Here's another excellent Deloitte TVC "Legends" session, put together by Ellen Mundell, with Doug Humphrey, the founder of Digex, Cidera and Colocation. Doug tells it like it is, with a refreshing perspective on his experiences taking Digex public in the late 90's.
Here is a transcription of the event:
Legends Series: Doug Humphrey, founder of Digex, Cidera & Colocation
Dated: September 22, 2009
(3:22) For those of you who don't know me, I'm Chuck Carr. I'm a partner at Deloitte; I lead our, what we call our, early stage drug practice in the greater Washington area. On behalf of Deloitte and all our Tech Metrocenter sponsors, we want to welcome you all here this morning. This kicks off our fall season of the Technology Venture Center. We're very fortunate to the kickoff the Legend with Doug Humphrey. Basically what we do for these types of events is it's very open-ended; it's a lot of Q and A; Doug will speak a little bit about the companies he's been involved with back in the late 90s, and those of you who were in the area, I'm sure know Doug. He was quite visible during that timeframe. He went into hiding a little bit here.
I retired, but I'm done with that now.
He's back. And, sort of kicking off being back, I guess, we are so fortunate to have Dough here, and...I'll turn it over to Doug now.
Ok. I see ex-business partners here! ... you know who that is. Well, thank you very much. I will refer to notes occasionally so I don't get too far off track...Everyone turn off your phones, etc. and I will try to remember to tell you to turn them back on when this is all over because that's the problem with turning your phones off; you'll be wandering around saying "god, everything must be going great. No one's calling me." And then you're like, "oohhh, nooo!" and you turn on your phone and you can't believe. I turned on my phone one day, and somebody said, "how's it going?" and I said "we'll find out!" And I turned it on...and it went BLEEP every time a text message came in, and it sits there and starts dancing around on the table. BLEEP BLEEP BLEEP BLEEP BLEEP. And, I was like "Oh no." Anything more than, like, eight bleeps and the day's done. So, thanks to Deloitte, which is, congratulations on being a survivor. I had to check yesterday, on a conference call, what is it, a big what now, and they were like: four. I said, "ok, good." When I retired I think it was between like five or six wasn't sure; I remember the phrase "Big Eight" when it wasn't a college.
[laughs] You guys remember that? Anyone here old enough to remember that? Yeah, thank you. You make me feel better. And, then Cooley Godward [Kronish LLP], who is my favorite law firm. I think my law firm...I'm nominating Carl Grant [Sr. VP of Business Development] as the majority whip [laughs] because, I mean, none of you guys would be here if it wasn't for the fact that:" ah, I can't, I've got to get up early or else I'll piss Carl off." So, Mr. Grant knows how to whip 'em and drive 'em, so we're very happy for him. And, I did see Corbus down there and my old friend Esther Smith...So, I was told past/present/future or something like that. Every story has an arc. So, I'm going to keep it very simple. My story arc. Dry erase marker; important. I will say this. Immediately, I'm off to a long story. Past. Present. Future. I gotta start thinking. I'm thinking story arc, like on a TV show or something like that, a story arc has a start and an end at a stable point. But, nope. As we know in our industry, I'm a start-up guy, a serial entrepreneur, God help me!, that's what I am. And in my world,I have to get back to this mindset,in my world, everything goes up, so whether that's totally true or not, we'll see. Let's see, very early (I have note that says 'very early'), in junior high school I started a company, which was doing model rocket transmitter, tracking transmitters out of G. Harry Stine's The Handbook of Model Rocketry, which was copyrighted in 1950-something.
And, I had my first, it was very educational, because there was a schematic...and I thought: I can do this. I made them, and they didn't work. The schematic was wrong. So I was like "screwed by the engineering department again!" Well, not again, but for the first time, but not the last time! And, so I had to actually then learn what the damn circuit did. And, then, you know, so it was no problem, I figured it out...the value of this was...it was going to work better. And then I sold like three of them. I ran it one on EBay, I don't know, about five years ago,...transmitter or something like that, PI....Corporate, which wasn't even a corporate. They just put it on there because it sounded right. And it was this thing, I went "oh I have to buy this" and so I bought back my own transmitter. [laughs] I did, for more than I probably made on all the transmitters that I owned. But it was in junior high school, so it's ok. So, I have that safely ensconced away so that after I die, my kids will go: "what's this piece of crap?" and throw it away. [laughs] I was at a yard sale,this is so sad,some old guy all his hand...tubes and stuff, and I mean they were going to trash them. Literally, it was this huge box that was going to go in the dumpster. So I walked up and said "what, I'll give you $20 for it," and I send them as Christmas presents to all my friends. Lasers and high energy physics... I send them as Christmas presents to all my friends, and I remember senior year I had old physicists crying...[laughs] There's no profit there. So, let's see: past, present, and future.
The past, eh, starting companies wasn't my first startup; my grandmother gave me hell when I was a little kid--I was living in Georgia, so I must have been a really little kid,maybe 1st grade, they bought me this big package of assorted cracker packets. You know, it's like 12 different kinds of crackers. And, so I immediately opened up a little stand on the porch and started selling them. I got yelled at for that. That was probably my first entrepreneurial experience. In '92,'90-'91 I was at a company called Candum Computers, a big, full power matrix systems, and we had a nice clientel: NY Stock Exchange, all sorts of people at NASDAC, and it gave me an appreciation for something that has served me forever, which is no single point of failure, fault..., critical engineering, and everything I ever do in the end comes down to that because there are only 193 people on the entire planet that have that clue; that clue is preserved, conserved, there are no more being made. When one does, a new one isn't like it. It's like Buffy the Vampire Slayer or something. And what you get is, most people think they understand, but most people have no freaking idea. And so there are only a certain number of people who seem to 'grock,' and you do, actually. So, after...is one of my partners here and a million square foot collocation facilities. It's kind of a weird thing, but it's served me well. In '92, I started an Internet Service Provider called Digex. It was way early, so we were driving around putting flyers under windshield wipers saying there's this thing called an Intranet and you need to be on it. It was way pre the World Wide Web or any of that. And, it was started really because I saw my kind of peer group was people who graduated from college. In college 75% of--they were on the Arbornet slash early, early Internet. And 75% of their social lives was over the net; I mean, email and you know...email was the killer app. Email today, right now, it's still the killer app. Everybody goes: "Oh, what's the next killer app?" It's like, it's email! You know, I mean, the second killer app kind of changes and moves around. It's not Twitter, it's email. People Twitter about things that don't matter.
You know, people still email about things that do matter. But, um, I notice that all my friends would get out of school and go "aaaah" because they couldn't get Internet access. It's just the end of the world for them. So, we were like "huh." So I got an old Sun...360, 18...base machine; a couple friends of mine, like Bob Stratten, a guy name Rob Seastrom, help me config it up. It was running on Fujitsu Eagles; I don't know if anyone remembers 470 meg, 470 pound, 470 amp, 470 kilowatt heat Fujitsu Eagles sitting on a carpet in my townhouse. When we sold that townhouse, there were two Fujitsu Eagle shaped indentions in the carpet [laughs], and where the heat, since it's sort of, you know, a poly-whatever carpet,if it were wool I'm sure we would have been ok, but then the place would have smelled like lanolin [laughs],but truly, it had the combination of...and the heat had change the...of the carpet, and no amount of physical work was going to get this done. One day I walked somebody through, and they were looking at it and said "what the hell's that?" and I said "Take a guess. I used to have a ... " he said "Fuji Eagles!" and I said "oh my god, you're one of us!" [laughs] Shoot yourself now. But anyway, so, I walked into a party and said, "who needs an email account?" we were CUUP-feed. We weren't even on the Internet, it was still T-1 lines. So that was the bottom line. That was early '92, '93, in '94, I think, I was out raising venture capital and a thing to note, raising VC in '94 was like crawling over broken glass, this was tough. I mean, no one has an official number: 40, 45 presentations. We started that and found a boutique firm, Armada Partners, which was Bob Stewart and George Rich. They put a little bit of seed money in. My law firm at the time was Reed Smith Shaw McClay, which is a great law firm, don't get me wrong, but not a venture firm. And that's my talk that I give at Mike Lincoln's UVA Law School thing all the time: get yourself a venture firm, a firm that knows venture if you want to do ventures, because if you get a litigating firm to do your venture deal, [inhale] it gets a little litigious, and then you don't want to be there. But, they were very sharp people and very good. So, literally, we went to Boston, so I could blow up all the VC in Boston and make...because every time I did our pitch we'd get destroyed, absolutely shredded. There are some other phrases I'd use, but I'll be polite here.
And, if you've ever read Mike Lewis's A Liar's Poker, you'll know some of the phrases in there that I really do like. He doesn't like the French for example. I'd go to a meeting and get destroyed, but the cool thing was my two guys from Armada, and this is the important thing, when you go get yourself a boutique consulting firm, whatever, to help you with this, and you're doing your pitch, if they're in the room watching you give the pitch, fire them immediately; bullet to the back of the head. Gone. No discussion. That's not their job. But if they're sitting at the table, one on each side, watching the people you're pitching to and making notes, they should know your pitch by now for God's sake, they can give your pitch in their sleep, in your sleep to [laughs]. I mean, believe me, if you get this close with people, it's sort of a wife-husband relationship, but much closer, you know what I mean? [laughs] None of the benefits from any distance at all. But truthfully, they need to be watching from the other side of the table and taking notes because when you say something, they need to know who liked it, did it work, did it not. Read the body language. Read it. See how it goes. And you need to be tuning this with your pitch. It's back to the hotel to rewrite the pitch. We do a pitch, and ok, back to the hotel, rewrite the pitch: boom, boom, boom. 'Harry McCants' old...guy at Blalock in Boston. The word "autopsy" is almost correct here...to me. I mean, my spirit was in the corner of the room, watching myself get torn into little pieces and admiring the skill with which I was getting torn into little pieces. And at the very end, as we were leaving, he walked up to me, shook my hand, and said, "Listen, nothing personal on that; just thought you needed some...." I said, "I cannot thank you enough." And, when I got funding from...and Grotech and Massey Burch, when I closed my round, I sent him a bottle of champagne, and I said, "Of all of the pain I suffered, yours was the best." [laughs] I know he understood; I know he got that. I completely know he got that. So, we went up to Boston pitched all over the place. Got blown up, crashed and burned. Boom boom boom. And, they came back to where we wanted to score because the truth is a VC wanted to do a local deal. You really don't want to be far, far away. They want to be able to come stand on your desk or you to come stand on their desk with their questions, whatever.
Distant VCs tend to follow, which a lead VC tends to want to become a local. I think that hasn't changed. This is a good point here. I've been Rip Van Winkle at it for six, seven, eight years,I don't even know, I'm afraid to really figure it out,so there's this hole in here, and what I am doing is trying to fill that hole. And trying to truly get my situational awareness up; that's why I'm meeting with everyone I know. You'll say, "what are you going to do?" I'll say "I have no idea." I mean, right now, you know, from there to there, what field are you going to be in, I don't know. What kind of position are you looking for? I don't know, you know. I mean, even I don't know, I don't know. So, by the end of the year, maybe I'll have some of this filled in. I don't know. But I can say that the VC world has changed a lot. Now I remember it, though, before it was easy money, before the go-go days. So I do recognize a lot of it, I'm not just wandering in saying "holy shit, where're the VCs? Oh my god!" I'm sort of like going "hmmmm, in 1994...a little bit, but worse." So, that's where we are. So, we IPO-ed in 1997. That worked out pretty well, and in fact, we offered to sell the company to Verizon, back when they were Bell Atlantic for $50million, way back when, and they were like, "what are you talking about? Internet? Huh? What? What's that?" I mean, it was really hilarious. They had no clue. And, if you go to digex.net now, it will push you over to a Verizon website because Digex went public, they went private with a company called...who got bought by MCI, no got bought by WorldCom,remember Bernie? He's still in prison, isn't he?. [laughs]...and, they bought by MCI, then MCI got bought by Verizon.
