. When their partners write something, it is often worth reading. And this month two of them publish a book! I begin here with John Doerr and his Measure What Matters (though this is the paperback publication – the hardcover was published in 2017). In my next post I will write about Komisar’s Straight Talk for Startups

Ideas are Easy. Implementation is Everything.

Doerr is a Silicon Valley legend. He owes a lot to the pioneers of Silicon Valley, such as Noyce and Moore and particularly to Andy Grove, whom he mentions a lot: he calls him one of the father of OKRs. Chapter 2 is about Grove who said “there are so many people working so hard and achieving so little”. It reminds me of The Innovation Illusion: How So Little is Created by So Many Working So Hard. And many owe to him, beginning with the Google founders. Indeed Larry Page is the author of a short, 2-page and powerful foreword about OKRs: “OKRs are a simple process that helps drive varied organizations forward… OKRs have helped lead us to 10x growth, many times over.”

And Doerr begins with a tribute to Google and its two founders (page 4):
Sergey was exuberant, mercurial, strongly opinionated, and able to leap intellectual chasms in a single bound. A Soviet-born immigrant, he was a canny, creative negotiator and a principled leader. Sergey was restless, always pushing for more; he might drop to the floor in the middle of a meeting for a set of push-ups.
Larry was an engineer’s engineer, the son of a computer science pioneer. He was a soft-spoken nonconformist, a rebel with a 10x cause: to make the internet exponentially relevant. While Sergey crafted the commerce of technology, Larry toiled on the product and imagined the impossible. He was a blue-sky thinker with his feet on the ground.

So what are these OKRs? It’s an acronym for Objective and Key Results. “An objective is simply WHAT is to be achieved. Key Results benchmark and monitor HOW to get to the objective.” (Page 7) But there is no recipe. Each company or organization should have its own. “By definition, start-ups wrestle with ambiguity… You’re not going to get the system just right the first time around. It’s not going to be perfect the second or third time, either. But don’t get discouraged. Persevere. You need to adapt it and make it your own.” (Page 75)

Now if you need that kind of advice, read Doerr’s book…

Why was Netscape a weird example (to me) of Equity Sharing between Founders

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Marc Andreessen and Jim Clark, the founders of Netscape

You may not know I owe a lot to Nesheim’s High Tech Start Up, which cap. tables I took inspiration from. If you do not know Nesheim’s, let me just quote Steve Blank’s in his bibliography for 4 steps to the Epiphany: “High Tech Start Up is the gold standard of the nuts and bolts of all the financing stages from venture capital to IPOs”.

There was one such cap. table which was striking to me and I never mentioned it until now. Here it is now scanned from Nesheim’s book. I did not ask for authorization but I hope not to get in trouble!

Click on picture to enlarge

Do you see why I found it striking? If not have a look again. If not again, follow me for a few minutes. I decided to look for Netscape IPO prospectus, which I could find in two formats, an html IPO prospectus on the Internet archive as well as a pdf S-1 filing document. They give slightly different data, but I could build my own table as follows.

Click on picture to enlarge

And now? Well I had never understood why the two founders, James Clark and Marc Andreessen could have such a different amount of equity. How could it be a 10x difference even if James Clark was a more experienced entrepreneur (he was a former Stanford professor and co-founder of Silicon Graphics) and Marc Andreessen had no experience but was the author of Mosaic, the predecessor of Netscape as a browser. (Netscape is a sad illustration of bad relationships between a university – the University of Illinois – where a technology was developed and entrepreneurs, but this is another story.)

Well I found the answer thanks to the two documents: Jim Clark was
– first, a co-founder and both founders had 720’000 founders’ shares and
– second, a business angel: he invested $3M in the series A and then $1.1M in the series B. He got the equivalent of 9M commmon shares for his investment.

This comforts me in the general explanation I usually give about sharing equity between founders and then investors, managers, employees as you may see in Equity split in start-ups or on Slideshare. First founders split equity based on their non-cash contributions, then investments are taken into account.

The Venture Capital Secret: 3 Out of 4 Start-Ups Fail

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In a recent article from the WSJ (thanks Greg :-), it is claimed that Venture Capital is much less succesful than thought: 3 Out of 4 Start-Ups Fail. Well I am surprised by the surprise. I did some copy paste of the paper below, and I put in bold the things I found interesting. You should jump there and come back here!

I have done my analyis in the past. You can go back to by 2’700 stanford related companies (slide 9 of the pdf) or more anecdotically to Kleiner Perkins first fund.

