bronson.vc

When I transitioned from investor to operator nearly four years ago, blogging sadly fell by the wayside.  Let this post serve as my heartfelt mea culpa.

During my blogging hiatus, I’ve kept closely connected with the companies and operators that I worked with as an investor. (In fact, I remained on the board of one until last month).

And comiXology has certainly kept me busy.  I’ve learned many lessons since joining the ranks of its amazing team, the most transferable of which I look forward to sharing here.

Coming up will be a “Where are they now?” series, focused on the companies I worked with as an investor.  And, since hindsight is always 20/20, I’ll reveal a few could-have, should-have investment opportunities, too.  After all, sometimes we learn more from our misses than our wins.

Until next time…stay tuned!!!

All businesses are effectively trying to incent behavior.  If you are considering a rewards or incentive plan here are four factors to consider.  I don’t have the metrics to back up these points on hand but if people are interested I will dig them up.

Cash isn’t King

Hedonistic rewards work best.   If you offer as a reward something that the consumer would not otherwise purchase for themselves they will do considerably more than they would for an equivalent non-hedonistic reward, even cash.  Consider three potential rewards each worth $50; a massage, a gift card to Walgreens or cash. Consumers will be willing to do more to receive the massage offer than either of the other two.  Cash would be second in this example. Theoretically someone should be at least as willing to work for the cash as they are for the massage, as they could buy themselves the massage.  As the explanation goes (not scientific) there is guilt associated with spending the cash on the hedonistic massage.  Effectively the consumer will ‘work’ their guilt away.

Randomized rewards work

If you give someone direct compensation for their actions it is one quick step to figure out how much you are valuing their time and effort.  If the rewards are randomized people generally won’t draw this comparison (my non scientific explanation).  You just have to look as far as the existence of casinos and the lottery to see randomized rewards work.  No one would gamble if they thought about it in terms of expected value (without assigning some value to excitement but that is a topic for another time).

Give people a sense of accomplishment along the way

This is what airline points are all about.  If you give someone mini senses of accomplishment along the way they will remain more engaged.  I find this affects my own actions with games on my iPhone.  Games that give me points to open new levels keep my attention much longer.  Shh don’t tell anyone but I have even bought additional levels for a couple games.

It’s about the perceived value, not what you pay

If there is no clear price to the reward people will tend to assign a much higher value to it than it costs you.  There is an argument that it is to avoid cognitive dissonance about the value of their time but regardless of why, the less clear the value of the reward it the more consumers will do for it. This is why rewards like back stage passes to a sold out concert are particularly effective.

There is no question that legal bills for startups, as a percentage of expenses, are out of control.  In some cases I have seen more than a third of the capital raised by start-ups go to paying various legal bills.  Closing fees are, in most cases, the largest portion of the cost.  However if you are starting a B2B company, or forging a lot of partnerships, negotiating contracts can quickly drain the coffers.  The answer is not a cheap lawyer or your uncle.

Put it out to bid

Early on it is very difficult to gauge how much legal work should cost.  A few months ago I met a great company called Legal River.  They effectively turn the legal process on its head allowing small businesses to create RFPs for any work they need done.  Lawyers with free time, and generally expertise in the area, bid on the work.  Even if you don’t use one of the lawyers who responded, you now have a market price for the work you want done.  They certainly aren’t the first to embrace this model but they are catering to start-ups and small businesses.

Ask for a quote up front

As standard practice now I advise startups to ask for quotes, or at minimum estimates of the amount of time each project will take.  Whether this lowers the actual bill or not (which in some cases it does) it helps tremendously to scope out the work ahead of time and make sure you aren’t paying more than the document is worth to you.  Of course there is a limit here.  If you ask for continuing revisions it will raise the cost.

Negotiate

I consider the necessity of negotiation unfortunate, but the fact remains that most legal bills are negotiable; particularly if the hours put in to the work appear more than necessary (or considerably more than you were quoted).  If you are not negotiating or actively managing your counsel you are probably paying more than you need to be.

I have been thinking about starting a series of posts about cool companies that we are not invested in for a while now.  After office hours yesterday I officially became motivated to start.

NYC Way is best described as a free meta iPhone app for all things NYC.  It was covered on ReadWriteWeb a few days ago.  The app could replace about a page worth of apps on my iPhone including ‘Sit or Squat’, ‘Wifi Locator’ and ‘Urban Spoon’.  It even has a decent Craig’s List interface.  My personal favorite though is the traffic camera section where you can view any on NYC’s traffic cameras. Granted I have no idea why  would actually need to do that, but it is cool.  My only gripe is that it runs a bit slow (it might be where the data is coming from).

The founder shared with me the road map of what he is developing.  Once he includes these, this app goes from very cool, to a must have for all New Yorkers.

Given that we fund about 1% of companies we meet with, I try to give entrepreneurs I meet with some advice and/ or a sense of what would make their company interesting to us as an investment.  I figure it is the least I can do for them spending the time to share their company with me.  As I see it, every no can be broken down into two categories. Either your vision of the company is not one that we find attractive as an investment, or we don’t think you have a high probability of getting there.  Below is a list of common reasons that companies get rejected from my experience and what they really mean.