Or close, I don't even keep track of them all. 1998, a company called SkyCache, and this is an interesting thing: the lesson with SkyCache is when you take venture capital money,I get this a lot, people say do you want it,when you take VC money, you're getting on a train that's on a set of rails. That's going to happen. You are limited your options, choice, etc; you are also opening up a gigantic world. I'll tell you my Reed Smith story. I go to sign on the deal for Digex, the first $6million, right? $2million from Grotech, $2million from 'Benrock,' $2million from Massey Burch. By the way, that sounds like a strangely pity deal, but that was a standard deal back in '94. that was a fuckin' lot of money, pardon me. Especially when I already had like $3million of it spent already. My God that was a lot of money. No seriously, back then, a $15million fund was a good sized fund; $100million fund was a big fund. Ok, and besides, the first two they're putting in is a commitment; there's another 2, 3, even 4 million...There's another...behind that too. On their books, they're budgeting that out. So, truly when you're getting a $6million deal, they're $18million in the universe somewhere that's kind of getting earmarked over into your direction. So, that's big. And, we go to the final bing, and my lawyer says to me, who's a litigator, says "you can't sign this deal." It's a horror show; I mean, I'm locked up personally forever, oh it's just terrible, non compete...It's fine, though. You can't sign this because you're getting screwed. So, we went into a little room and she repeated it, and I said "you're not getting this. I'm here to be screwed. I want to be screwed. That's why I'm here. I'm getting screwed." And what do you think is happening to the guys who are putting $6million down on the other end of the conference table?
You think any of that is ever going to be seen, ever again? Gone, baby, gone! Half of it's already gone. [laughs] I mean, I just scheduled to get married a month after our close. And at the close, just before the close, they were negotiating: how much of a salary do you want? I mean, we had nothing. And, I said, "I don't know, $120?, whatever, I don't know." And, they said, "yeah, ok, that's reasonable." And I said, "ah, request from my wife: I have a little problem. I've got a wedding to pay for. My own in about a month. We've got like $5 in savings." And to their, to Frank's credit, they got up and said "why don't we just make your pay retroactive to Jan 1." I said: "thank you." So, there's a certain magic to the big-money world, you know. I went home and said, "honey, the wedding's paid for, and I'm employed." And she said, "ehhh." [laughs] 'Cause out of college, she had made a thing that said: "I'm not too picky, but in order to date somebody, they have to be employed." She made an exception in my case. [laughs] Um, the Digex lesson there was, this is not a normal transaction. You can't cover your ass, I mean, this is a big leap into the void, but the good new is that someone is giving you their parachute to leap in the void, so that's quid pro quo. SkyCache...a satellite company in '98. What I was saying about getting on the rails; interesting lesson: on the napkin, and this time we actually wrote it out on a napkin because we knew that everyone was always talking about writing the business plan out on a napkin, so we actually jokingly by a guy who was going to do marketing, Greg Money,..."whoa, whoa, you're going to write some shit on here, on a napkin? God, you're already looking forward to the 'here's a picture of the actual napkin.'" I said, "man you're looking forward." And that's what...I mean, he was good at that: marketing, discussions. We said, listen, what we're going to do is the cutting edge internet, R and D that all the satellite companies are too slow; they're all too stodgy. They're like networking x25. We're like, no, Internet world! So, we did all that work, but we figured we're going to do this, do this, do that.
We'll sell it out for like $50million 'cause we'll sell it to the logical buyer, which will be one of a satellite companies. They're going to look at it and go, "damn, you've done all the R and D that we didn't even know we needed to do, but now that we look at what you've done, you know, wow, that's really great!" And, we did, except we didn't because we had taken a VC partner and, there you go, we had taken a VC partner and they were just one of say...a very good one, they owned a piece. You know, what happened was, it went...when the Orion guys showed up [names] all walked in, and we showed them what we were doing, and they looked at me in the conference room and said, "wow, you guys have done all the research work, dadadadada." I mean it completely repeated my preamble to my [illegible noise], and I was like, "God, you haven't even seen the business. This is great!" And, they said, "look, we'll give you $50million for your company right now." Which is exactly the number we were talking, and it was exactly $2million for each person in the company. Now, we had a VC involved, etc., etc, but I was pretty sure I could turn to every member of the company and say, "listen, here's the deal. We're going to get bought by those guys. We're going to turn into a stodgy satellite company. You're going to hate this. But, here's suitcase for a quarter million dollars. here's suitcase for three hundred thousand dollars." Boom boom boom boom boom. And, we'd make everybody feel good. Well, except, once you got the VC in there, it's not your decision. And, the VC said, "wow, if they're willing to pay $50million for it right now, think about how big this is going to be when we IPO." So, that didn't end up working out. But, you know you're in trouble,the only other anecdote would be-- you know you're in trouble when in your D round, the Bank of Kuwait calls you and says, "we need to be in your deal. Whatever it is. Whoever you are." and sends a representative. I didn't even meet with him; I, by then, in both of my companies, I replaced myself with another CEO to go public. And in this case, we had reds, boxes of red herrings to use as kindle wood. End of the market. But, literally the Bank of Kuwait showed up, didn't understand what we did, and gave us $3million or so to be in the D round. And, even sent up, I remember Rick came out of a meeting, I didn't even sit in this one, I don't consider the D round the one I raised, I just wasn't involved, but he came in and was like, "ok, random banks from the Middle East are showing up and shoving money at the deal." And I said, "what's the amount?" and he said "they told us 'whatever we wanted.'" Ah, ok. That's your sign that it's over, I just want you to know, that's your sign that it's over. It's like your cabbie giving you stock tips. You're like, "ehh. Sell everything." So, anyway, that didn't work out so well. But I did have the joy of taking over a company that was crashing and try to soft-land it for two years. And, firing 200 people in one day. And a bunch of other, so remember with the good, comes the bad. Firing 200 people in a day is...they were all really understanding. They really were. They were very nice. I was shocked. I figured I'd have to shoot three of them, but they were like, "dude, I understand. Sorry. If there's anything..." Almost all of them, a few of them just walked out, most of them came up to me and said, "listen, you know, just 'cause I'm not getting paid, doesn't mean I won't work for you, so if you need anything, you call me, and I'll do it." I do still have a cadre of about 100 people who'll drop whatever they're doing and come follow me into hell, which I'm very, very lucky to have. I tell those people, "Don't do that. You have kids now." So, I'll have to figure out some other way to do that. When'd we start Core?
'99, yes., that's what I thought. In 1999, in a totally separate direction, and this is sort of what I do. At the UVA Law School picnic, they said "what do you do?" and I said, "the best way I can tell you is I'm a synergist. I'm not the guy who invents the next formula or the next whatever." I have a physics background, which actually serves me very well, because if you understand physics, you kind of 'grock' the physics of any situation, even if it's a business situation. The physics of the situation is simply the stuff that it is and cannot change. And if you can figure that out, it's easy to figure out the rest of the situation. What I do is try to look for large forces moving in different directions and go, ok, the deal is you're a surfer, and if you want to catch the real wave, you've got to figure out where it's going to be long before it is there. If you see it happen, you're late to the game. So you need to be paddling out, and if everyone on the beach says, "you're out of your mind." well, maybe you're out of your mind. But, if everybody on the beach except one or two people you respect, everybody thinks you're out of your mind, but maybe you see a couple people not saying that, then you're probably right. And you're paddling out to where the waves can happen. Almost nothing in life happens for a single event; almost everything is a confluence of events. Almost everything is multiple events coming together. So, one day, I had a good real estate relationship with the Ezra Company, which.... And, they were my real estate guys, so whenever we would start a company, whatever, you and Mike would come on out, or your dad you know, and we would hook up and they'd find me real estate; they're real estate reps, you know. It's a nice business, a nice staid business. But I always knew these guys were entrepreneurial. They've got huge drive. So what I said was, "hey, I talk to them, they talk to me, the opportunity was in what's called collocation. So, collocation in a nutshell is where all the servers are now. The internet used to be, here's the internet tree and it has a branch and off the branch is another branch and a leaf, here's a leaf. And in the original internet model, the leaves talk to each other. There's no smarts, no storage. There's really no computers in the tree, it's just routers. And that worked for awhile, but what happens is, what happens if it's like AOL where seven million leaves are all trying to talk to AOL.
The problem is, you can see the branches get pretty thin here. If 7 million leaves here are all trying to talk, there's something...it's just easier and should go some place where there are multiple carriers like ATT, Sprint or MCI and...and where you have big bandwidth available. And where you have generators and infrastructure and everything all together. And that's what collocation basically came from. It was actually a serious shift in how the internet architecture was used....well up until now they'd all the internet colos have really been like telecolos. But telecolos were all about telephone traffic, they weren't computers...no, and orders of magnitude...energy heating and cooling...in downtown DC, a telecolo could be this room, on 20 and L Street, maybe three of these rooms. And that was it, I mean, you put a bomb there and you take out ½ the telecom in Washington DC for awhile, right? We were going to do a calendar, which was just going to be Ryder trucks of different kinds parked in front of critical infrastructure locations, and it would look to anyone who didn't know like it was a Ryder calendar, right? Here's the little truck and the big truck...but anyone in the know would be like, "Here's a Ryder truck parked in front of 55 Market Street in San Jose? Here's a Ryder truck parked in front of Pearl Street station in New York City. Here's a Ryder truck parked in front of the May East." You know, we thought it would be a great calendar. After 9/11 we scraped plans [laugh] 'cause suddenly there were a lot of people who would get it and would not; I will say this, I have a singular credit, a buddy of mine, at an agency/job that shall not be mentioned, faxed me a page, he said, long story short, he said it was the cover page of a report generated by people I can't talk about to people I can't talk about, I had nothing to do with it, except that several years ago I edited a picture that, Federal Express has a service called Custom Critical, which is their super duper high-end service, I used to do nuclear physics and there's a thing called Prompt Critical, and Prompt Criticality is sort of this thing that happens [snap] just before a nuclear explosion,a lot of controversy over it,, very technical but anyway, so I PhotoShop-ed the word "Prompt" over the word "Custom" right? And it was the lead cover item on a top secret report that someone had searched off the internet and put it on this report and it said "Our Biggest Fear." A Fed Ex truck marked Prompt Critical. Well, I didn't intend it to be that joke, but the guy was actually like, ok I've got to scrub all this stuff off but it's just your picture...'cause I didn't have a credit on it, so I was like, "How did you know that was my picture?" and he was like, "I can't talk about that." [laughs] ack, well, thanks a lot, I'll order pizza the next time I talk on the phone. So, what we did at Core Location was we identified these trends. We suddenly realized that if all the servers are in the middle of the internet,and we weren't the first guys, there were bigger colos, I mean you guys were seeing it, where the Ezra guys would try to find office space in some building and like "this is a rinky dink piece of crap building. Why are we paying $40/square foot for this stuff?" The answer was a telecom building. Right? So they were in on this anyway. I went...we talked it over and what we decided was to go look for big white elephant buildings, and we got million square foot buildings for really cheap and we'd go out mega-data-centers, huge things, and it worked really, really well. So we were very happy, very profitable. Carlisle Group was our partner on that; Carlisle put up a lot of money.
