This busy Tuesday morning, I am persuaded to make a short post provoked by — of all things — a bumper sticker I came across this weekend on the back of a race car ahead of me at Sears Point Raceway (aka Infineon). 

On first read, the bumper sticker alluded to the obvious trade-offs weekend racers must continually make in the delicate balance of speed, performance and safety. More broadly, however, it speaks to the management of risk and reward in a world tightly governed by constraints — constaints made by physical laws (pretty much non-negotiable), those constraints that are financial in nature (what economists would call scarcity), and those having to do with sheer will, nerve, or guts. As the sticker laid bare, one almost never gets all three at one time. Which two one wishes to have at any one point is the ultimate decision a company leader (or race car driver, for that matter) must make, and make time and again.

In the start-up world, the parallels are fairly obvious: Start-ups teams typically eat, breathe and sleep constraints of some form or another. Some believe this need to manage constraints is a rite of passage and focuses the mind of management teams to develop their core products and services without distraction and temptation brought about often by too much available capital, too many idle resources, and too many chefs in the kitchen. As an early mentor — a renown venture investor in his own right — taught me years ago, start-ups rarely fail from being too focused. Indeed, it is often the distraction and the temptation to ‘boil the ocean’ that gets young founders and their companies into trouble. Awash in opportunity, management teams can fall victim to wanting to pursue every initiative, every possible new revenue line item, every new partnership possibility, at the risk of diluting the company’s core focus and value proposition.

Cheap, Fast, Reliable - Pick Two. The key point here (and, hence, the irony) is that most emerging growth companies will ultimately never survive in the long term without possessing all three characteristics in their business model and processes. How to reconcile the Catch-22 depends upon how a management team makes the key early decisions about what is most important to focus on, and when it is most important to focus it there. Does being the low-cost provider make the most sense at launch, or should one launch with a bullet-proof product that is fast and responsive, build a customer beach-head, and then drop prices as volume increases? Then again, will the focus on building a bullet-proof, fast and responsive product take so much development time and so many resources that one will miss the window of entry and end up playing catch-up to a cheaper, inferior product that launched earlier and is now far ahead in terms of users/customers and is rapidly erecting switching costs around that user base? Tough questions.

Clearly, there is no uniform right answer. Each market is different, there are different issues and drivers at play, and one can rarely plot a strategy from a conference room table and execute it by rote without regard to how quickly the sands shift. Management teams (and their advisors and venture investors) must be supremely flexible in the current environment and be able to navigate a world where one rarely has everything one needs when needed. Some technologists are loathe to release any product that is not perfect. Some investors think it’s anathema to launch certain initiatives without a full team in place ready to manage the onslaught of orders, press inquiries, resumes, etc. The truth is that those proclivities on the part of certain leaders and investors are something of a luxury. One reads often in the business and trade press about risk management and personnel management. A less well-trodden subject that is arguably even more relevant for start-up management teams is, for lack of a more pithy term, “constraint management.” How a team manages being deprived of resources for long stretches of time can be the difference between an ultimately successful large enterprise, or another start-up bust. In future posts I will endeavor to spend more time on the issue of the unique stresses start-up founders and their teams must face and overcome in order to be successful. If you have interesting stories of your own challenges and stresses experienced in the pursuit of building your companies, I’d like to hear them.

The--ahem--NEW Dodge Challenger

I’m a car guy.  Always have been. As a penniless student I was one of those people that would make the (false) economy of happily subsisting on a steady diet of Top Ramen and Pop-Tarts if it meant I could pay for that new performance chip on my banged-up 911. But with age comes wisdom, and one reaches a point in life where the Bohemian pleasures of hitch-hiking or crashing on friends’ couches just does not hold the allure and proletarian nobility it once did. It was maybe that or the free breakfasts at Holiday Inn Express. Can’t decide.

In any event, get a car guy to reminisce about early Steve McQueen movies or discuss the plot twists in gear-head classics like Vanishing Point or Dirty Mary Crazy Larry and you’ll be there a while, so get comfortable. Car guys love to wax poetic about vintage horsepower and the evocative shapes and visceral, fry-your-loafers, bugs-in-your-teeth driving experiences inherent in 1960s-70s GT cars. It is perhaps not surprising, therefore, that the auto industry cleverly exploited the graying of the baby boomers by re-issuing versions of its most famous badges - Charger, Mustang, Beetle, Thunderbird, and now, Challenger.

