Welcome Christine and Kent

While First Round Capital has investments located all over the United States, our portfolio (and dealflow) is heavily concentrated on the west coast.  That’s why we opened a West Coast office two years ago, with the addition of my partner Rob Hayes and later Mazen Araabi to our team.  It’s why I’m going to qualify for Chairman’s Preferred on US Airways after my three trips to California this month.  And it’s also why I’m super-excited to announce the addition of two Principals in our San Francisco office – Christine Herron and Kent Goldman. 

I first met Christine while she was part of the investment team at the Omidyar Network, where we had several overlapping deals.  And this past year, Christine began working with us part time as a Venture Advisor, helping us out with a number of our new investments.  Her prior experience includes a number of entrepreneurial ventures in various capacities (including CEO).  And she started her career in venture capital at Geocapital Partners where she discovered a little company called Netcom before most people knew how to spell “internet.”

Kent’s journey to First Round Capital is a unique one – we truly were brought together by the "news feed”.  While I’ve known Kent for some time, we got to know each other much better this year when he was (unintentionally) ensnared in my ill-fated experiment with Facebook’s Social Advertising.  And, in an ironic twist you couldn’t script if you wanted too, the news of Kent’s new role at First Round Capital was also unintentionally revealed by Facebook’s pesky news feeds, as Kent blogged about earlier today.  Kent joins us from Yahoo, where he was a member of their Corporate Development team focusing on M&A to support the company's user-facing properties.  He also led business strategy efforts for Yahoo’s Front Page, Communications and Community products which included Yahoo.com, My Yahoo and Yahoo Mail.  Before Yahoo, Kent spent some time in investment banking and early-stage venture investing.

My partners and I are thrilled to welcome Christine and Kent to the team

The Steve Jobs of Classical Music

I've been going to the TED conference for almost 10 years now -- and I've seen hundreds of incredible speakers take the stage.  Last year, Benjamin Zander - the conductor of the Boston Philharmonic, gave what I think is one of the best talks of all time.  Zander is the Steve Jobs of classical music. 

An online video of his talk was just released this week.  Ostensibly, his talk was about classical music.  But, in reality, Zander shows how in just twenty minutes one can expose people to new ideas, new possibilities and new passions.  He truly embodies his belief that "one of the characteristics of a leader is that he not doubt for one moment the capacity of the people he's leading to realize whatever he's dreaming".  I especially liked his realization that since the conductor of an orchestra doesn't make a sound, he depends for his power on his ability to make other people powerful.  His job is to awaken possibility in other people.

Take 20 minutes out of your day today and watch this talk.   You'll see an moving example of leadership, evangelism and passion.  And see how a leader can make your "eyes shine".

School Bus Gas Prices Impacting Software Sales

So I was talking the a CEO of one of our portfolio companies today.  He runs an enterprise software company, and we were reviewing his pipeline.  During our conversation, he mentioned that he lost a $12,000 sale because of fuel prices.  Yes, that's right -- the price of gasoline is now impacting enterprise software sales.

Apparently, the customer was a large county school district.  And despite the fact that they had spent months going through a detailed RFP process (which our company won), the project was killed at the last minute.  The district has had to cut virtually all IT spending so they can pay for gasoline for their school buses and maintenance vehicles.  Apparently, they are not alone.  School districts across the country are facing similar issues.

What a tough month.  First, US Airways eliminates free pretzels due to fuel prices.  Now, school districts are slashing computer spending to keep the buses running.  Next thing we know, Google will start charging employees to ride the Google Bus to work. 

The Death of Stealth Mode

Seeing how attacking startup lawyers seems to be en vogue this month, let's put this post in the category of "Things I wish lawyers told their startup clients."

Here's a situation I see all the time: 

A pre-launch, stealth-mode company just closes a seed round of funding.  Three weeks go by, and the news of the company's funding starts appearing in VentureBeat, PEHub, and Venturewire.  The story is then picked up by mainstream tech bloggers and press.  The CEO starts getting phone calls from journalists.  I then receive frantic, angry phone calls and emails from the CEO that go something like this: "Dude!  Did you announce the funding?  We wanted to stay under the radar..."

I want to reply, "No.  I didn't announce the funding.  Your lawyer did."