So yes, there is a lot of failure in VC and the numbers do not count so much. It might be that in the past, there were fewer failures than today, and the reasons would be numerous, but the important point in the paper is the following: “the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures”

From the WSJ article:

It looks so easy from the outside. An entrepreneur with a hot technology and venture-capital funding becomes a billionaire in his 20s. But now there is evidence that venture-backed start-ups fail at far higher numbers than the rate the industry usually cites. About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School. Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.

Mr. Ghosh chalks up the discrepancy in part to a dearth of in-depth research into failures. “We’re just getting more light on the entrepreneurial process,” he says. His findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010. He also combed the portfolios of VC firms and talked to people at start-ups, he says. The results were similar when he examined data for companies funded from 2000 to 2010, he says. Venture capitalists “bury their dead very quietly,” Mr. Ghosh says. “They emphasize the successes but they don’t talk about the failures at all.”

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh’s research.
Failure often is harder on entrepreneurs who lose money that they’ve borrowed on credit cards or from friends and relatives than it is on those who raised venture capital.

“People are embarrassed to talk about their failures, but the truth is that if you don’t have a lot of failures, then you’re just not doing it right, because that means that you’re not investing in risky ventures,” Mr. Cowan says. “I believe failure is an option for entrepreneurs and if you don’t believe that, then you can bang your head against the wall trying to make it work.”

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work, Harvard’s Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, a nonprofit that promotes U.S. entrepreneurship. Both studies counted only incorporated companies with employees. And companies that didn’t survive might have closed their doors for reasons other than failure, for example, getting acquired or the founders moving on to new projects. Languishing businesses were counted as survivors.

Of the 6,613 U.S.-based companies initially funded by venture capital between 2006 and 2011, 84% now are closely held and operating independently, 11% were acquired or made initial public offerings of stock and 4% went out of business, according to Dow Jones VentureSource. Less than 1% are currently in IPO registration.

—Vanessa O’Connell contributed to this article.
Write to Deborah Gage at deborah.gage@dowjones.com

Something Ventured: a great movie

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I just watched Something Ventured and I loved it. Loved it so much I plan to have it shown to as many EPFL students as possible in the spring! It is a movie about passion, enthusiasm, energy, changing the world and yes… about money. When asked about their hope about the movie, producers Molly Davis Paul Holland said: Our high hope for this film is that every student that wants to be an entrepreneur—at every level, high school, business school, on corporate campuses—sees it. We want to see more young people fall in love with entrepreneurship… And if we have a quieter, more serious goal, it’s that I want policymakers to look at this and say ‘What can we do to make it easier, not harder, for people in this country to start those kinds of businesses?’

I would have said I hope that every student — at every level — sees it. And the producers added we were trying to explain our vision for the movie and said, ‘What we are envisioning is a movie like Reds [Warren Beatty’s 1981 film about the original Bolsheviks], where you go back in time to talk about an exciting period — in that case 1917 Russia — and ask people in the present day what it was like back then. Dan said ‘Ok, so you want to make Reds but without the Communists.’ That is ultimately what came about: A really beautiful dialogue with really interesting men and the people they financed.

“A Film About Capitalism, and (Surprise) It’s a Love Story.”

This is the title of another article about the movie, where the journalist says “moviegoers can see what might be the rarest bird in the documentary world: a genuine love story about capitalism.” Somewhere else, the moviemaker, Dayna Goldfine explains: “I think what compelled us to take this one on, even though it is a positive view of business, was, one, it’s a chance to do this kind of alternative view. But also, what these guys were doing – both the entrepreneurs and the venture capitalists – was creating real products. So much of what has come down in terms of the financial tragedy of the last few years has been caused by the investment bankers –people who were really just creating financial instruments, as opposed to changing the world with technology by creating or funding an Apple Computer, or a Cisco Systems, or a Genentech”. Co-moviemaker Dan Geller adds: “I wouldn’t say that money was incidental – money was important – but the overwhelming enthusiasm was for taking these brilliant ideas and these inchoate technologies and making something earth-shattering with them. That’s the energy, I think, that comes through in these stories.”

Yes it is a movie about capitalism, about business. But it is also a movie about enthusiasm, happiness, failure also. It begins in 1957 with Fairchild and Arthur Rock. It could have begun with French expatriate Georges Doriot. A professor at Harvard who supposedly taught manufacturing (in fact it was about how many glasses to drink at a cocktail party and how to read newspapers – go to obituaries), Doriot did not create venture capital with ARD (even if he funded Digital Equipment – DEC) – Rock created the term later, but Doriot inspired most of the heroes of the movie: Tom Perkins, Bill Draper, Pitch Johnson, Dick Kramlich. And these guys funded Intel, Atari, Apple, Tandem, Genentech, Cisco. (The movie tells stories from the 60s to the 80s, but Google, Yahoo, Amazon, Facebook could have been added). Indeed with the movie, the Social Network, it’s the best movie I have seen about high-tech entrepreneurship. What I had nearly forgotten in The Social Network is the closed Boston society (Zuckerberg desperate efforts to enter high-end social clubs). Here also, the Wild West explains its success through openness and risk taking.