Morgan Stanley. I mean there was a whole list, but actually Carlisle gets the lion's share of the credit with all of us 'cause we were in the front taking the risk. Big risk. And then, following behind us, when they saw what was going on, Morgan Stanley and all those guys swoooshed. And it was a big industry until the crash. But we got out long before the crash so we're happy now. So that's good. So, that was Core Location. It's not really much known because truthfully it was a small team of people...there was no dilution, no PC model, it was, what that was was a collision between the internet and real estate. And this industry worked in a certain way. And it didn't understand this industry. It worked in a totally different way. And it didn't understand that industry. And truthfully if you had to boil it down, we understood both industries. I mean, that was it. You put you guys and he guys in the room, we all sat around bullshitted and talked about it, and very, very quickly, we grocked both industries. And in doing that, bingo, you identify where the wave is going to happen. In this case, you get there by buying up million square foot buildings which you can buy for a song because nobody used them anymore.
And leasing them.
And leasing them, yes. And then what you guys did. Buying them was the hard part. It's just like the VC world, you've got the fundraising, then you've gotta go do it, and in your case, you guys, they leased a million-plus square foot building up at what...months. Unbelievable. I couldn't believe it. So, the core exist was 2001. I got my numbers right. Then Cidera crashed. I did two years of trying to [groan] solve...and somewhere along the line, I got out. I said, "ok, boss. That's it. We're going to go have babies. I have a 4 year old, an 8 year old, they're fabulous, so I'm out." My eight year old is named Juniper, which is really funny. Not after the networking company; we liked the name. But I do have a dog named Cisco; and he is named after them. He's a sheltie, we call him Cisco the Router Dog. You know sheltie is the...[laugh] so he's a herding dog, but he will rout you. He's getting old now, but back then, he'd take off and try to run you in a straight line. Now everyone knows if you have herding dogs, they see anything going in a straight line, they need to catch and eat it...not for any reason. It's just DNA. So, um, the first VC was tough; then there were the go-go years. I mean, in NASA they refer to the go-go years, you know, the go-go years were great. The Golden Age of PC, I call it. Just like NASA the go-go years, I was telling...fabulous stuff, you're doing great things, but could get money. I mean the VC would stalk the halls looking to put VC...I will say that it's happened and still happened...out of VC world. You'll find the old line firms and going to make it because they have foundation, infrastructure, deep pockets, or anyone who's going to invest, who you going to trust? An EVC or ...NEA. I think you're going to turn to those guys....I think I'll invest in your fund to 12; I don't think I'll invest in this fund 1, you know? So, that's going to be a big scrub out, and it's already happened a lot but I think it's not done yet. Note that things tend to run in 10-year cycles and we're just coming up on the. Nobody in the VC world has made any money since '01. and if you pull one or four or five or eight deals, big deals, out of the equation, that was '01. so, either you reached your last fund in '00 or, well, we're coming up. And when you send your guys out in 2010 to try to raise your next funding, it's going to be very interesting to see how that's going to happen. So that'll clean up. Yeah, it was a time of excess. I bought a warship. I had two kids; they weren't excesses, they'll pay off eventually...yeah, we should take everybody out for a ride. I'll send you the website 'cause it's up for lease or for sale, people kept calling and contacting me saying, "we want to lease your warship, we want to go fight pirates." The whole piracy thing? It's ready to go, I mean, it's the only...stamp ready to go, armed up, warship, ready to go, just turn on the engines, and go, 50 caliber machine guns...30 side arms, she still has all of her armor plating, the whole nine yards, and except for the hottub that replaced the front gun now.
But it doesn't look like it with the covers on...I got an email, there's photos on the web, from a guy who served on it for like 8 years. It's an old British navy boat, and he sent me an email, he's like, "these are a blast. The picture in the buggies, OMG, 'cause it's got buggies, you know strollers...storage for two 50-caliber machine guns, a thousand rounds of ammo, four strollers." So, we're set, we're all good....Everyone wants to lease this thing, sail it halfway around the world, where it will cost a half-million dollars to get it back, and you'll run it into a war zone where there's no insurance. No. cash in the barrel-head or go away. I mean, if you really want it, that's how much it is, write the check. And if you can't write the check, call me when you can 'cause there's just no way. Ok, me? Ok, now we're to the present. Retirement. Me and retirement, not so good. I've been on the beach for a long time; I love everyone I'm on the beach with. A friend of mine called me looking for a job; you getting divorced? Nooooo. Stop that right now. My kids are great; my wife is great; my daughters are great; I have a great life. We're just on the beach, that's all. So, me and retirement, not too good. My eight year old is into horsies now, so daddy has to go get a new job because we all know about horses. Uuugh my god. Also, the economy is also in a weird place. But also, let's look at this ramp thing. What entrepreneur truly worth his salt; I mean, what you always look for is the knee in the curve, and this is for everything in life. Linear things are not interesting. If you put one dollar in and you get two dollars out; if you put a hundred dollars in and two hundred dollars out, not interested. I mean, interested in doubling your money, but you know what I'm saying. Not that interesting. Why is this not that interesting? 'cause if you know that, everybody else knows it. Secret knowledge is what makes it worth doing. Linear things, everyone knows about linear things. Stock market performance: a dollar in a dollar out. Terrific. I know, nobody here lots any money, I know. I know...I think the key is, what you're looking for, is the knee in the curve where things are not linear.
You put a dollar in, you get two bucks out; you put $10 in, you get $30 out; you put $100 in, you get $1,000 out. And that's what the VC look for; it's what anyone looks for. That's what you look for at the Stop-n-Save. That's what you look for at the car dealership. Why do you not go shopping for your BMW three days into the quarter? Because they've got quarterly numbers. 'cause there's no knee in the curve, baby, it's all linear. 20 minutes before midnight, you know, on the last day of the quarter, especially if your friend called you and told you that at whatjamagiggyBMW they're way under quota, ahh, there'll be a knee in that curve. It's where you get some leverage. So, you're always looking for this, and if you really think about it, where is the economy today? Now is the time to get in. Now, I could be completely wrong. Understand this, I am wrong many times...but I'm not. So, now's the time. So, the present is, I'm looking around to see what's going on, what I want to do, and I don't know, I mean, someone said "do you want to do a Bears startup?" and I'm looking at some of those; I mean, maybe, you know. I'm talking to professors who are doing things, and that's the bear-est of the bear. That's called get your suit on and suck it up for money. You know, that's the bear-est of the bear. There's also some things you'll see in here like companies that need their second CEO. To quote Jimi Hendrix, "I have tire tracks all up and down my back." So, if you see knife handles sticking out, I know the names and I know how they got there. So I'll try not to do that again. But the reality is, a company that needs its second CEO, I've replaced myself before. I'd like to be a good guy to replace somebody; I mean, I might be a little more gentle this time. I have a friend of mine who called me up and said "I have a 200-person division, I could put you in for your clearance now, and no one will ever hear from you again." And I said, "appealing in some ways, maybe not so much in others." So, I don't know at all the format of any thing....I've talked to some very interesting biomed, biomedtechnology people. Very interesting stuff going on. Part of this is trying to figure out where the future waves are. That has to sort of inform this. What is the future? Boomer warehousing. Everybody's going to get old; you've got to have places to stick 'em. Ok, boomer warehousing. Boomer repair. People repairing boomers. They're all going to need to get fixed before you throw them out eventually, so. Boomer disposal. Betcha not going to be able to fix 'em anymore. At Cisco, there's a phrase for products, EOL: end of life...it's like: what happened to Bob? Oh, he's EOL. Umm, that's now. If you have any suggestions. And, the future. Well, we talk about the VC guys. What are hot areas? Security stuff is hot; christ I can't talk to anybody about anything without the whole security thing popping up. But I'd like to hear from you guys. Why don't we do Q and A?
Based on what you described at the...traditional web posting, what I'm hearing in our company is that...
Well, clown computing is, in fact, the same thing. Completely the same thing. The only difference in clown computing is 1) whoever owns whatever it is, so in the colo world, you put your hardware in, you own it, you have to run it, etc. and in clown computing, someone else is putting all that gear in. I mean, you couldn't tell by looking at a colo whether that was clown computing or someone's dedicated computing. You couldn't tell by looking at it; the physical is identical. It's a question of who owns it, who manages it. Ah, clown computing, as usual with any sort of thing, clown computing will be very profitable; it's an outsourcing thing. It will be very profitable for the small/medium sized user, and if you get big enough, you'll eventually come around to where you'll want to...stuff. If you're really huge, you're paying someone else's profit and not getting that much better...but, what's happened is that there's enough management software out there now; people have done the work...to manage clown computing things because in your small organization you get the advantage of fully distributed things; you might actually get a couple of extra nines for liability and that sort of thing. So, yeah, clown computing is a great idea...it usually, it started out as Yahoo! and all those other guys, who have lots of spare 'zoobs;' they've got 50,000 spare machines deployed all over the place, and 80% of the time, the machines are doing this. That they were like, "why don't we sell some of that capacity off?"
The new CIO for...CIO and CTO are really high on this?
Yeah, and they may be really high too, but that's a different...to give you an example, I mean, this is, ok, key things to take away; the knee in the curve; the things that transcend just what we're talking about: there's always, everything in life is cycles, managed, not managed. You get through that, switch. Then, this, that. Those guys love clown computing because clown computing allows them to offload responsibility. The problem is the federal government always gets burned when it offloads responsibility. There used to be dedicated emergency responder networks, going back to the 60s, 70s, 80s. and then everybody realized, that from an economics perspective, your cell phone, why do we need to pay for this huge, freaking dedicated, big, heavy Motorola blah blah blah. Oh my god. Everybody got a cell phone. It's all good. But, in an emergency everybody picks up their cell phone; all of a sudden, the emergency responder cell phones don't work. So, shared infrastructure, dedicated infrastructure that's the back and forth that you see there. The government has always had dedicated infrastructure. It's very expensive. But, on the other hand, you can control your fate. Now they're going " oh wow, oh wow, we're ... bucks." Shared infrastructure, while it's fabulous until it bites you in the ass. I'm not necessarily saying it's a bad thing; I'm just saying the truth is somewhere in the mix of these things because denial of service attacks, you know, if you're really, really, really clown computing, you don't even have control over it, you're counting on Yahoo! or whoever your vendor is to not get 'swacked' in the...the first time that happens and wipes them off the face of the map and then Homeland Security or whoever the hell it is...contracted...is going "ooooh my god!" so, "we must control our destiny!" you'll hear that line.
What was your thought on the fact that iPhone, SmartPhone, GooglePhone has come out; what is your thought on the next computing device from PC ...?
What I want, the best thing, what I want is I want my iPhone to magically go 'whoop, whoop, whoop', with a bigger screen, to be all touchy, and then go 'whoop, whoop, whoop' and go back into my pocket. That's a little ways away, but if Apple came out with a smaller, Apple will do it and everyone else is in their dust. They're just totally in Apple's dust. I don't even know why anymore. It's not the Steve Jobs' reality distortion...which I've experienced and it's fabulous. [laughs] Steve Jobs. Anyone here ever met Steve or dealt with Steve? Bottom line. Bill Clinton, who I've met twice, and I mean I meet, you know, we worked together, I mean I was at a guy's party who had him there, and I was like... Ronald Reagan had an RDF, a reality distortion field. Bill Clinton's was even more powerful, was different that Reagan's, but he had an RDF. But Steve Jobs bent, is hard to describe when he's in the room. And, it didn't affect a friend of mine, Don Hopkins. And we were at this Apple roll-out event at...and Don Hopkins was like, "watch this." So he goes over to the cruditÃ©s stand and gets a decorative green pepper...and Steve Jobs is in this receiving line. And I mean, he's in complete rope-off mode, and he says "hi, how are you?" and sprays a thousand miles. The RDF really isn't even turned on though. It's just like coasting. But he's like, "ah, you can't have this tie on you." He's been doing this for probably a thousand people. Don steps up; Steve goes, and Don takes the thing and goes, "earth man, give me your seed." [laughs] And Jobs' face! We all watched Steve Jobs reboot. [laughs] It crashed him, completely crashed him. He went...[laughs] you saw the little thing go...[laughs] And, then he went, he just started laughing his ass off; he grabbed Don and hugged him, shook his hand, Don moved on down the line, but it was right, I mean. He crashed. I watched Steve Jobs have to reboot. But I mean, he was a million miles away. And, but the reality distortion field...is a huge connection. I don't know what to tell you. I mean, Apple bleeds it all. Apple will be a leading edge. So, iPhones, iTunes store, the Iapps,revolutionary, completely changed everything. Caught every other cell phone manufacturer asleep, dead, buried, and they're all still trying to climb out of the grave. Ah, here's the Google, dadada, this will be free. Fuck free. Nobody wants free. Because free isn't it. I don't mind paying $0.99 for an app that works; I really don't. I'm good with that. The little slum of people who won't do it because it's $0.99, you really want them as customers anyway? I mean, are those the guys you're really trying to figure out how to get the money out of their pockets? I don't think so. Now, Steve and company, they have it right. I would guess, if they expand their touchscreen to a tablet touchscreen they'll grow continuously for another ten years...I'm not the...guy here, right? I would say that that's set and will I buy one? Will my wife buy one? Are you serious?! Absolutely. No question. If it costs a few thousand bucks? Yes.