Demographics are only part of the reason. Simply looking at the evolution of car names tells you a lot about the degradation of the automobile from a symbol of power, freedom and often excess to a dull, quotidian appliance. Cars used to have great names: Falcon, Dart, Fury, Cougar, Firebird, Mustang, Charger, Barracuda, Hornet, Starlight. Now we have Elantra, Sentry, Altima, Camry, Sienna, Corrolla, Tercel, Maxima. There’s even a Nissan SUV called the Murano. Murano is a small island off Venice famous for its artisans that produce delicate glass sculptures and figurines. Delicate glass is hardly something you want to equate with a muscular, go-anywhere, do-anything SUV. As Jerry Seinfeld might say, who were the overpaid branding geniuses that came up with that one? That’s almost as bad as the luggage manufacturer that—get this—launched a line of luggage named after Amelia Earhart. Yes, Amelia Earhart luggage. Luggage that honors someone most famous for getting lost and never being found. Braaaavo.

When the Beetle was re-imagined in the mid-1990s, I applauded. Smart thinking on VW’s part, I reckoned. The idea was a simple one: Resurrect the image and nostalgia of that instantly recognizable car that made your company famous–quick!: can you think of any other VW model?– and bring it into the 21st century. It worked wonders for VW. Ford followed suit shortly thereafter with the Thunderbird, although the line between tasteful homage and shameless exploitation was starting to blur. By the new millennium, the Mustang re-appeared and, with its success, the “retro” boom was in full swing. Some automakers that did not choose to resurrect a model from their glory days still played the retro card by simply launching new models that evoked the style and details of earlier road card, often not even their own models. Chrysler’s 300 and it’s PT Cruiser are the most famous and successful examples. The 300’s Bentley-esque front grill and the high waist of 1930s gangster saloons gave the 300 a sleek, slightly menacing stance. A clever marketing push followed and the 300 became (for a while, at least) the ride of choice for rap artists, athletes and urban hipsters.

But, with the Challenger, one must conclude that this trend has decidedly jumped the shark. Too often, what is worth doing is worth overdoing - at least for the Big 3 which have a terrible history of blowing huge strategic advantages by not pivoting quickly enough to address new market realities. GM’s recent shuttering of several SUV and light truck plants is another example of a bloated company not adjusting to changing market conditions. In a $4/gallon world, GM should have been throttling back SUV and light truck production for a while now. Everyone knew this day was coming. Instead, GM continued to stamp them out like CDs. Those blunders will continue to crush the SUV/light truck aftermarket and hurt its dealer network for years to come. How Rick Wagoner continues to hold a job baffles me.

The “new” Challenger epitomizes a troublesome trend of “retro rehash” that I have seen in too many markets now. The fashion and music industries are other segments where the pre-occupation with trotting out new spins on the golden oldies that worked for so long has eclipsed real intellectual work on their part in actually innovating new designs (fashion and apparel) or discovering and promoting new music that is not entirely derivative or referential. Interestingly enough, the woes of the music industry are eerily similar to those of the auto industry. Music industry execs love to whine about piracy, peer-to-peer file sharing, concert ticket prices, and a host of other evils to explain their troubles, but the real culprit is prevalent “me-too”-ism in signing artists and a lack of innovation and creativity on the part of the entire industry. The auto industry–and to a lesser extent, the music and fashion industries–have been for a long time utterly bereft of any real innovation. This “retro” boom is simply the most clear manifestation of this lack of innovation. Why bother creating new products that customers want when you can rest on old ideas that you can simply re-introduce with a little tweaking?

In the end, I think the “new” Challenger is as doomed as was its original namesake. Auto buffs will remember that what ultimately buried the 1970s Challenger was the one-two punch of a gas crisis and performance figures that did not break any new ground. The original Challenger simply debuted too late. By the time production ramped up, the muscle car boom that began in the mid-1960s was well on its way out. The 1973 oil shock was just the final stake through the heart. With the new Challenger, the similarities are ominous. $4 gas is killing the appetite for big, raw, powerful vehicles. Heck, even GM itself is considering selling the Hummer–the epitome of the brutish, thirsty, muscular SUV–and Ford has already sold Aston Martin, Jaguar and Land Rover. Perhaps now, the automakers, the music execs and the fashionistas will begin thinking more about innovation and how their very existence will likely depend on it. There simply aren’t any more bodies to exhume. Old wine in new bottles is simply not a sustainable strategy.