The culprit is a little known SEC regulation called "Regulation D".  A basic summary:

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC.  While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

When a company raises capital, most lawyers fill out the Form D paperwork on the company's behalf and stick it on the pile of papers a CEO has to sign on closing.  (Click here to see the complete form in pdf format).  There's little a company can do to avoid a Form D filing - more than 17,000 companies and partnerships made nearly 28,000 Form D filings in 2007.   I'm continually surprised, however, by the fact that few attorneys actually tell their clients about this public disclosure.  Maybe they don't mention it because they know that people can't access these documents online.  (You can search the SEC database to see if any documents exist, but you can't access the actual content/document.)  This by itself can be pretty revealing.  For example, although Twitter announced their funding today, you could have searched the SEC database and saw that the round closed on June 9th.  It's also a great way to get the address and phone number for stealth mode companies ;-)

In addition, hardcopies of these documents are available to the public (and press) for a limited time.  As Scott Austin of Venturewire writes:

The SEC makes hard copies of these filings available in a series of folders located in a public reference room at their Washington headquarters.  There's about a two-week lag time between when the filings are processed and when they hit this room, and after 30 days they disappear. Also in the room are four computers, but they're without Internet access.  And the staff members that work there are known to shrug their shoulders when asked for help.  In other words, this room appears to be intentionally uncooperative - much like the private companies and partnerships that wish to keep the information contained in these filings under wraps.  At VentureWire, news of start-up financings are our bread and butter, so we send a couple of helpful reporters from our Dow Jones Newswires bureau in Washington to sift through the filings and pull out the most interesting ones...

So it turns out that the SEC is the source of most of these "leaks". 

But, wait, there's more.  A few months ago, the SEC published rule amendments mandating the electronic filing of information required by Securities Act of 1933 Form D through the Internet.  Starting next year, the data filed will be available on the SEC Web site and will be interactive and searchable.  View the Final SEC Rule here.

One small positive change.  While your company name and amount of funding will be public, apparently the forms have been changed so that companies no longer need to disclose names of investors that own more than 10% of a class of securities.

If you're starting a company and want to stay in "stealth mode", make sure you understand the impact of your Form D filing and factor that into your plans.  And if you're a lawyer for a startup company, please tell your clients about the public disclosures you make on their behalf!

The Big Five for Face Painters and Entrepreneurs

My family and I spent the past weekend at Hershey Park and Dutch Wonderland -- we had a blast at the two great amusement parks located in Pennsylvania.  (Near Sand Hill Road in Hershey, PA.  Not quite like the California version of Sand Hill Road -- it's full of houses/farms and it has cell phone coverage).

Anyhow, during our visit to Dutch Wonderland, I noticed this sign posted behind the door of the face painting booth.  While it was obviously intended for their employees I managed to grab a photograph. 

I thought that their "Big 5" tips were applicable to both face painters and to entrepreneurs:

• Be Seen
• Be Heard
• Be Active
• Be Prepared, and
• Upsell

Validate Your Own Market

My recent post on patents discussed a fictitious "Founder's Manual For Pitching a VC" which would contain all of the cliche "lines" entrepreneurs give to answer some typical VC questions.  However, just like canned pick-up-lines don't work in a bar, I don't think canned answers work for VCs.*

For example, let's take a look at the standard line used when asked about competition.  The section would say something like: "When a VC asks about what happens if [INSERT LARGE ESTABLISHED PROSPECTIVE COMPETITOR HERE] decides to get into the market, tell the VC that their entry will validate the market." 

I'm not sure what I felt back in November of 2000, when Amazon launched their used-book Marketplace just eleven months after we launched Half.com, but I doubt I was happily validated.  I'm just fortunate that Half.com didn't join the legion of other companies whose business model were validated -- like Wordstar and Netscape were validated by Microsoft. 

What amazes me is how often the "validate" spin is used.  Apple seems to be validating a lot of businesses lately.  As an investor in Odeo, I saw firsthand how Apple validated Odeo's podcasting strategy.  Helio believes that "Apple's iPhone validates [their] strategy of creating a premium brand".  And I'm sure we all agree with HandHeld Entertainment that "Apple's announcement...about its plans to begin shipping an iPod video player validates their vision" for their ZVUE portable video player.

A quick Google search shows that companies of all sizes use the "validate" line.  Obopay was validated by Amazon's launch of SMS purchasing last month.    Microsoft feels validated that Google and Salesforce are integrating CRM and office productivity applications.  Novell was validated by Oracle's support for Linux.  Even Tesla Motors is validated by General Motor's launch of the Chevy Volt. 

If you ask me, as a prospective investor in your company, I'd much rather you validate your own market.  So, what should an entrepreneur say when asked about a prospective large competitor?  That's my next post...

*NOTE - As a happily married man, I'm not basing my conclusion on the effectiveness of pick up lines on personal experience.  Rather, I'm basing it on the numerous 1 star reviews on Amazon.  Feel free to enjoy a preview of the book on Google Books and let me know if I'm drawing an incorrect conclusion.  My favorite  pickup line is #26 - "If beauty was a mustard, you'd be Grey Poupon"

Pinch Me

I'm super excited about our new investment in Pinch Media.  My partner, Chris Fralic blogged about it here and our co-investors, Union Square Ventures, discussed it here.