Related to that, you talked about the boomers. And this is fast...but I see a disconnect between me and the next 30 years and my parents. We just came back from a trip and I wanted to email my mother some pictures. My mother is 89. She cannot figure out...
Get her a Mac. Get her a Mac. Her biggest problem is that she's sitting in front of a PC. And I'm not trying to be a ...here, I'm not kidding. My mom, who recently passed away, I bought my mom a Mac, and she was online. I mean, she was truly, even at the end of her days, did not have a huge appreciation for what was going on under the covers, but she was emailing. I asked her, you know what I did, I got her a Mac and this will sound very weird. I got her a Mac, and I got her an AOL account. Took care of everything. I never had to do...the only time I had to a little support call was literally when the phone line wasn't working or something.
I guess what I'm asking, though, is actually a little bit bigger question, though, which is: it seems to me that there's a fairly big market who people haven't, you know, bought an iPhone because it's just, kinda, too hard.
Well, ahhh, right. And, you know what? Those people will be solved by time. [laughs] EOL. Didn't we discuss EOL? That's...problem. I'm not trying to make...a friend of mine, a friend of mine, we were talking about racism, bigotry. And, look, my grandmother was racist, you know. She grew up in the South; that was her world. And, you cannot judge the past by the standards of today. I mean, you can judge it a little bit, but you've gotta, without the context, the data doesn't make sense. In the context of when she grew up, was the context of when she grew up. She wasn't a bad person, but those were her views. Am I going to get into it with her and try to change her views? Do I need to beat this into my grandmother's head? No. she was smart enough to know; she never said it in public; she never said it to anybody. She maintained politeness; she was a Southern woman. I knew what she thought. It's ok; I didn't think it. Some things get solved with time. Technology uptake, you know to add documents? print them out. On what paper? ...the feel of paper. So, the paperless office, it's just the funniest concept in the whole world to me. I have this shredder, I mean an Oliver North signature model, turns it into dust. This shredder I got at NSA at an auction. Only pushed hard for a few years. Only shredded on Sundays for the...agency or something. But, if I'm editing a real document, I print it...I edit it up. I work on it. Somewhere along the line I go back; I change a version number; I put my edits in. I don't do it online. I've got a $2,000 laptop; it's more powerful than all the computers in the world 25 years ago all combined, right? I edit on paper 'cause I can see it. Just works for me better. But, I'm not trying to say that that's bad or good, but I'm doubting that I'll be editing not on paper on my deathbed, you know what I mean?; it's sort of, it's my MO. It's the way I work.
Right. Where I was headed, actually, was thinking of all this biomed stuff and the degree to which if we change the healthcare system...
Oh, yeah! That's going to be huge! Ok, ok, I'm type 2 diabetic, right? Although that's weird because I've changed my diet and I'm not anymore, but the underlying lack of basal substance is still there, right? So. If I go in there and chew down a whole, all sorts of carby things, then I'll get my blood sugar level up. But the point is you know I test, I have a little thing, I go boom, I bleed, you know. Right now if I squeeze my finger, I just bleed. A friend of mine tests himself in the middle of his hand; I'm like, "dude, it's like stigmata! What are you doing?" 'cause one day he poked himself, first off, that's like the most, I'm like, you're a masochist, right? You're a ... there's just no question. Because, dude, you like pain far too much. That's gotta be the worst place to hit yourself, and he hits himself right there. And one day, it didn't just close up automatically, so he's doing work on stuff and leaving little bloody, bloddy prints everywhere. I grabbed his hand, turned it over, and...stigmata...no, no, ok. You're ok. But, um, all of this is arcane. I've got an iPhone right there, what do I do? I test myself and I send myself an email with my iPhone that says BG whatever it is in the subject line. And then my mail system takes it out and sorts it and shoves it...it's all good. Ok, wait a minute. There's something wrong with that. This is, like, way back when, when a buddy of mine got a Motorola pager and two Motorola cell phones. He got paged by the Motorola pager, look at the phone number, pull out the Motorola cell phone [laughs], and call. Tell me there isn't somebody who hasn't thought of the idea that you should be able to go...hi, Bob, you know? So so protocol. I'll give a medical device history that will blow you away. A friend of mine is at the highest, highest, highest, highest, highest, highest level as a contractor, but I mean, highest policy levels of National Security Agency. She really is.
Having lunch with her...two people standing by the front door at the restaurant...just hanging out....so I had lunch with her the other day. She just had a spine implant done, and she showed it to me the other day...and, um, it's literally a spinal stimulator. It's a row of three by 24 electrode diode thingies and it's implanted in her spine now. I said, "Oh, TSA is going to love you!" and, then we're talking, I said, "oh, you have another problem, what does the office of security at the fort think about this?" And she said, "yeah, didn't have much..." I mean, this has a wireless remote control. No, but she's walking in the spaces at NSA, skiffs...it's like, this thing logs data. You know, when she goes to the doctor, he goes booop and wirelessly downloads stuff from her! She's bionic! I said, "do they have a policy on that?" and she said, "nobody in the entire community has a policy on this." She said, "this has caused, like, waves of trouble throughout the intelligence community." Because, who would have ever thought about this? I mean, you're not supposed to walk in there with a wrist watch, and she's walking in with a wireless data-logging system that's got an...[laughs] I mean, I'm like, you better be careful, someone's going to walk up to you and they're going to, like, Bluetooth and exploit and something like...excuse me...[laughs]...exploit your spine, you know? And, she's like, "that's what they're scared of." Medtronic, that's it, Medtronic. Thanks. I'm just like, "holy shit!" so guess what?...but as everyone gets older, that's the thing to look for. The confluence of events. What is, what will all the, I mean, this is just selling, it's just marketing. What will all these people need as various markets collide? Health care, I mean, I won't go into details, but, I mean, you know, this is a looming disaster that is so big that actually no one will actually, everyone is just diverting the days...ok. And, the only way to solve it is not policy, it's not denial of care, or this or that, it's not beating the 20 or 30%, even if you, ok, even if you got beat 20% profits and 30% in efficiency out of the whole system and cut the costs in half, we are screwed, I mean, we aren't just sort of screwed. We are completely screwed. The only way to solve this is with technology. The only way to solve this is that instead of it being a wrist watch, here that I have, that when I get to be 65 or 50 or whatever the hell it is, I put on the Metronic blahblahblah wrist watch. And the blahblah wrist watch would...allow me to do anything, report my blood sucrose, reports my blood sugar, my blood pressure, and does this and does that, and monitors a zillion things so that without any effort, ie any cost, there's ...eye running somewhere that looks this whole thing over and goes: hey, unit number 7763, I don't know, I am not a man, I am a number...has this problem and we have to take a look and they solve this thing easy because the only other alternative is that three-quarters of us get hit by a bus so the only thing the system has to do is pay out $3000 for burial. But if every single person in the, all of us, everyone in this room, expects someone to spend $3million to get your butt to live six months more at the end of every single life, the math doesn't work. The good news is we're the people who are going to solve the problem. So, other than that, you're question is not interesting. [laughs]
One last question.
One more, one more. Come on guys, come on. But not you Dennis...financial guys. They aren't going to talk to you anymore. Yes.
Just to fill the last question: a guy who was a Chief Information Security Officer at Intuit, and he says 10% of the computers in the US have been botted by guys who will download stuff so they can use it. And he said the only good news is 5%, 10% of the bots here are in this bot herd, and 10% are in this bot herd, and once you're in a bot herd they will make sure you don't get other viruses.
Oh yes, each bot herd had very good internet security. Yeah, absolutely.
The fear he has, of course, is that these are being orchestrated by foreign governments and...
Well, they're being orchestrated by whoever can write the check, but yeah, yeah.
So, the point being that stopping that is actually a critical thing to the United States.
You can completely blame Microsoft for this.
So, fixing it, is that an area of interest? That's the question.
It's an area of huge interest. Gigantic. The problem with it is, um, we have now, we have what's called the curse of the installed base. All of us have this problem. As a service provider, look at Microsoft right now. What is it, Microsoft, the browser, for whatever, it's one of old or seven ... I'm a Mac guy. I tell people I know nothing about Microsoft. And that way I don't have to fix their computers. Um, do you know something about...the bottom line is once you let a piece of software out there, it's out there. And, to your point, now you got your mom. What's going to happen when you've got your mom working on something and it turns out she gets owned by a bot 'cause it's an old version of whatever, and she doesn't know how to update her security things, and lalalala. Well, we're going to get mom to upgrade the software? You're out of your mind. You can't get us to upgrade the software. Mom's not upgrading the software. Enterprises solve this by getting an iron fist on the machine. I'm just saying, look you use it, you're not running it, you're not controlling it. There are certain downsides to this, but it's not...example: a buddy of mine works for a data security company. This is good. He lives down here...he had to explain this to me 'cause I'm not a Windows guy but I am a crypto guy sort of. I quickly got it once he got to the crypto part. All the stuff on his PC is encrypted, and it's all encrypted to registry serial numbers of his machine. Someone at headquarters, and his machine is part of the local network of their machines, someone at headquarters in an upgrade shifted their system over from all the machines control their own keys to their crypto off the registry to their crypto off the...all this makes sense except when they pushed the button, it then erased the keys from all the local registries never to...again. But now replacing them with the keys from this central registry, which of course don't work, now he said any new work he does is encrypted under the new keys. And he has sent them his old harddrive with a note that says "Everything I've ever done for you [laughs] is on this harddrive. There are various data places and various agencies that might bust it for you, although I would note that corporately you opted for very strong encryption. So here's a harddrive. Have a nice day." So, there was a little bit of trouble. And management in Toronto said, "well can't we just undo that?" ... so that does happen. Uum, you've got a point, systemic problems, when Microsoft first puts stuff out, they tore all the security out of the baseline stuff because the theory was it's a personal computer, it doesn't even allow for multi-level, multi-user security. When something comes into my map, it tries to do something nefarious, the first thing that happens is that I get asked for the root password. Well, if I don't like what's going on, I type in the password, and guess what, nothing happens. So, that isn't an option on any of your older Microsoft operating systems, they all...boom, someone's telling me to do something, I should do it. It's not multi-level security stuff. Now, the new ones do, and if Microsoft could push a button; they'd pay a million bucks for a PC if they could push a button and make the past go away, know they'd do that. You know they'd...billions of dollars for the...but they can't...
Just a simple question for a crypto-expert, super techno...
Do you shop online?