Let me start by first saying that I generally like conferences. They are often a great way to connect with colleagues and service providers to the venture business that I typically only interface with sporadically during the year — and even then, often via email, conference call or through some other quasi-technologically enabled medium. That said, conferences can be a time sink. I also find the ”content” at these affairs to be on the wane, particularly those events targeted at venture industry professionals and the businesses that service them. Put bluntly, the modern venture industry conference is hewing dangerously close to becoming an irrelevant echo chamber. There is simply too much filler, too many of the same faces every year saying versions of the same thing at every conference, too much marginalia, too many self-congratulatory tributes, too many resume recitations and thinly veiled fundraising pitches. Not enough self-reflection, not enough contrarian thinking and challenges of conventional approaches, not enough panelists challenging others about basic market assumptions and predictions. Not enough mea culpas.

I realize conferences are not intended as exorcisms of past demons, or a recitation of misdeeds, or of great deals missed, or of lousy investments green-lit. Indeed, who would want to attend such a thing, much less to do so at $3,995 a pop? But a true “trade” conference, as opposed to an emerging company forum like DEMO or TechCrunch50, are supposed to be opportunities to convene an industry to network, re-connect, combine on opportunities, address industry challenges, and sometimes commiserate on the state of the profession. If a trade conference strays too far from that mission, it ceases to become an assemblage of the industry’s top professionals to meet, discuss and network and risks becoming just another ‘pay-to-play’ trade show . 

Trade conferences have some work to do to re-invigorate the medium and re-establish its relevance in an industry clearly going through some re-calibration and re-inspection. I am confident the main conference exhibitors can meet the challenge, but doing so relies heavily on the assumption that they realize there is a problem.

Last week the 19th annual IBF Venture Capital conference convened in San Francisco. Not surprisingly, some of the bullishness evident at recent conferences was replaced by a more cautious, measured perspective from the attendees and panelists. While I would say there are few “new” ideas to emanate from these affairs, having esteemed colleagues articulate in front of 200 people what you have been noodling with in your head for the past few months helps underscore one’s intuitions about what is occurring in the venture business and how the industry needs to respond.

As is my custom, I like to scribble notes from panel discussions and keynote addresses when I come upon a pithy observation or insight. Rather than prefacing these remarks with context, I am simply presenting them here as uttered, without elaboration. Many speak for themselves and, surprisingly, retain more power when they stand alone, without comment or context.

From an “Investing in a Downturn” panel:

- “Money is a proxy for time, so make damn sure your company has enough cash to make it through the downturn. If a dollar does not absolutely need to be spent, don’t spend it right now. Spend for growth, nothing else”

- “There is always a bull market somewhere. The US market is tough, but the dollar is very weak and international opportunities abound. Have your portfolio companies look abroad for opportunities to sell their products and services.”

- “We are definitely entering a period of longer hold times (for venture investors.) Manage your fund and fundraising accordingly”

- “There is a lot of foreign capital in China, Korea, the UAE and elsewhere looking for a home. They will begin competing with venture investors for venture deals. They already are.”

- “Every portfolio company CEO and every VC needs to take a long-term view now. We must re-emphasize capital efficiencies”

- [For VCs] “Try to work with syndicate partners that will be around to support the portfolio company through the downturn. Work with firms that have a reputation for hanging in there in the tough times. Reputation is key.”

- “Make sure the board and the investors are properly communicating with one another”

- “Make sure the board’s investors are ‘walking the plant floor’ - i.e. they really know what’s going on at the company and who the people are at the company, not just grabbing a sandwich and Coke at the board meetings and not even getting to know the name of the receptionist.”

From an “Early Stage Investing” Panel:

- “This is great time for early stage investors because a lot of what we do has little to do with exogenous factors. Because such factors have little bearing on getting a company to build its first product, the downturn often means less froth, less distraction, less competition for talent and resources, and more time and attention to focus on building a young company”

- “In terms of deal flow, the downturn means fewer entrepreneurs, but better entrepreneurs. The ‘born’ entrepreneurs are still going to launch companies and find good partners; the entrepreneurs that are not as talented or driven will likely stay in their corporate jobs fretting over getting laid off, not trying to launch start-ups.”

- “We are seeing a renewed focus on disruptive business models as opposed to disruptive technologies. An example of a disruptive business model is one where a company is leveraging a spin on a large market that an incumbent can’t accomplish itself without cannibalizing its own business.”