And the authors did not cheat. It is also about painful memories, how Powerpoint ended up in Microsoft hands, maybe because the entrepreneur had found it too tough before or how one of the rare women in this world, Sandy Lerner, the co-founder of Cisco, may have not forgiven her firing from the company she had created: “you gotta understand the game that you’re in. […] Look, there wasn’t a box for me.” So yes, it is also about failures, “living deads”, but there is a “feel good” attitude, funny moments, such as when Valentine visiting the Atari factory does not recognize the cigarette brands he smokes!! Or when Gordon Moore (the famous Moore law) remembers that Intel went public the same day as PlayBoy.

So if you do not know much (or even if you do know a lot) about Fairchild, Intel, Atari, Tandem, Genentech, Apple, Cisco, and even if you do not care about entrepreneurship, run and watch Something Ventured. Hopefully you will care!

When Kleiner Perkins and Sequoia co-invest(ed).

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I end 2012 with two posts related to my beloved Silicon Valley. This one is about the two great Venture Capital firms Sequoia Capital and Kleiner, Perkins, Caufield and Byers. The next one will be about Palo Alto-based author of thrillers, Keith Raffel.

I have already said a lot about these two firms. You can for example read again the following on KP:
– About KP first fund (3 posts)
– Tom Perkins, a Silicon Valley venture capitalist
– Robert Swanson, 1947-1999
and about Sequoia:
– When Valentine was talking (2 posts)

The recent IPO of Jive is the motivation for this new post because Jive has both funds as co-investors. I am obviously providing my now-usual cap. table and what you can discover here is the huge amounts of money both funds have poured in the start-up ($57M for Sequoia and $40M for KP) … is this still venture capital? I am not sure.

Click on picture to enlarge

I am not writing an article on Jive here but let me add that we have again here two founders who had each 50% of the start-up at creation and end up with 8%, the investors have 30%. What is really unusual is that the company raised money in 2007, six years after inception. A sign of a new trend in high-tech?

Now back to Sequoia and KP. When they co-invested in Google in 1999, I thought it had been a very unusual event. David Vise in his Google Story (pages 66-68; I also have mine!) explains how the start-up founders desired to have both funds to “divide and conquer”, hoping no single fund would control them. When I met Pierre Lamond, then at Sequoia, in 2006, I was surprised to learn from him that in fact the two funds has regularly co-invested together. As often in Silicon Valley, it is about co-opetition, not just competition.

So I did my short analysis. A first Internet search got me the following:
– The question on Quora “How unusual is it for both Kleiner Perkins and Sequoia to co-invest in a company?” (August 2010) gives 11 recent investments, including Jive and Google.
– Russ Garland in the Wall Street Journal adresses the topic in “Kleiner Perkins, Sequoia Combo Has Solid Track Record” (July 2010). He says: “But the two Menlo Park, Calif.-based firms have done plenty of other deals together – at least 53, according to VentureWire records. It’s been a fruitful relationship: 29 of them have gone public. They include Cypress Semiconductor Corp., Electronic Arts Inc., Flextronics International and Symantec Corp. That track record lends credibility to the excitement generated by the Jive investment. But most of those 53 deals were done prior to 2000; the two firms have been less collaborative since then. Of the handful of companies that both Kleiner Perkins and Sequoia have backed since 2000, at least one is out of business. That would be Abeona Networks, a developer of technology for Internet-based services.”
– Now in my own Equity List, I have 4 (Tandem, Cypress, EA, google) plus Jive.

So I did a more systematic analysis and found 55 companies. More than the WSJ! I will not put the full list here, but let me give more data: Kleiner has invested a total of $267M whereas Sequoia put $268M [this is strangely similar!], i.e. about $5M per start-up. On average, KP invested in round #2.07 and Sequoia in round #2.63, so a little later. Time to exit from foundation is 6.5 years. I found 27 IPOs (I miss two compared to the WSJ)

Is Garland right when he claims “But most of those 53 deals were done prior to 2000; the two firms have been less collaborative since then”? Here is my analysis:

Number of co-investments related to the start-up foundation year

If I look at the decades, it gives,
70s: 6,
80s: 30,
90s: 11,
00s: 7.
Clearly KP and Sequoia co-invested a lot in the 80s, much less in the 90s and 00s. Whereas the fields are

So what? I am not sure 🙂 . KP and Sequoia are clearly two impressive funds and as a conclusion, I’d like to thank Fredrik who pointed me to Business Week’s The Venture Capital Winners of 2011.