Oh, all the time! All the time! All the time, for sure! I bought my boat on the...server. I will say this, but I have a separate credit card. I have, like, four Visa cards, and they are dedicated to different things, and I have one of them that's my online card, so that not when,not if, rather--but when random charges start showing up, I'll...the damn thing, which they do once in a blue moon. They're not even panicking my other card, and every once in a while I will cancel that card. I mean, literally, I, if anything's funny I call the credit card company and say, "those two charges look bad." And they go, "ok." And I say, "turn it off and send me a new card." I literally, I can't even remember, but I get my bill and I go, "Amazon. Yeah, they have my thing. And these guys, eh, I'll go change my card." And trust me if someone tries to buy something, they will tell me. They're gonna..."We feel unloved." But I do have it on a separate
Yesterday Shai Goldman of Silicon Valley Bank hosted and moderated a fundraising panel for the popular SD Forum organization, a Bay area non-profit created to foster innovation, entrepreneurship and leadership within the Silicon Valley ecosystem.
As somebody new to the Bay area myself, I was flattered to be invited by Shai to be a panelist, along with Ken Singer, the CEO of Ondeego, which recently raised $3.3MM.
The result was a lively panel with many questions from the audience surrounding the learning that Ken and I had as we raised angel and venture money in the Valley.
In the video I spoke highly of AngelList (you can watch a related interview with Naval, one of the AngelList founders), I gave my top tips for hiring technical talent (which I've never given publicly before), and I spoke openly about the mistakes I made, and what I would do differently if going through it again. I also interviewed Shai on the topic recently.
My participation on this panel was part of a series of blogs I'll be writing through the end of the year on our 14 weeks spent fundraising, in an attempt to help other entrepreneurs shortcut the process. If you'd like to read my upcoming posts on the topic, in which I'll go into great detail, please subscribe to this blog (top right). I'd also welcome any comments anyone has on fundraising tips, especially the decision points between choosing convertible debt vs an equity round.
Yesterday Shai Goldman of Silicon Valley Bank hosted and moderated a fundraising panel for the popular SD Forum organization, a Bay area non-profit created to foster innovation, entrepreneurship and leadership within the Silicon Valley ecosystem. As somebody new to the Bay area myself, I was flattered to be invited by Shai to be a panelist, along with Ken Singer, the CEO of Ondeego, which recently raised $3.3MM. The result was a lively panel with many questions from the audience surrounding the learning that Ken and I had as we raised angel and venture money in the Valley. In the video I spoke highly of AngelList (you can watch a related interview with Naval, one of the AngelList founders), I gave my top tips for hiring technical talent (which I've never given publicly before), and I spoke openly about the mistakes I made, and what I would do differently if going through it again. I also interviewed Shai on the topic recently. My participation on this panel was part of a series of blogs I'll be writing through the end of the year on our 14 weeks spent fundraising, in an attempt to help other entrepreneurs shortcut the process. If you'd like to read my upcoming posts on the topic, in which I'll go into great detail, please subscribe to this blog (top right). I'd also welcome any comments anyone has on fundraising tips, especially the decision points between choosing convertible debt vs an equity round. Here's the video: Here's a transcript of the video: (learn how & why I do this) Shai Goldman SVB Mobile Fundraising Event Shai- Good morning, alright we are going to get started here, just a few quick remarks and we will get into the panel. My name is Shai Goldman with Silicon Valley Bank I am here tonight, we are the host. Just a quick overview of SVB we've been around for almost 30 years and we are a commercial bank focusing on technology companies anywhere from Venture back start-ups to public technology companies. We have offices across the country but also globally in the UK, Israel, China and India. My role is really working with pre-venture back companies in the Bay Area helping them with the fundraising process which is what we will be discussing tonight. We have a few sponsors tonight PWC, DLA and Microsoft they help make this happen. So those are quick remarks on the co-chair addition to SVB we have a co-chair at ST forum it's really a a long term position, I I've been there for four years. A quick overview of ST forum is it's a non-profit organization based in the Bay Area our focus is providing advice and content for technology companies based in the Bay Area so its a ST forum event that's mainly it. Also, cell phones if you could put those on vibrate, I'll do the same, I have one or two myself. So we have like an hour, an hour and 15 minutes um mostly Q&A, I have a few questions for the panelist but its really based on what you guys want to discuss. The primary topic really is the fundraising processes, talk about which channel (.....) what stage are they, where they were at when they raised a round of financing. Both CEOS are in the mobile space so if theres enough time we will get into discussion around the trends of mobility. We had a third CEO scheduled her name is Karmia at Busy Bees but she is closing a business tonight so she couldn't make it unfortunately but we still have two great panelist so with that we will get in to it. So we have Daniel over here from AppMakr, we have Ken with Ondeego. So a first time of raising a round of financing or a VC round of financing from what I understand so lets get off to a few questions and I will let you guys drive the conversation. It will be helpful to know how much you raised, when did you raise money but first what do you guys do, when did you raise money and how much. Guest- what are the name again Shai- It's Daniel with AppMakr Ken - I am Ken with Ondeego, were changing our name because you wont be able to spell it. It is Ken Singer, when you get money you get to spend it on re-branding, right? Guest- What is the new company name? Ken- I don't know we hired someone else for that. Daniel- I hear AppMakr is a great name Ken- yeah it is but I hear it's taken. So we are about 3 ½ years old which makes it kind of an old company that tried to get series A financing we raised 3.3 million about a month and half ago from Blue Run Ventures which is a great VC fund we are very mobile focused that was one of the reasons why we chose them we had other VC's that were interested we tried to go the strategic route, find the right partner in terms of market (...) Guest- What is the element of of (....) Ken- We have an enterprise app store to help a company deploy different applications to their employees regardless of whether its for a tablet or for a phone and uh once you deploy it through our system you get to manage the applications so you know who has it what versions they have. If they decide to leave the company with their iPhone but has your application on it you can remotely wipe the data application. Daniel- Hi guys, my name is Daniel Odio, I am actually Co-founder and COO of a company called PointAbout, AppMakr is our product that we launched in January. PointAbout is based out of Washington DC and in fact I was also based out of Washington DC until just this summer. I drove the car across the country to the Valley here over the summer. I am an East Coast entrepreneur that has decided along with our team that the place to be is the West Coast to launch a product company and that's what we've done. We've set up office in SoMa. We've got about 30 people and we are about 2 ½ years old. We started doing professional services so PointAbout was named by Fast Company as one of the top 3 enterprise app creation companies. Things like iPad apps, Andriod, mobile web for large clients fortune 1,000 clients like GM and Disney. We are all product guys in fact we are all web guys and we really wanted anybody to be able to make an app so we had been architecting this thing called AppMakr for the last year and ½ and we launched it in January. We saw tremendous growth it's been doubling every 45 days it's been used to build 1% of all the apps in the app store including used by large brands like Newsweek, National Geographic, PGA Tour, Congress, Coast Guard and a lot of small brands that you've never heard of like soccer coaches and bands and so we did a Angel Round of 1 million bucks from some West Coast Angles. I've got a lot that I can tell you, a lot of learning especially as an East Coast entrepreneur who are coming to the West Coast. I tell ya, you guys have this culture out here that's very subtle but I learned all about it. All in the process of raising funds over the summer. I will be happy to talk about that, but I do have a question for everyone here because really I am here for you. I mean, can you just raise your hands, is anyone here looking to raise money, like I am very curious, ok so thinking about it. Is anyone in the process of raising right now? Ok, a few are. Who in here has raised either an Angel or an institutional round. A couple of you, I think that you guys are just as well qualified as we are to speak to this issues and possibly more so. I would encourage you to speak up while we are going through this tonight. Hopefully, there will be a lot of learning here that's what I am here for. Guest- when did you close your round? Daniel- Just in October, we had a big funding party, which by the way we did it with a $500.00 budget at the end of October. Guest- That was the Angel round you raised? Daniel- Yeah that was the Angel round, so Mitch Kapor, Charles River Ventures, George Zachary and Bill Tai, Kima Ventures which is a French super Angel, Brain McClendon who's a VP at Google and a bunch of others. I could rattle off a whole list if you want to hear it but it's basically about 10 Silicon Valley Angels. Shai- So the challenge that I see with a lot of start-ups is that when they go out and pitch money too early which is also (....) and ambiguous so maybe we sort of set the standard by what state was your company when (....) raise that first round of capitol. (........) Ken- I actually not the case that you could ever be too early as a company, your market can be too early so if the VC thinks that the market it here and your product or your company is not quite there but you are the best horse in the race they will fund you because they believe the market is here. That is what the goal is they think they can fix everything else. The market they cant fix they cant force customers to buy if they are not ready so if your company if not ready yet I still suggest going out and one of the things an advisor of mine used to tell me even you are not looking for money always go and meet a VC every quarter so you get practice. You really want to stay engaged with the language the way that they look at information because VC's calculate things quite differently than the rest of humanity that's why they are (....) people. Guest- So I want to ask you just to generalize for just a second. You said if the market is ready... Define readiness of a market. Ken- They VC has to agree the market is ready. And it's weird, you have to go with their psychology. Its not how good you are, how good your technology is its when they believe the market is ready. You will hear this term- product market fit- a lot. If the VC's are good, they will use that term , it means does your product in the market actually have found each other. Like, do people understand what they would be buying if they heard about you, are they asking for it. There is this little interesting dance between the market, the people who will be paying for your stuff and you what you're offering. If the VC's feel there is a fit then you will have a lot of VC's interested. Now you might just have (...) and that's what you see a lot of companies who are just complete crap who get funded because someone believed the market was ready and they threw a bunch of money on it and made that company be ready to service that market. So, you know if you get a lot of no's from VC's it may not be how great you are as a entrepreneur, as a team or your product, or your product might be stoic. It may just be that they do not believe the market and what you're offering are matching for whatever reason. (..........) Guest- So do they think the market is ready now...or do they think the market will be ready in 6 to 12 months when your product is going to be out there? Ken- That depends on the VC, some VC's will look for whats going to be ready 6 months from now. They are very cutting edge, they are very early stage, they want to make sure that you will be ready for the next wing. A lot of VC's are while they say that they are early stage, they are really not. They are followers, if you look at some of their portfolio companies, you'll see that they bet on the 2nd horse they'll be, guys that invested in say...umm ....uh , I don't know....uh Friendster which was the first social network and then you'll see some that Feebo the second or third horse, because they've seen someone out there already doing it they think there's gotta be a market. Shai- So Let's talk specifics so what was the stage of your company, and what did you have done, did your particular VC feel the market was ready Ken- We had customers, so... Shai- Talk through that (....) Ken- So we, we started out three years ago , similar to actually, we had exactly the same business we built applications for enterprises and um we sold an enterprise application to Anheuser Busch which was amazing client of mine, we built there sales tool application location. If you guys are familiar with the beer industry, it's incredibly screwed up in the U.S. Breweries are not allowed to sell directly into a bar in the states so if this multi billion industry there sales guys can not even step into a bar to sell. It's just not legal, so they have all these wholesalers that do the selling for them and give them as much information about the alcohol content, the availability and hope to God that they are going to sell it right because in certain states you can only sell 6% of beer, you can only sell certain beers that are constructed a certain way theres a lot of these regulatory rules that prohibit you from selling county to county. So they spend millions of dollars trying to put all of this information into these guys hands of the beer sell guys, it's really sophisticated. But, they carry Blackberry's so they had us build an app that we could put this information right at their fingertips so we built this for them and they spent a lot of money on the app we were really thrilled they spent a lot of money on this. We delivered it, it was great, it was exactly what they want but how do we get this out to our guys. What do you mean use your web server and just push it out, no they said - we cant even communicate with our wholesaler and sales team in certain states so, we need a system to deploy it out. So that's where we changed gears with building applications to managing (...) and that was actually when we talked to the top 3 VC's who we were negotiating with. That was the major mark of the (...) that they identified, that we pivoted and we saw the markets change. That's what they're looking for right, the three top VC's that we ended up getting term sheets from we met with each one no more than 5 times. OK, and we raised 3.3.million and in total we were offered about 4.5million from the VC's. For someone to offer to give you 4.5 million-5 million dollars having only met you 5 times they have to go through a certain series of credibility checks and that they are comfortable handing