Great Book: Predictably Irrational

I recently received Predictably Irrational by Dan Arielly from the TED book club -- and highly recommend it.  Dan does a powerful job of convincing us that (1) People are not as rational (or smart) in making decisions as they think, and (2) The mistakes and errors that we make are systemic and predictable.  Thus, we are predictably irrational.

Chapter Three was especially interesting to me, as Arielly describes an experiment which proves my "Penny Gap" theory.  (A copy of the experiment is available on his website here.) 

And for anyone trying to decide how to price an online service, I'd strongly recommend the first chapter -- which discusses the importance of setting relative context for price/value determination.  (An excerpt from this chapter is available here.) 

Some new thoughts on the "Atomization of Conversation"

About a year ago, right after Facebook launched its Platform, I started telling my wife about Facebook.  She didn't get it.  While she understood how it could be useful to college kids, she just didn't understand how it could be relevant/useful to adults.  In order to show her the benefits of the site, I set up a Facebook account for her.  But given her predisposition, my expectations for her longevity on Facebook were very low.

Surprisingly, however, my wife started to use the site.  She slowly but surely connected with old friends from grade school, summer camp and college.  She connected online with our neighbors and parents of our kids' friends.  She started playing Scrabulous with her mother and sister.  She even started updating her Facebook Status.  She now has over 250 friends on the site, and it's part of her daily routine.

This past week has been a really bad week for us.  On Saturday, I learned that my Grandmother passed away.  On Sunday morning, our seven-year old daughter awoke with sharp pain in the lower right-hand corner of her stomach.  Fearing appendicitis, we took her to the hospital, and they operated.  Her recovery took longer than expected -- and she was in the hospital for six days.

I canceled my calls and meetings and basically disconnected from the Internet for the week.  The only hint I gave was a brief Twitter message.  My wife also cleared her calendar -- but she provided some Facebook updates about the situation.

And what happened next really amazed me.  Her phone started ringing with calls of support and help.  Friends offered to pick-up and drop-off our son at school.  Home-cooked dinners arrived at our house.  Balloons, stuffed animals, and cards arrived at the hospital room.  Old friends from high school and college called her saying that they were there to listen if she wanted to vent or talk.

Her brief Facebook status update was all it took to activate her real-world support network.  It was incredible. 

Last week (just hours before this whole ordeal began) I wrote a post about the "Atomization of Conversation" in which I worried about the effects of asynchronous communication resulting from things like Twitter and Facebook Status updates. 

However, after witnessing how a 90-character update can unleash such a torrent of concern, support and love -- I now know we have nothing to fear from the atomization of conversation.  Rather, it's just the opposite.  As tools get created to atomize our interactions, they provide a much easier, much faster way for us to react to the events in others' lives.

My daughter is home recovering -- and I'm going to go play with her now...

Depending on pending...

If someone was to put together the "Founder's Manual" for pitching a VC, the section on barriers to entry would say something like: "When asked about your barrier to entry, tell the VC that you have several patents pending for proprietary technology."   Heck, I'm sure I used the same line when I was raising money for Half.com -- after all, we filed for our first patent in October 1999. 

Well, I'm excited to announce that the original Half.com patent (#7,373,317) was finally approved by the USPTO last week - eight and a half years after we filed it (and seven years after eBay acquired Half.com). 

Most people don't realize that the average software patent will take many  years from initial application to issuance.  (According to the USPTO, software patents have the longest backlog of any type of patent.  In 2005 the backlog was almost four years...and it has grown larger since then).

Given that a patent needs to be issued before it can be enforced, and given that it takes 4+ years for a patent to issue, you can't really call it an effective "barrier" to entry.  Before you can even consider enforcing the patent, your company has already succeeded or failed in the marketplace.  And by the time you try to close the "patent door" to the barn, the horse has not only left the barn, it has probably died of old age. 

I believe there is little-to-no value in depending on pending patents for a "barrier" to entry. 

So should startups invest in patents?  I agree with much of what Brad Feld writes in his AskTheVC post on this topic - especially his conclusion that pending "patents are probably the most overvalued 'asset' that startups promote when raising funds".  [UPDATE:  Brad has a great post today on IP protection]

There is value in owning issued patents -- but that typically comes after you've experienced success in the marketplace.  (If a company has failed in the marketplace, their patent filing is typically abandoned/withdrawn).  I think Fred Wilson said it best when he said "Patents are like nuclear bombs, you just got to have some".  But if you're fighting a war today, it's better to count on weapons you have at hand today -- don't rely on a nuclear program that could take five years to come to fruition. 

You can't keep competitors out of your market just by depending on something that's still pending...