- “Spending cash for eyeballs is totally dead as a business strategy right now”

- “Capital efficiency is tossed around liberally with regards to early stage investing, but it applies to all stages of venture capital, not only early stage.  Great consumer internet companies, in particular, have launched with very little money and developed into powerful businesses. Companies that require a lot of money at the outset may still become great companies, but rarely make good venture investments”

And finally, most sobering of all…

- “VCs need to embrace the current market, not complain about it. They must adjust their investment models to the market. They can’t have it both ways: They can’t complain to their LPs that the market is unattractive and not invest and still expect to collect management fees on capital not being managed.”

Fellow venture blogger Fred Wilson and his colleagues at Union Square Ventures opined in recent posts about a correlation between an entrepreneur’s “openness” and that particular venture’s eventual success or failure. The discussion and reader comments that ensued spurred some dialogue internally here as well. Some months ago I posted about my (and virtually every other VC’s) discomfort with signing NDAs and my sometime annoyance with the entrepreneurs that insist upon them. My reasons were pretty well itemized in the relevant post, so there’s no purpose in rehashing them here.

While I have yet to unearth any solid evidence that supports the point, anecdotally I am fairly convinced that ‘openness’, in almost all its forms, has a direct and positive impact on a start-up’s long-term success. The openness I refer to is most obviously witnessed in the manner in which the founding team deals with investors and, to a lesser extent, with strategic partners and potential customers. But openness connotes quite a bit more than that. Openness is quite frankly a state of mind, an attitude, and a modus operandi for many highly successful entrepreneurs. Some of the most successful entrepreneurs I have come across in my career were irrepressible in their enthusiasm for what they were doing. As such, you sometimes could not shut them up about their companies and what it was they were seeking to do. Their excitement was infectious. Often times, that infectiousness is what drove some investors to set aside minor flaws or ambiguities in the business plan and move forward with the investment. This occurred often because the investors felt so drawn to the entrepreneur’s vision that the belief was quickly formed that the knits and knats of things would ultimately get sorted out. Yes, the devil is in the details — the thinking sometime goes - but without a compelling vision and a charismatic entrepreneur able to articulate that vision, getting caught up in the details is somewhat academic.

But there is something beyond simply being chatty with investors that has bearing upon a venture’s eventual success. In recent years it has become abundantly (and, for many investors who suffered through the 2001-03 tech bust, painfully) clear that ideas, in isolation, have little value. Execution and strategy is what is most important. The old “where the rubber hits the road” cliche comes to mind here. Secondly, ideas are typically dynamic. Like a block of wood being whittled into a fine instrument, the idea takes shape over time and with constant refinements made by outside forces. What make up those outside forces are the innumerable conversations an entrepreneur will have with venture investors, partners, colleagues, industry experts and others about his or her idea. This process of learning and refining is critical, we have found. Few successful companies launched with the original idea as its core business proposition. More often than not, the business that ultimately launched was quite different from the original concept pitched by the entrepreneurial team those many months before. In some cases, so many refinements were made due to the feedback and learning process inherent in all those conversations, that the eventual business was almost unrecognizable from the initial idea pitched to the early investors.

Some may regard these wholesale changes to a business concept as a bit of a failure, or as “mission creep.” In fact, I submit that these refinements to a business concept, when done in a methodical, rationale way, is what is healthy and, ultimately, what is rewarding. Moreover, I am nowadays more concerned when I see very little pre-launch modifications to a business because it indicates that there has not been sufficient data gathering and ongoing conversations up until this point with customers, partners and others that will ultimately determine the fate of the business.

Like anything else, there are exceptions to adopting a culture of openness. Clearly, one-on-one meetings with direct competitors about the core concept of the eventual business is typically ill-advised as would be speaking with the press or others when there are no clear rules on what is confidential and what is not. Setting those instances aside, my view is that the benefits of being open about your business and seeking input from others far outweigh the potential costs and risks of doing so. Being secretive has its place, but very few great companies were launched without a lot of input from outsiders and a LOT of discussions with customers and partners. Cutting yourself off by imposing restrictions on what is discussed or demanding NDAs from people who are genuinely interested in helping is a good way to cripple a promising company.

Angel investing has existed since the very beginning of what we consider the modern age of venture capital. Indeed, long before there ever was much of a venture capital community, loose groups of semi-retired execs assembled regularly to discuss interesting young technology companies to fund. Routinely, there would be a “passing of the hat”,  some cursory discussion of deal terms and, whammo, a seed investment would be made. Colorful stories of just such seat-of-the-pants financings of companies that later became tech industry juggernauts are now the stuff of venture capital legend.