you a check. Because I'm telling you it's awesome. Your bank account at your bank went from near zero to this incredibly huge number it was amazing. I mean they literally just dumped the money in and you could just run off to Cabo and spend it all they have to figure out that you are trusted to give this money to, and so for 5 meetings not any of them lasting more than 2 hours they've gaged that your business is a good fit. That there is an opportunity there, that you are the right person, or that maybe your team is the right team and not necessarily just you. That you will be able to deliver the results that they're looking for, right. So Based on that, they have to look for those markers. The biggest marker every single one pointed to was that you pivoted when you saw the market change. So in your pitches that you make I would encourage you to show your thinking. Why you made the decisions that you did because they are accessing what kind of decisions, when given a certain decision, what direction you'll go. Do you listen to your market, do you listen to much, do you change too frequently. There are trying to gage how you think. So I have to say that was why we had every single VC that were really interested in coming back and said ok you've actually identified the market when you saw it, now show us more of that (..) execute. Daniel- I think there is also specific to mobile there's some you know, I always say that mobile is like flight. Flight for thousands of years humans have wanted to be able to fly through the air and no one has been able to do it. It had a really bad rap, I mean those that doubted it was possible just like mobile. Mobiles been along time coming and then the iPhone came out iin 2007 and it was like the Wright Brothers, it was a seed change. It was figured out and so I do think that the institutional inventors now see this huge opportunity that is ready and right but pre iPhone it was a very hard slog. We weren't in that world but you were so Im sure you have some war stories about that. Also, I am a huge fan of the whole lean start-up mentality, Im sure that most of you are familiar with Paul Graham. My brother went through Y Combinator so I got to watch this idea of being Ramen Noodle profitable and getting just a little bit of money and testing and reiterating and repeating, I do think that there are a lot of people that think I am going to go out and talk to a VC when really they should just be trying to get a minimum viable product out there and get feedback on it. I think that a VC is there to put fuel on the fire but is not there to start the fire. We went through that also, we didn't know if we were going to raise an A round or a C round when we first started and not to put to fine of a point on it but we met with some very large VC's when I first came out here. You know I'm new to the Valley so this was my first time raising money so it's a very humbling experience and you know I am not shy about admitting to all the mistakes that I made but we to not put to fine of a point on it- we blew our load to large VC's early on and we ended up deciding to take an Angel round instead the Angels were very excited about what we were doing. They were ready to move quickly the VC's weren't. They weren't excited enough about it. In fact we ended up figuring a lot of things out over the summer about our business that I think if we've waited to talk to these large, I'm talking literally if you can think of a top tier VC when I first got here, I had meetings lined up with all of them. I wish that I hadn't done it that way, I wish that I had gone out and maybe started with a B set I don't know if that would have been the right way necessarily but maybe talked to more Angels at the beginning for our business specifically because its kind of hard to go back these VC's that have said no or more likely they just wont return your call which is even worse. Guest- Can you kind of go through the process of how you met the Angels and how you found the ones that (...) to you Daniel- I highly recommend AngelList, who in here knows about AngelList? So like, a quarter of you or less. It's amazing these two guys Naval Ravikant and Bobat Nivi, who goes by Nivi, started this thing called AngelList, I am not a big fan of angel groups where you go and you pitch to a group of angels. I'm not convinced that they interested in really investing a lot of the time, maybe they are just looking for something to do. But there is this one exception, AngelList and I don't know why this is free, I don't know why they don't take equity, it's literally amazing. We raised 54½% of the money we raised including people like Mitch Kapore who's unbelievable who came through AngelList. It is these guys these two guys had this company called Venture Hacks and they've both been successful investors in the past and they wanted to create a market place for investing. They started AngelList, it's been in the press a lot lately, I think its AngelList.co they'll joke that they couldn't afford the m Angel.co, right it's Angel.co and you pitch to AngelList, if you get accepted then they will put you out on the AngelList they have created this whole platform. I mean it really is turning into this electronic trading system almost where they are consolidating all these angels so you put your pitch on the AngelList and then if they approve it, they will send it out to the network and the angels that are interested will contact you and then you'll have meetings with them directly. So it's not an angel group as much as it's accessing one place to a bunch of angles. It's awesome, it really is phenomenal. I mean just the people that are on there are the top angels in the world. Shai- Whats your point as to why it works, have you seen a few iterations of this? Most exchanges are trying to charge one side or the other and they have some sort of angle to want to do it. AngelList is not charging either side, there's no real angle other than they are trying to get into the best deal themselves. They want to make sure that the best deals come across this list so they can see them. Daniel- It's the best thing that has happened to entrepreneurs raising angel money that I've experienced. Guest- When did you promote your yourselves? Daniel- It took us 14 weeks to raise the million bucks. I also had a lot of, so there's a couple of key pieces of learning. One is, things that we did and things that I wish I would've done, and we can go over through if you guys want to hear them. There's 4 co-founders to PointAbout and we decided that one of us would handle the fundraising process which I think is a good idea. It's very distracting, I basically did nothing except for fund raise for 14 weeks. Which is 3 months, so I am glad that the other co-founders were still running the business because it would have just stopped dead in it tracks. So that's one thing that I think we did well. I wished that we had timed it better in terms of us not raising over the summer which I don't recommend, I don't know what is the best time to do it but definitely not the summer time. Shai- Well the summer time and the winter time are the worse, after Thanksgiving things are basically shut down. July and August are the same. Daniel- So I guess Spring and Fall are the best times to do it. Shai- September and January are probably the best times. Daniel- And then we also did a convertible note, which looking back on it I'd probably tell you to do an equity round, like a price round. Not a convertible note, do you guys know the difference between the two? I don't want to get into a lot of detail here but, a convertible note is a (..) that converts into equity. There are a lot of angels that said no because it was a convertible note. Now, I spoke earlier to the culture and in the Valley here, let me just tell you, there are professionals at saying no and you wont even know why they are saying no- unless they say yes, then it's a no. You know you'll hear my sister is having open heart surgery, you know all the reasons that people come up with. You're just never willing to trust the reason, it's like ok so it's not a yes, then it's a no. So I don't know if they were saying well I would have done it if it were a price round if that's truthful or if they weren't interested enough in the business. But I do think that the reasoning for convertible notes is to get it done quickly and we weren't able to get our note done quickly. It took us 14 weeks, and so because of that I wish we would have done a price round because it would have taken just as long and it potentially less time because so many people were into the note structure. That's one thing, also out here on the West Coast everybody wants an valuation cap on the not which by the way no body on the East Coast mentioned that at all so it's very much a West Coast thing its probably going to move East but maybe it's there now. The first meeting I had with and angel he asked what the valuation cap was and I don't know if you guys know about valuation caps I wont go into a lot of detail but basically it kind of protects the angel, if they are giving you a loan now and you do your series A at some crazy high valuation they end up with a really small piece of equity even though they took a lot of risks early on. Valuation cap protects them, it gives them a maximum series of dilution basically. So even if you are able to do an A round at a very high valuation there not getting screwed and there is an issues where a convertible notes tend to cause angels to act against the entrepreneurs best interest, I haven't experienced that personally and I have had other entrepreneurs say they have experienced it, which might be a function of the angels but there are situations where the angel is negotiating against you to make a super high valuation especially if there is no valuation cap because they don't want to end up with a really small chunk. So I guess the last kind of major piece of learning is I find that I mean, angels are people, they're very easily influenced especially by press. We had a couple great press announcements and I noticed that every time we had a tech crunch story the interest would spike. So I wish that we would have coordinated a better market regarding our press strategy to describe what we are doing as a company during the time that we were raising money because I think that could have shortened the ultimate time that it took. So like time out, product and press releases, that sort of thing. So those are a couple of differences. Shai- Ken, you raised a VC round - how many firms did you talk to, to get to the final firm. (...) Ken- Yeah actually, to follow-up with what he was saying, I would take a couple of days to work on the mechanics of financing before you guys do anything just because what he said is all true and its all wrong at the same time. When a VC comes in, they could re-write everything , literally every contract that you have ever signed with anybody they can say that doesn't work. That valuation that you just did with your angel round that's not going to happen. They are going to give you money and you could re-write contract at that point. So with that said, I am not seeing a VC ever to do that at that level but they can. They can ask you to change the valuation of your previous angels. One of the reasons we talked to a VC is because the angels just wouldn't go along with it, it just so depressed the value and the valuation that they can do that. I guess the only advice I can give you is just try to stay within the industry norms as much as possible. One of the other things when a VC looks at you, they can look at how obscure or weird your deal building structure has been up to that point. There's a lot of hygiene factors that go in and how many investors did you bring in, what kind of various terms did you give the different angels. How involved are the angels, so a lot of those things go into the calculation of how a VC comes in to see whether again, if you made good decisions or if you surround yourself with good people. We were really fortunate to have very active angels that weren't really well known, and you guys have probably seen the blogs theres a lot of Kayne West type of deals on twitter slamming each other, if you have an angel investor who focuses more on themselves than on your business, that's a sign that you don't want to buy that because you remember it's a 2 way relationship. Those people are great at marketing you because they are creative marketing themselves, right. So if that's the value you're looking for in an angel then those guys might be it. If your business requires that kind of marketing than those kinds narcissistic behaviors can be a benefit to you. But if you are in the enterprise base, which we are, we need to be more buttoned up and professional and we needed the angels who could get us into those conversations, we chose that. I don't know what kind of businesses you guys are in but I would recommend is be as authentic to your business as possible. I mean that all the way through, from the angels and the VC's that you chose to the employees that you bring on the location of your office, all of those things need to be consistent because what you're trying to do is tell a story that will help your business and any quirky thing that deviates from the story is a distraction. Daniel- Let me ask you a quick question, because I here to learn to and I haven't done the A round so- what part was wrong? What did I get wrong from what I said? Ken - No, I am just saying that you can go into any VC and if they don't like the terms that you had with your angels they can say you if you want (...) Daniel- Yeah, but I am talking more about the angel themselves seem to be turning down convertible note structures because they were worried about that Ken- I actually had that as well, I had one angel that told us that he wants a price round that Daniel- We had a ton of angel say that, so I don't know if that was true or not, I was referring more to the angels themselves, like I wonder if you could actually get a price round done more quickly than a convertible note even though the whole reason is because you can get it done more quickly. I had a lot of angels say they didn't like notes. Ken- We did a note that was priced. You could have a hybrid model where you can say that you're calculating the value of the note to be X but when a VC comes along they'll say that's really rich so we're just going to change the mechanics of it and if you're not on board than we cant take your money. Guest- In the software world, I think the rise of angels in the last year or so comes from the belief they have that you might not need an A round and they wont get wiped out by the VC's. Software is a lot less expensive to produce that it used to be and hardware bio tech are. When you talk to your angels, Dan, how many of them talk about the possibility that you would not need an A round, and that hope you would get cashful positive with this one investment Daniel- That's a very good point because to your point just to explain, if you do a convertible note and you never raise- the note converts upon an A round based on certain terms- so if you never do the A round technically, you can just pay them back, you can pay back the loan and if course no angel is in the business to give out loans, they want to see big exits. It didn't come up as often as I thought it would. It came up a couple times the way that it did come up is our law firm is Cooley which has been a great law firm but the paperwork that they put together did not have a conversion into equity clause upon acquisition and we actually were have way through the note we had about ½ the investors signed up when a very astute legal council saw that there wasn't a clause and if were to get acquired it would convert into equity. Without that clause, we could just pay the note back and we were even aware of this either so when they asked for it, we put it in and thought it the right