Sequoia and KP may not be #1 and #2, but their track record remains more than impressive. Here is a bad picture taken on an iPad!

A history of venture capital

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I am surprised not to have published this before. It was one of my first work before I even wrote my book. It became its chapter 4. Venture capital is about 50 years old and it has changed a lot in parallel to innovation and high-tech. I hope you will enjoy these very visual slides!

A history of venture capital lebret – vers 1.1

View more presentations from Herve Lebret

Robert Swanson, 1947-1999

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This is again one of my recent readings from old Red Herring. I had already published a post on Bob Swanson, the co-founder of Genentech. This RH article is not that different and I thought it would be important to mention the story again of Boyer and Swanson and the beginnings of the biotech industry. Here it is.

The cofounder of Genentech also founded an industry.

ON THE OCCASION of their deaths, the founders of technology companies can take some satisfaction that they started something From nothing. The best will be able to claim they founded companies that changed the world, and a lucky few will have built organizations that lasted. But almost no one will be able say they founded a company that created an entire industry. Robert Swanson, who died from brain cancer at his home in Hillsborough, California, on December 6, would be very justified in claiming to have started the biotechnology industry.

DREAMS 0F GENIES

Mr. Swanson was a 29-year-old venture capitalist with the firm that today is Kleiner Perkins Caufield and Byers when he collared Herbert W. Boyer, a scientist at the University of California at San Francisco who was researching recombinant gene therapy. Recombinant DNA is formed when DNA from different sources is combined to create new DNA molecules. Dr. Boyer thought that combining DNA—or gene splicing—would allow scientists to design the proteins necessary to treat particular diseases, and would liberate scientists from trial-and-error methods of protein testing. In 1976, venture capitalists, and even most academics, did not believe in the immediate commercial value of such research. Dr. Boyer himself was uncertain when gene-splicing would be a business. Nevertheless, Mr. Swanson convinced Dr. Boyer to grant him a ten-minute interview. “Here cornes this brash young entrepreneur filled with enthusiasm and ideas and ready to go,” Dr. Boyer says today. “I recognized right away that he had the drive and the understanding.” They formed Genentech, which is generally thought to be the first biotech company, later that year. Twenty-three years later—and in the very winter of Wall Street’s discontent with biotechnology—it is difficult to remember how revolutionary Genentech was. In 1977, Genentech produced the first human protein by splicing a gene with bacteria. Later Genentech created human insulin, the first drug produced by genetic engineering, which it licensed to Ely Lilly for the treatment of diabetes. It was the first biotechnology company to sell a drug it had developed on its own: human growth hormone, for children whose bodies do not produce enough of the hormone. And Genentech was the first biotechnology company to offer its shares in an initial public offering—which, until the Internet boom, was among the most spectacular Wall Street had ever seen. Genentech’s example made biotechnology possible by demonstrating to venture capitalists, entrepreneurs, and scientists that a sustainable business could be based on genetic engineering. Today, there are more than 1,000 biotechnology companies in the United States, and Genentech remains one of the most successful.

INGENEOUS

Mr. Swanson was born in Brooklyn, New York. He attended the Massachusetts Institute of Technology, receiving an undergraduate degree in chemistry and a graduate degree from MIT’s Sloan School of Management. Before becoming a partner at Kleiner Perkins, Mr. Swanson was a VC at Citicorp Venture Capital. He was Genentech’s chief executive from the company’s founding until 1990, and was its chairman from 1990 to 1996. After retiring from Genentech in 1996, Mr. Swanson formed K&E Management, a private investment – management firm. He was also chairman of Tularik, a biotechnology firm that was preparing to go public in mid-December. As an entrepreneur he was courageous, ingenious, stubborn, and slightly crazy. “If you told him that doing something violated the rules of physics, he’d tell you the law must be wrong and you’d almost believe it,” said Arthur D. Levinson, the current chairman of Genentech. Friday afternoons at Genentech were devoted to theme parties, called Ho-hos—on Hawaiian theme days, Genentech’s chairman would invariably don a grass skirt and dance the hula for his employees. Mr. Swanson wished to change the world by commercializing, and therefore making widely available, new drugs based on gene splicing. He got his wish. Last year new pharmaceuticals developed by Genentech scientists (that is to say nothing of established drugs still being sold) earned more than $4 billion in revenues, according to MIT, and saved countless lives—if not, sadly, Mr. Swanson’s own.

Write to jason@redherring.com.