Since the “institutionalization” of venture capital, beginning in the 1970s, angel investing has evolved quite dramatically. Sure, there will always be wealthy uncles and trusting friends willing to back energetic young entrepreneurs with intriguing business ideas, but finding strangers willing to do so out of their own pocket has become increasingly challenging. Indications are that it will become only more difficult as many “angels” have found themselves squeezed out of many opportunities and the prospect of backing companies in general increasingly fraught with risk and uncertainty.

To be sure, true angel investing is tough to do - and even tougher to do well.  For this reason, even many successful retired venture capitalists steer clear of angel deals. The reasons for this are many. For one thing, it is not often that an investment comes along that matches one’s direct domain expertise, skillset, and network of contacts. As such, many angels get into the dicey business of investing out of one’s comfort zone and away from a relevant knowledge base that can actually help the company. This is fine when things are going well, but when things hit rough patches many angels find themselves unable to really be of much assistance. This can be enormously frustrating for both the angel investor and the company experiencing troubles and needing sound guidance from its investors.

But this is just the tip of the iceberg when it comes to the challenges of being a good, successful angel investor. For every Andy Bechtolsheim or Ron Conway there are a thousand well-meaning angels who made their money in shopping centers or tanning salons only to lose a chunk of it backing technology or life sciences companies where they had no expertise or understanding of what was really going on at the companies.

However, even with the risks, prospective angels understand that participating in early stage deals can bring staggering rewards for those fortunate enough to come in on the next Google, Skype or YouTube. And thank goodness for that, because angels provide a critical and increasingly valuable service to the venture and start-up community. As venture capital fund sizes have generally increased in recent years, many venture firms have moved upstream into more developed opportunities where more capital can be deployed and where the classic early stage risks can be somewhat mitigated. The result of this has been a dwindling universe of investors that still specialize in truly raw, early stage opportunities. 

For years, the options available to individual investors determined to participate in venture were not terribly attractive. Option one: Become a limited partner (LP) in a top-performing venture capital fund. Sounds good, but in truth many venture funds have increased their average fund sizes dramatically in recent years and, as a consequence, have focused almost exclusively on big institutional investors (endowments, pension funds, etc) to make up their LP base. In many cases, individual investors need not apply — unless, of course, you were in that particular VC firm’s last few funds and have an established relationship with the partnership. Secondly, the need for a venture capital firm to openly solicit funds outside a narrow group of previous limited partners is proportionate to an extent with how successful it has been historically. In short, the more successful and renown the firm the less it probably requires or wants your investment commitment (again, unless you are already a known quantity with that fund and there is a relationship already.)

Option two: Become an angel investor. For reasons cited earlier, this is tough. Even with a technical background and some operating or investing experience, how does a prospective angel begin to create deal flow? How will entrepreneurs of promising companies even find the angel or learn that he or she is interested in making early stage investments? Of course, the prospective angel can try to join a prominent angel fund to gain access to their deal flow, but such groups are often very exclusive, require one to go through a lengthy and competitive membership process that can take months, and are often closed to new members for years at a time.

Now, fortunately, something of a third option which can mitigate some of the inherent risks in angel investing has begun to emerge. Enter the Pledge Fund.

What is a Pledge Fund?

A Pledge Fund is essentially a non-committed venture capital fund, or a fundless VC firm if you will, that operates as a bit of a cross between a traditional venture firm and a loose confederation of individual angels making early stage investments together. The logic is fairly simple: take the best elements of both structures to create a model that enables individual parties to make angel investments in a standardized, formalized way that eliminates many of the traditional pitfalls of angel investing on one’s own.

How it works:

The Pledge Fund is typically run by experienced angels or former (or even current) VCs. These individuals constitute the “GPs”, as it were, of the fund. The GPs handle all of the admin functions of the fund much as one would expect at a traditional venture firm: outreach to the entrepreneurial community; sourcing, vetting and presenting deals to the Pledge Fund’s “investors” (often called “Members” – more on that later); handling term sheet negotiations; drafting documents; and handling post-investment support by means of sitting on company boards, etc.

This GP management layer, if you will, is critical because individual angels are just not set up to handle most of these functions. Even assuming an individual angel can find good deals (and that’s a big assumption), will that person even be able to properly evaluate it? Will he recognize the flaws? Can he properly size up the team and do thorough due diligence on the technology? on the market? Would he have access to broad groups of experts in various fields to help him vett the opportunity and the management team? Even after an investment is made, will the angel sit on the company’s board and, if so, can he really expect to make much of a contribution?