things to do and put it in retroactively to the others that have come into the note as well. I probably would have been hanged if we hadn't so I think it was the right thing to do but there that a super important clause that I think if you look inside yourself honestly as a entrepreneur you would not want angry angels you would want it to get converged upon at acquisition. Our stock (...) where it didn't have that. Guest- how long do you expect that seed round to last and if its a year are you going to look for VC funding, would you start it all again? Daniel- We're in a little bit of strange position because we, so , on the East Coast we tried to start a company by pushing a piece of rope up hill, I mean it really is, especially in DC except for professional services which is very to be a consultant for the government or whatever the case may be, we have a professional services group that's doing very well on the East Coast and so because of that we can manage our cash flow a little bit better than a standard star-up that's relying on completely on the funding- its probably going to last us about a year and in 6-9 months we are going to have to get this machine started back up again. However, one interesting thing is that we had a couple of institutions, Triple Point Ventures and Charles River Ventures both came in on this angel round and they did with the intent of being involved in the A round. Who knows if that will happen there great so I hope it does they've been great but its been interesting to see the VC's feeling like that to start taking small bets in these convertible or angel rounds so that they can be close to the start-up for the A rounds which I think is how they are feeling. Guest- Just one other, with multiple angels in the seed round what's it like- is it like herding cats? Daniel- It hasn't been because there is no board seed so we don't have to deal, that's a beautiful thing not having to deal with a board. Guest- that's weird right? Daniel- No, for angel rounds its not weird, for an A round you'll have to give up board seats. So it really hasn't been that bad, there is a spectrum of interest level in terms of being, like Warren Hellman is an investor but he is completely passive versus Kima Ventures who are very interested and being very active and so one of things that we had to do, we had to actually create RSS feeds for the angels of industry news and company news, so we let them latch on to as much of it as they want and we do awesome meeting every Monday and they can be as involved as they like to be but we're also trying to make it so its not like herding cats, you know we have 11 total angels in our round it could get really dicey if we had to answer to all of them. Guest- and your based out of Washington, DC, there are some VC- definitely angels in NY- what compelled you to look for your seed round here in the Valley, why did you feel like that was the right place for your company to even move here? Daniel- The cliche that you always hear are really true- angels, VC's- we tried raising money on the East Coast and we couldn't we got close to a term sheet but the terms are so (...) just from the conversations that we had. Out here people are willing to take chances they are like 6 months ahead of East Coast folks, East Coast VC's I've found tend to be more analytical and data oriented, they want to see numbers even when we were doing this angel round we had a couple of East Coast contacts from being out there that we got included in the conversations and they were asking to see things that none of the West Coast guys were asking for. Things that we should have and do have an idea about like, whats your revenue going to look like over the next 60 months, but really the reality is we are all guessing and no body knows, right. Out here it's more, I want to meet the team, I want to understand your vision, I want to know where you're going and if I should bet on you, I think what Ken said is really true. Out here its finding horses to bet on, I find that on the East Coast- its show me your numbers, and maybe we'll talk. Guest- Related to a personal experience I've had there was somebody that had a contact on the East Coast just like you did, then they came to pitch here on the West Coast they wound up getting funding out here, and the person I introduced them to what he said was- I like your idea but it is 5 years behind you, you work on this side- we will relocate on your people you have from the East Coast to the West Coast because what they had the team structure that they had they were willing to relocate them and that is how fast they move that stuff. They were looking at the team and ways to implement it. Daniel- I think its a shame really because I mean really if we raise our hands- who here is from the East Coast, It's like a quarter of you or even more, I wish it weren't that way but the only thing I regret about coming out here is that I didn't do it 10 years ago. Guest- so I have a question about the service aspect, does your start-up now take a back seat to a service business, having that as like the main source of funding, I mean you said before you got funding, even possibly now do you drop your clients. Daniel- it's a very good question and you know I would not recommend do what we did because there is this difficulty in focus, not robbing Peter to pay Paul we had Disney as a client, we had to pull people off one side of the company to finish with this very large client that we wanted to make happy. We've navigated past that I think largely all the founders are focused on the product, moving all the founders out here 2 of the 4 of us are already out here the others are coming we've introduced PNL separation completely different PNL's the services side is growing organically on its own so all of the convertible note money is going to product. Different leadership, different employees, different brands but it was like going through a dark forest to get out into the sunny meadow it cost us a lot in terms of momentum and time and I wouldn't do it that way. I would start here on the West Coast with an idea and get it funded. Guest- Yeah, that's what I was facing. Daniel- Theres one entity, and by the way- just explaining this to an angel takes 5 minutes and you're losing valuable time rights, that's another reason not to do it this way. Our corporate entity which is PointAbout Inc. it has a product AppMakr which is a brand, its not its own entity, so technically the convertible note was in the overall company which has this services group this product so if were to spin off services or whatever we end up doing we running the 2 separate PNL's right now but its part of one entity but people who invested in the note would benefit from that. Guest- but the services prove there's a business. Daniel- Yeah, and some angels love the fact that we have both because it keeps our nose under the tent with the enterprise we're doing very large enterprise mobile projects that we can see what enterprise's need so that's nice but its not worth the distraction, I wouldn't do it again. Guest- so theres mixed reactions to that then? Daniel - Oh yeah. Some of wanted it gone and some of them loved the stability that it brought and the insight that it brought. Then Microsoft paid us a bunch of money to create AppMakr for Windows phone which BTW is going to coming out by the end of the year. As a product company, Microsoft windows phone doesn't have any traction right now, its new, so we would have never put that on the product road map but because we have a services group they were able to create AppMakr for Windows phone and then we can productize it. There are benefits that we're seeing from it. There's a lot of great synergies but I also say everything comes at a cost, the cost was high. Shai- Its very a typical just to make that point. You hardly see (...) comes in funding (....) that ones that we see come through the Bay Area as far as financing, you hardly see (.......) Daniel- Its because they usually don't survive, you just have to be really lean and if the 4 founders really all didn't like each as people theres no way we could have done this. It;s a lot like Elon Musk says, eating glass and staring into the abyss, its actually Bill Lees saying, one of our investors. Shai- more questions? Guest- whats the perspective of angels or million dollar rounds on salaries? Daniel- Do you have any thoughts on that? Ken- No, I went from getting no aid for about a year and ½ to actually seeing a pay check, you know what it is- It depends on the VC or the angel about how you spend your money and test them out on this talk about how frugal you are and if they are like oh that's awesome, then keep the salary really low. Its actually to your benefit to keep them low across the board but if you really need to get, just pay your self enough that you can get by. If you're angel funded, once you get VC funded you'll have to bring on people from industry who know what to do in marketing or product and you have to pay them market and when you pay them market it's tough not to pay yourself market. If your angel funded just keep it as minimal as possible, the money goes away really quickly. Even if you're spending 20-30K a month that's like a (...) right? Shai- what do you think, engineering talent Ive seen on blog posts for the couple of months about finding key talent. What are you paying your top engineers? Daniel- I don't know if I want to necessarily give exact figures, but to answer this really fast I've heard exactly what Ken said but then I've also heard and we had some investors say- if you cant pay yourself market rate salaries then you really don't have a business. To proof that you have a business you need to be paying market rate salaries, we paid ourselves a little ten we paid ourselves a little more its not market, if you don't read Paul Grahams essays, I highly recommend them, theres one on being Ramen Noodle profitable, I know he is a very polarizing figure out here I happen to love him, he is awesome. I highly recommend Paulgraham.com he has about 20 or 30 essays for entrepreneurs that are just phenomenal he goes into some detail about this exact topic. Ken- I think when you're angel funded, I mean right before you get angel and right when you get it, you really don't have a business, right? You're trying to build something into a business and you're probably not (....) positive that's why you need money. One of the markers that I say people look for is dedication and passion, what one of the ways to look at that is are you willing to forgo gratification which is a paycheck for much greater gratification later its way a way they can say this guy is in it to win it. Theres that and I've heard the same thing, some VC's like our VC's right now are saying- I don't want you to think about what you're going to eat today because you don't have the money because I want you to be focused on the business so pay yourself. Theres different schools of thought there. Daniel- I am all about very pragmatic tips, like I am a very pragmatic lean start-up kind of guy. On the hiring topic, I don't think its appropriate to give out exact salaries but I have two tips one is, as I'm sure you guys know- its impossible to find talent out here in the Bay Area so we've become very good at in-sourcing like finding people in Texas. Our lead designer is from Texas, we relocated him here. It's a little easier for us because we have the DC office so we are kind of used to finding talent outside. Here's my number one tip for hiring, I've never actually told this to anyone before but I think Facebook is about shut my account down for doing it so I probably don't have very long left, so I'll give it to you guys so you can try it. I go to LinkedIn and I look for key words like, Objective C or Android, or whatever the case might be and you know everybody does that which is fine, but here's is what I don't do, I don't try to message them through LinkedIn because nobody answers answers instead I have an assistant look up there name on Facebook and send them a Facebook message and the response rate is 10 times the LinkedIn response rate because people don't typically get spam if you want to call it, solicitation emails about jobs on Facebook. That's my top hiring tip like I said, I think Facebook is about to keep me from doing it anymore. Guest- And they will shut you down, why? Daniel- They sent me an email saying that I was sending too many emails out. Too many messages. Guest- that was before today? Daniel- it is amazingly effective, like I cant even tell you how good it is. So good luck with that. Guest- The topic tonight, is avoiding problems, and raising money or something like that. Have either of you turned down a check from an angel? What are some of the criteria that would cause you to do so. Ken- If you can sense they are going to be a pain in the ass, and you can tell. I mean it probably helps to know if they have the same instincts that you do about the business. If they are in it for the same reasons you are. If they are completely coin operated, then you just have to know that, right, if that's something you can work with, then great if that's something that you might have issues with because you're leading a revolution and you're passionate about something and its not just about money and its about changing the world and this person is completely coin operated, then its not going to be a fit. Ive turned down money twice, I turned down a VC that we gave a tentative yes to and then it turned out that the relationship probably wouldn't have worked out. Guest- Was it too quick of a yes? Ken- What do you mean? Guest- Was it oh you're awesome, I'm in!! Daniel- like take their money as fast as you can. Ken- it depend on if you did a really good job on articulating what you do and why you're doing it and they believe in all of that stuff. It might be that you're really good. Right, or you know, my one piece of advice when you're fund raising is that while they're looking at you you're going to be pitching to someone and they are actually pitching to you. Turn the tables around, right. I think my most successful meetings were times when I were hypercritical about the fund and about the people in the room. At that point I had already hammered out my presentation and practiced it with about ½ dozen VC's. I knew that the presentation worked, I knew that the messaging was in line with what was going on with market so at that point I could just kind of play and so I'd meet with these VC's and turn the tables around and be like so, you know having taking a look at what we're doing do you think this fits within your portfolio and the way that they would answer it to see what companies they identified that they thought would be a good fit for us to talk to that might be good relationships or why they are investing in us, they didn't have a very good answer. I was just kind of you know, go after them like why are you even interested in this investment. Ive even had one VC say because we know that this other company is interested, this other firm. I was like that's a reason, and you know its like thank you, I'm kind of done, right. You got to turn and be evaluating them because you're going to be married to these guys. Right, and they will position themselves as the guys that can get you the furthest along and you got to believe that. I gotta tell you, you're gonna have, we've got great VC's but we've already had times where battling it out about what is the best strategy and you need to have that with someone that you really respect, and that they respect you and you get to and end point where you're both satisfied. If you have a partner that is all about one thing like money, make money, money and you might have other things going on its not going to be a fun time and you might not last. Just be evaluating them. Daniel- I think I've got 2 thoughts which are, I agree, 1 is we have not turned any money down we didn't have the opportunity to do so. We