Your market is too small –

VCs invest in big and growing markets.  In general we all have similar views on market size in most cases (we are looking at the same numbers).  If you are hearing that the market is too small ask yourself if there is a logical expansion strategy with synergies to the core business model that increase the market size? Potential ideas include geographic or vertical expansion.  Market size is frequently tied to ARPU.  If your market size appears to small demonstrating that you can extract a larger ARPU than the VC is anticipating effectively increases the market opportunity.

To early –

This can mean several things.  You simply could not have hit minimal milestones for the fund to get interested.  However more likely this means that the risk reward profile as it is perceived isn’t attractive enough against other companies looking for our money. This is particularly true in crowded spaces – if there are a lot of companies trying to solve the same problem VCs are more likely to sit on the sidelines and wait to pick a winner.  When raising money it is important to remember that your competition is every deal the VC is looking at.   Think about how to de-risk the business prior to investment.

Bad idea –

The good news is that if you get a meeting than the VC probably doesn’t think this to start with.

We don’t buy your Monetization strategy  –

Usually the only solution to this reservation is demonstrating that the consumer is willing to pay for your service. Depending on the type of business letters of intent from customers can go a long way.  If you are seriously considering raising money for an ad-supported content play look long and hard at what monetization rates others are getting in the marketplace, convert it to a realistic ARPU and figure out how big you really need to get to attract venture funding.  The answer is very big.

Bad feel on the entrepreneur –

You likely won’t hear this but it happens.  If you miss represent anything or have very unrealistic expectations your done.

Bad fit for the company –

This is ironically the best one to get.  If it is a bad fit they will refer you around.  VC is a massive interconnected web.  Firms have favorite other firms but know most of them.  If we like you we will try to help. However we wont refer a deal to a fund that we don’t think is potentially a good fit.

One of the most exciting things about everyone having a broadcast voice, a la Twitter, is the promise of corporations becoming more responsive to the consumer. A number of startups have emerged over the last couple years to help corporations monitor and manage public sentiment. Our newest portfolio company Crimson Hexagon released analysis of what people are saying about Google Buzz over the weekend (first posted on Mashable). Crimson Hexagon analyzes the mass of sentiment across the web and clusters it into meaningful categories of points of view.

I love the irony of Twitter buzz driving iteration for google’s Buzz.

I believe in silos and feel like I am fighting to keep them.  Facebook for friends, LinkedIn for professional contacts, and twitter for what (for some reason I decide) is worth broadcasting to the world. I don’t cross-pollinate between services and I don’t know who I am talking to on Buzz.  Google knows who I email with most regularly but not why (thankfully).  I don’t want to post vacation pictures to my attorney, or VC posts to my aunt.  It is so easy to start using because when I tried it out this morning I already had several ‘followers’ but so hard to figure out what to do with it because they are not the same audience.

That said, it is incredibly easy to use, maybe it replaces Facebook for me.  I think twitter is here to stay because they have so beautifully tapped the worlds two carnal desires, narcissism and stalking (The gentleman who coined that wishes to remain anonymous)

I recently gave a talk at one of the Free Lunch Fridays at RTV.  This is a portion of the conversation.

When selling anything, including your company for investment, you have to tailor your pitch to the audience.  Towards that end, it is helpful to understand how selling your company to an associate at a VC firm differs from selling to a partner.

I frequently get the feeling that entrepreneurs forget that VCs are profit-seeking entities, just like the startup.  The main difference is that a venture fund always has to raise another round. We don’t have the luxury of reaching cash flow break even and growing on our own.  Partners live by the success of the firm. Pre-partner level associates are on a quest to become partners, either at their current firm or another. Over the short-term the associate is trying to look good to the partners, over the long-term they are attempting to create a track record of investing in successful companies.

Selling the Associate

Young VCs are trying to become old VCs (in most cases).  The number one way they do that is by establishing a track record of finding and doing good deals.  They only get so many bullets in the chamber and one of them has to hit or enough have to look like they are on target to be able to move up the ladder in their career.  In my experience, the lower the professional ranks in a firm, the more risk averse they are in recommending investments.  In short you need to sell them on the fact that they want to bet a part of their career on the success of your company.

Arming the Associate

When entering into the diligence process entrepreneurs are well served to help the associate on their deal look good. Arm them with the answers to any question they will face when bringing the deal to the partnership, whether they ask them or not. That means you have to be able to tell a simple convincing story and simply address the major obstacles you will face.  But it also means they will need to be able to address fairly detailed questions about your business and why they think you will succeed prior to bringing the deal to the partners meeting. The more knowledge the VC has of the space the more specific the questions will be.   The less they know about the space the less likely they are to become your advocate.  I don’t want to invest or recommend investment in something that I don’t really understand.  It is a good idea to feel out the level of understanding at the table.  When someone pitches me on something I don’t know I will frequently say something like “I am sorry but since I don’t know the space very well you bear the burden of educating me, why don’t we start from there”. Selling the market is frequently step one in selling your company.  If you aren’t sure if you have to sell the market, ask.