A good venture firm performs most, if not all, of these management, deal-making, and post-deal support functions. So, in a sense, a Pledge Fund does much the same thing on behalf of the angels. The key difference is that, unlike in a traditional venture fund, the Pledge Fund does not operate a blind pool of capital from which to invest in deals. The Pledge Fund can only source, vett, and scrub deals for its members. It is the members that ultimately determine what deals they participate in. Traditional venture capital firms, by contrast, typically offer their limited partners little to no say in what deals the fund invests in and in overall day-to-day firm operations.

On becoming a Member:

Most Pledge Funds have a straightforward process to gain admission to the organization. There are usually some questionnaires to complete and accreditation requirements to meet, but they are far less onerous than one would expect at many private equity funds. Once admitted as a Member, the only commitment is a small annual management fee (usually to cover overhead and ancillary fund expenses) We’ve heard management fees in the $5k-$10k/year range. The thinking behind the fee is not so much to be a revenue generator as much as a way to cover basic costs and to weed out people who are not serious in actually making seed stage investments. The logic goes that if a prospective angel is considering $100k-250k in angel investments over the next couple years, paying $5k a year to see scrubbed and vetted deals should not present an issue; if it does, then the investor was probably not serious to begin with.

This management fee permits the Member to gain access to the Pledge Fund’s deal flow but does not commit him in any other way. Each month, the Pledge Fund’s deal review committee scrubs all that month’s deal submissions, meets with the most promising companies, conducts a preliminary due diligence process, and selects the top 3-5 deals. Those deals are then scrubbed again, executive summaries in the Pledge Fund’s standardized format are prepared, and the deals are submitted to the Members.

Members are then given a fairly narrow window (we’ve heard a few days, some as long as a week) to review the deal submissions and respond back to the Pledge Fund GPs about which deals, if any, they are most interested in. In short order, the Pledge Fund GPs can determine what syndicate, if any, they can pull together among their Members to make an investment.  If it can, then deeper diligence is commenced, the Pledge Fund’s attorneys are summoned to draft deal documents, and things move apace at that point.

Once an investment is made, another interesting twist occurs. In the past, angel deals sometimes suffered from a bit of a stigma within the venture community. Venture investors looking at an investment that was previously seeded by angels sometimes grew concerned that they might be inheriting unsophisticated investors on the board and/or otherwise involved with the company that could potentially cause problems down the road. Stories of neophyte ”friends and family” investors throwing up roadblocks or being obstructionist when a professional investor got involved are fairly common in the venture community. For this reason, some venture investors are leery of angel deals unless the angel group is already well-known and respected within the venture community.

To get around this problem most Pledge Funds structure the investment by creating a separate limited partnership entity to make the investment into that specific company. The Pledge Fund’s Members are then LPs in that new entity that, in turn, makes the actual investment. The impact of this is two-fold: (1) for the purposes of the Capitalization Table, there will not be a list of every Tom, Dick and Harry angel investor and their individual investments; there will only be a listing of the Pledge Fund’s name and the name/number of the LP — i.e. Acme Pledge Partners, Fund I, etc. That keeps the Cap Table pretty clean; (2) If a board seat is part of the investment terms, then a member of the Pledge Fund’s GP group will take that board seat. Since the Pledge Fund’s GP group is often made up of former VCs or well-known angels, there is less concern from professional investors that the member representing the angels will be unsophisticated and/or obstructionist.

Obviously, it’s still early days for this new form of Pledge Fund and it will be some time yet before we can opine on whether this model will become commonplace in the venture community. That said, we have seen versions of this in the past and always found it intriguing for the reasons cited here. It appears that, at least in this 2008 iteration, this modern Pledge Fund approach is presenting a well-constructed and well-reasoned model for those individuals interested in early stage investing while mitigating many of the classic pitfalls long associated with the practice.

[Updated Note: In light of the response to this post, readers interested in learning more about Pledge Funds and/or interested in being put in touch with funds pursuing this strategy are asked to contact me directly at jtower(at)citroncapital(dot)com for more information.]

David Mamet fans will recognize the title from one of the more memorable lines in Alec Baldwin’s “pep talk” speech to a slumping sales team in Glengarry Glen Ross. I bring this up in the wake of sitting through back to back pitches this week where companies failed to make evident what was being sought from the discussion. As Fred Wilson discussed in his recent post on the subject, it is critical for start-up teams to, for lack of a better term, ’ask for the order.’