were going after everybody that we could. We did have DC venture capitol firm that asks us for things that the West Coast firms didn't ask for. One thing they asked for was to be able to observe board meetings and we just decided that we didn't want to deal with that yet. There will come a time when we will have to and we want the beautiful luxury of not having to yet. We did say no to that and they said well they've never invested in a company that they haven't observed and we said ok, there are plenty of guys on the West Coast that will do it. The second thought is that I always try to think in terms of there's a cost to everything. Theres a cost to all of us sitting here theres something that you cant be doing tonight because you're here. I hope the cost is worth it. I would say, I would hope that if there is somebody that you're thinking about taking money from but you're not sure about, you can think what the costs are and then change the terms a little bit, I don't what you can do to try and mitigate those costs but I think really entrepreneurs are able to anticipate mitigate the costs well. So maybe its not saying no its saying yes but only under these conditions and I don't know what they would be I think it would depend make them be the ones that say no is I guess is kind of what my thought about it would be. Shai- we've got time for a few more questions so... Guest- to the board observer point, I'm an attorney and have spent a fair amount of time helping companies raise money if you're talking to a venture fund and if they have any pension money they are required to have what are called management rights, they are required to be a board observer in order to legally give you money and stay within the pension rules, Daniel- maybe that was the case Guest- so that I would interpret and when I said that, if they cant give money to people who don't give them observer rights without risking being in violation and so if you hear that from people it doesn't necessarily mean they're going to micro-manage you or that they are going to be over bearing they're just honoring a legal requirement that they have Daniel- to that point, I think maybe its a West Coast sophistication of setting entity's up. Charles River Ventures is a very well known fund I'm sure they've got pension money but I imagine that they set there structure up in a way where they have this thing called the quick start program. Guest- I've worked in venture funds and I've represented dozens of companies and it is absolutely standard Daniel- right, no, no no I'm not saying that's its not I'm just saying that some how Charles River Ventures was able to figure out a way to put money into our company without making that request. I imagine it's through a different legal entity a different structure where they make small bets so maybe its just that this East Coast firm didn't have the sophistication to set themselves up that way. All I know, if that's what happened. Guest- but, but, but (......) Shai- hold on, we have a few more questions, please. Guest- I am curious especially since you came from out of the area how did you target and I knwo you that you talked about being on AngelList and in some sense (....) but clearly almost ½ your stuff came from other sources. How did you actually target people and the angels you wanted (......) Daniel- So I was very lucky, I mean this is very specific example but I think it holds generally. I really believe in building a personal brand, I think that we should all be spending time building personal brands and that's separate from the company brand but its you as an entity. I define social media as getting information that's in your head out of your head and into the hands of people that can use it in beneficial ways to me that is social media its all about this knowledge that's captured up here and sharing it. I capture content everywhere I go, Im capturing content here today and I am going to put it up on my blog and I hope that instead of 40 people us all being able to benefit from it you know 40,000 can benefit from it and that's part of me always prioritizing creating a personal brand. I think since I've done that I've been lucky and you have these coincidences happen like James Hong, who is a creator of hotornot.com very well known in the area was looking for a way to put a laptop on a stationary exercise bike and I had made a blog about how I did that. I went to Home Depot and I made this stand and its totally a coincidence but its kind of not, I spent the time to capture that content and put it up on the blog and he saw it and he IM'ed me and asked me how I did it and we had a conversation and when I came out here I was bale to call him up and say hey James can you get me some intros and he did and he was phenominal and so its things like that being prepared to be lucky type of thing, I think that by creating a personal brand and capturing content and talking about whats in your head there are a lot of people that would love to hear about whatever you're thinking about. I just think that leads to really good outcomes. So that's how we got the non AngelList money was through connections like that, very happen stance, I couldn't tell you how to reproduce it Guest- so you were'nt actively searching (....) Daniel- I was actively searching but dig the well before you need to drink the water, right. Like, I had already formed these connections with people on the West Coast like James Hong that I was able to tap into. Shai- one more question back there Guest- yeah, so both of you had service businesses as well as exsisting customers you're probably getting more customers on board, Im curious if you guys had a plan B that didn't involve raising money, or maybe there was a part of you that wished you know that you could keep all the equity to yourself and grow it internally boost rapid, I was just curious as to if either of you had a plan B Ken- oh boy, No. I've been in the valley for about 12 years and I havent really seen many companies do a plan B generally it involves VC money if you want to grow it into a pretty big company right and so all of our angels who were early we had like 3 years ago about 4 angels the agreement was we were going to try to blow this out. (....) with that kind of framework we never really thought about you know could we turn this into a services play forever, right. One of the things that we were faced with was that at first we were the only ones there 3 years ago to build applications for some of these companies big companies in the Mid West and then we started getting asked to bid for contracts for companies that I'd worked with in the past, they would be like oh we came across a couple of these Indian firms and this Bulgarian firm and they were like bidding a 3rd of what you're bidding. Like, this is not a good sign, right and so we figured OK this is we've got to find a different thing to do and our plan B was to actually just shift our business completely if you can call it a plan B. I think its a viable strategy if you have the team and the investors who will go with you into a services play. If that's where you think the market is and where you can be successful but for us we had people who were like look we gave you money to nail this, you gotta go do it or just fold up shop. Daniel- I definitely believe in failing quickly. Failing quickly and if its not going to work go onto the next thing as quickly as you can Guest- you mentioned about how you found angels through AngelList but I was just curious how you went about getting connected to angels. Ken- angels for me, I kind of used unknown angel networks so like theres ethnic groups out there that have like and interest groups that all kind of talk to each other So if you're familiar with like theres about 30,000 Germans in the Bay Area a lot of them are connected into the money and some how I got connected to that when I was in college somehow I knew one German who knew a bunch more and so I got connected into this weird little angel part SAP part all these kind of German guys and then they also did a lot of business with Israelis and so I got connected with this whole group of Israeli investors as well so I know in the Valley more than 50% of the start-ups here are started by people who are not born in the US so they've got to get money from somewhere there's a lot of communities out there that are looking to help young entrepreneurs so you don't have to be of that ethnic group obviously, I'm not German I've tried to pick it up, I cant even speak but there are small groups out there that if you can connect with them they're incredibly valuable. If you have a consumer concept and publicly some of you have these super angels are really useful because they can get you access to Facebook and to other companies that they've invested in and get you the buzz but if you're building a business around enterprise or you know something that doesn't require that kind of buzz there are other networks out there you know and using LinkedIn is a great way, that's a brilliant idea to go through Facebook and I am going to have to use that, you know with angels if you live here you're probably only one connection away from an angel investor and angel investors know each other and they are all inner-connected so find someone who, I'll give you my recomendation is find someone who's going to believe in you one angel who will be your super angel who will be kind of your bead and have them mentor you and have them walk you through their network of investors and friends because they'll meet up every month or so and they'll talk about investments that they've made or whatever is going on but find that one guy that one who will take you under their wing and introduce you to the community and that's exactly what happened to us is that this one investor really believed in me and then kind of tried to shave off the rough edges and help develop me into an entrepreneur that he would not be embarrassed to introduce to his friends, you know he did somewhat of a good job I guess and learn from this person, right and that's my biggest recommendation because that person will make sure that you don't get into too much trouble that you wont get into terms that suck. We had one VC that when we were looking for money where the terms were incredibly bad and he was like, look you would embarrass me if you even took these terms to my network of friends that are investors here so you know you can do it but I'm telling you that it would look really bad on all of us. Daniel- One other hack that i can tell you about this is using the public AngelList site I'm sure if Nivi and Naval hear about this they're not going to be happy about it but it's nothing illegal so I'll just go ahead and just share it on AngelList you can search for angel names so the idea is you can search for (...) and learn about that specific angel but what they havent done is they havent shut it down so if you just put in one letter like the letter S which happens to be in almost everyones profile it will return all the angels on AngelList right, so just a website of every single angel on AngelList, because theres a filter right, the idea is that you submit to AngelList and then those angels contact you but if you could know who all of them are maybe you could just find ones that share an interest, you went to the same school or you know something that ties you together so if you just type the letter S on the angel.co site it will return a list of all angels Nivi and Naval- if you see this you should probably shut that off but use it while you can. And then look through the profiles of all the angels and try to find a connection, I'd say that's a great way to start i think theres 500 angels on that list now and its unbelievable the size of that network so you'll surely find 50 that share some kind of passion of the industry or your background, where you worked, school or whatever the case might be and strike up a conversation with them Ken- are you guys having difficulty raising angel money right now? Guest- yes Ken- why is that? Guest- I'm not sure, Ive got a really good angel but he only makes investments occasionally so he wont lead Daniel- thats an excuse, like seriously, if its not a yes then its a no, thats a no. I'm telling you guys in the Valley, you're crazy out here like he just said no to you and he just said it in a really polite way thats what I heard having gone through this. Guest- but he keeps putting me in front of a bunch of people Daniel- that's because he wants someone else to say yes so he doesn't have to be the first guy that says yes, like if they're really excited about it they'll jump at it so I think the real issue is and I don't know anything about you or your business so I could be speaking out of school but try and do something that they get really excited about and if they're not getting excited enough about it maybe that's an indication that you need to go back to the drawing board and iterate and test more because I mean literally George Zachary is an awesome example, he and Bill Lee were the first guys to believe in us and they in the first meeting were like yes, lets do it, this looks awesome lets do it and they didn't care about what anyone else thought or what anyone else said they were just so excited about what we were doing that they said yes right away on the first meeting I think if anyone is excited enough they will find a way to do it. No matter what limitations they otherwise have. It's just a polite way of saying no. Shai- one last question guest- this is a question about a whole lot of investors invested in a small company, the practical question is what value do each of those investors provide, obviously (..) lets say 5 or so invest do all of them add value , how does that actually all play out in records Daniel- I think if you're super over subscribed you can kind of architect well I want this angel because he's got these connections or this angel knows the industry we were not able to do that I think we ended up with a phenomenal list a list that we are very proud of to share but it was through a lot of rejections and it was not through this master plan it was just a lot of grinding the pavement and hard work and lots of follow up so I don't know if you have a better answer Ken- it varies right, just because the nature of our business we switched into becoming an enterprise play and so our super angel had come from that business come from Intel, kind of looked at other companies while he was at Intel so he is on the board at several companies and invests with his friends that are on the boards so we were really lucky and we got an angel who was a CFO at a company in the UK and we've got another who was a CIO of a major telecom in Europe. We were able to cherry pick people for their skill set and there money that came with it. We had a luxury of choosing because we had this one guy that kept spoon feeding us money. You hit this milestone it will be an indication that you're going the right way, I'll give you a little money and introduce you to this other person and as you build credibility and trust with the network they start opening themselves up and the network up to you. Its like Facebook if you have your friends, then you have this extended network of friends you're investors will have a close knit group of maybe 4 or 5 angels but beyond that they'll have maybe dozens of acquaintances that they've never done a deal with before but if the deal is strong enough they might introduce you to them the more you can pr .
"Okay guys, are we sorted out? I've got a few more things I've got to do this evening."
There's nods all-around. We just got our new office set up, and our first fulfillment staff just came in to sign the employment contract.
I pack up my computer and walk out from the glass-doored meeting room into the main room and head to the coat rack. I put on my winter coat, button it, and put on my ushanka Russian-style hat.
Then I remember - good, Tony's here.