Asking for the order simply means laying out for investors what you are asking of them. One would be surprised at how many flashy, full-color presentations a venture investor receives in a given week where what is being sought is not made clear in the materials. Countless hours are invested by a management team in a good set of investor documents. In many cases, a full set of integrated financial statements, an exhaustive analysis of the competitive landscape, and projections so detailed that the itemization of the number of staplers for the admin pool in the year 2011 is provided. Unfortunately, what is often omitted in all this superfluous detail is how much in funding the company is seeking, in what form, and how those funds will be allocated.

Every 8th grader remembers the building blocks of English Composition. Every course inevitably presented a maxim that, broadly speaking, went something like this: Tell them what you’re going to tell them; tell them; then tell them what you’ve just told them. Tangential to this maxim was the part in every good term paper that was referred to as the ‘Call to Action.’ What is it, dear author, that you are requiring of your reader? What are you asking of them?

These same principles, although admittedly a bit broad and simplistic, still apply in a general sense to a good investor presentation. Re-inventing the wheel is not necessary. Some of the best presentations I have ever seen were less than ten slides and had no whiz-bang graphics. Indeed, I have come to believe that longer presentations are not at all desireable unless there is a very specific reason when a longer presentation is necessary. Few companies meet that criteria.

So, in summation, I recommend that before start-up teams send off their documents or book a meeting with an investor, be sure that what is being sought is made abundantly clear in the documents.  Most likely, it took you a great deal of time and effort to get an all-hands meeting at that venture capital or angel fund. Don’t blow it - as they would say in the newspaper business —  by “burying the lead.” Put yourself in the place of a venture investor and ask yourself the following: How much are you seeking? How did you arrive at that number? What will that capital allow the company to accomplish? How far will it take the company? What are the milestones tied to that capital? [i.e. how will I, the investor, know that you have met your projections and objectives?]

Clearly, investors will have a great many more questions, but be sure that, at a minimum, the above questions are clearly addressed. Closing a round requires many elements too numerous to itemize and address in a single post. That said, no closing is likely to occur when the objective is vague and the path forward muddled and undefined.

Time was (and that time was not all that long ago) that the departure of a recognized general partner/managing director at a similarly recognized venture firm would be a buzzworthy 2-3 day story within venture circles.  Turn that “departure” tale into one where the departure involved that same investor joining a competitor firm and tongues would be wagging for some time.

In just the past few days, word has come out of the NVCA annual meeting that not one, but at least four, well-known and well-respected GP-level investors have left their respective firms to — in most cases — join a rival firm. If not unprecedented, this revelation certainly strains my memory to recall anything remotely similar in recent years. To be sure, partners retire. Other times, particularly when a firm has suffered poor returns or during a market downturn, partners are sometimes asked to, ahem, ”make other career arrangements.” This is often so the firm can retrench or reposition itself; it can also just be because of a strategy shift or because there has been internal rancor in the partnership for some time and, as such, a decision was reached to make a change.  

Regardless of the particular circumstances, in virtually all cases there have been carefully planned transitions and sealed lips on where things went off the rails in these investor-partnership relationships. “Smiles and handshakes all around” is often the party line.

While I send my best wishes to all those investors who have recently moved to new firms, I do ask myself whether this is a harbinger of things to come in the industry. To state that many partnerships have been under strain in the past year is to state the obvious to anyone with regular dealings in this industry. Conventional thinking has long held that continuity is critical in investment partnerships. I think that belief is going to be strained. It is a truism that many limited partnerships, when considering an investment in a venture fund, look at the continuity and ties of the investment team. This is particularly the case when you are talking about venture funds that typically have a 10-year life. That said, with this spate of recent departures — and the community’s response to them by taking the news in stride, for the most part — one has to wonder whether we are entering a new period in the venture community where “moving across the street” from one firm to another much in the traditional style of investment bankers or corporate attorneys will become the norm in the venture community. I don’t have a crystal ball here, but I am anxious to hear other people’s viewpoint.

The deal that so many thought HAD to be done went belly-up in the wake of face-saving gestures and last-minute posturing. In the end, many analysts close to the 3-month drama are coming around to the idea that this was doomed to begin with. The Ballmer-Yang tango was simply too caught up in the always flammable combination of ego, desperation and klieg lights.  

AllThingsD’s Kara Swisher gets the nod for breaking the story and, if that was not enough, following up with a thoughtful, well-researched rundown of the tick-by-tick events, along with a good autopsy on where things really went off the rails here.

My preliminary take on it is that what ultimately killed this acquisition was a combination of puzzling strategic missteps (Ballmer), growing internal rancor at MSFT that began to pollute the combination, pride (Yang), and hubris and miscalculation (Yang and Ballmer). In the final analysis both parties were about $5 Billion away. That fact alone would not have (and should not have) tanked the deal. So, clearly, in the final analysis this was not about money. If Microsoft really wanted to move forward it would have countered Yang’s $37 figure and a medium would have been found, in my estimation. It chose not to do so because, in my view, by that time too much distrust and animus had crept into the water supply and things became irretrievably broken.

Both sides lost, in my view. Who ends up the bigger loser remains to be seen, of course. If Yahoo! CEO Yang wants to package this to his troops as some kind of victory, it is a Pyrrhic one at best.  Options for the company are still about as unpalatable as they were before this entanglement, perhaps even less so depending on what happens to YHOO stock next week. Some have opined that MSFT has $50 billion now burning a hole in its pocket, but acquisition targets are few and largely complicated in their own right. Some small properties might be acquired (Twitter? Digg?) but they will be, by and large, at the margins and not game-changing in any dramatic sense. A big move is what is required here, and there are not that many big moves left on the chessboard.

In any event, one oddity to come out of this all was Yang’s implication that Yahoo would embark upon a kind of ’scorched earth’ policy in the event MSFT went hostile. That, in and of itself, is not unusual in M&A discussions of this magnitude. What was surprising, however, were the steps Yahoo! planned to take to muddy the waters so severely that MSFT would almost have to reject the transplant were the acquisition to proceed in a hostile fashion. The spitefulness of doing something that only makes sense so as to hurt another suitor was remarkable.

Reminds me of an old joke (with some modification for political correctness purposes) about a group of jungle explorers who are captured by cannibals. The cannibals bind the explorers and place them in a bubbling cauldron back at the campsite as young cannibals dance around them rejoicing. The cannibal chief approaches the explorers and informs them that they are to become dinner. The explorers’ skin will then be used to make canoes. The “good news”, says the chief, is that the explorers can choose how they wish to die. The first explorer, a Frenchman says, “I will take zee sword.” The chief hands him a sword. The Frenchman stands up and says, “Vive la France” and runs himself on the sword. The next explorer, a Brit, says “I will have the pistol.” The chief hands the Brit a pistol. The explorer stands up and says, “God Save the Queen,” and shoots himself dead. The third explorer, a New Yorker, says “I will take the fork.” Puzzled, the chief hands the explorer a fork. The explorer begins stabbing himself profusely with the fork, drawing copious amounts of blood and revolting all who are witnessing it. The chief says to the New Yorker, “why are you doing this?.” The explorer replies calmly in his thick Tony Soprano-esque accent, “So much for your f___ing canoe”.

This is firmly in the Only-In-Silicon-Valley column and is strictly meant to be all in fun: A reporter at a well-recognized periodical called me recently to remark on the odd and disproportionate appearance of exotic and super luxury automobiles on Fridays in the Valley — particularly on and around Sand Hill Road. She wanted my venture perspective on it all. I told her I’d need to do some more in-depth research to get to the bottom of things. And, while I was on the subject would her newspaper push through a requisition order for a lease on a Ferrari 599, preferably Rosso Corso with Tan interior, so that I might better be able to infiltrate the herd unnoticed. The phone went dead. 

Seriously though, in what some folks are saying (tongue firmly in cheek) is a new rite of Spring in the tech world, the highways and byways of Silicon Valley seem bumper to bumper with sleek Italian and German machines on Fridays…and, typically, only on Fridays. What do fast-rising venture capitalists, successful entrepreneurs and senior tech executives drive to work Mondays through Thursdays, you ask? Toyota Priuses, Hybrid Ford Escapes and other fairly nondescript, often eco-friendly, econoboxes.

So, on this lazy and balmy spring afternoon, as you nip out of the office for that critical 3pm coffee reboot, scan the parking lot. If you are seeing more Rosso Corsa than red, more Exeter Blue than Blue, and more Titanium than Grey, you’ve got a Casual Car Friday office. Spring is definitely here. Pass the margaritas. Gran Centenario Anejo, rocks, no salt.