Archive | January, 2008

A (final?) word on NDAs

29 Jan

Several times a month an entrepreneur I am intending to meet with hits me with an NDA demand. Often this happens over email so I find myself tapping out a reply where I itemize the reasons why I (and most of my venture colleagues) rarely sign NDAs, and why, in most cases, an entrepreneur should not even ask for one. I have tapped out the same ‘why I don’t sign NDAs’ content so many times that I now simply dig through my Sent Items folder and locate the most recent response I sent on this topic to the last entrepreneur who asked for an NDA, and I cut and paste it into my current reply.

What I find interesting is that there is a veritable banquet of information online and in book form for entrepreneurs about the mechanics of launching a start-up. Indeed, folks like Guy Kawasaki, have almost carved out an entire cottage industry of How-To manuals and seminars on navigating the rocky shoals of entrepreneurship successfully. I think highly of Guy and others like him who have laid a foundation of good insights and information for entrepreneurs to leverage. With all that information, however, the NDA question seems to come up more than most. As such, I thought a post on this subject was in order.

Foundry Group’s Seth Levine covered this subject recently, as have many VC bloggers over the past few years. Their posts are worthwhile reading. That said, here are my specifics in layman’s terms on why entrepreneurs should think carefully about bringing up this subject next time a meeting with a venture capitalist is in the offing.

1. The Urban Legend issue. I am not sure where this all started, but there remains a persistent fear among some entrepreneurs (usually the first-timers) that VCs steal ideas from entrepreneurs with abandon. For some entrepreneurs, this paranoia is so palpable that they simply cannot get past it. Unfortunately, this unhealthy pre-occupation ends up precluding them from getting any help from potential advisors, investors, and others who might actually like the idea and help the entrepreneur become successful. Too often, the end result is that the idea dies, unfunded and unrealized due to irrational fear and paranoia.

Have their been occasions in the past when some VCs have behaved unethically or inappropriately with sensitive information imparted by an entrepreneur? I am sure that there were such occasions, but I have never seen it on my watch, I have never heard any verifiable accounts of any note, and I doubt highly that it goes on nowadays with the many firms I collaborate with on investments, ideas or due diligence.

For one reason, it’s a career killer. VCs live and die in large part based upon their reputations in the community. Good reputations breed good relationships with fellow VCs, entrepreneurs, and partners. Those good relationships then breed good deal flow and a network of people to collaborate with on other investments. One clumsy attempt to ‘steal’ an idea from an entrepreneur will all but assuredly kill that venture investor’s career and virtually anything he or she touches. In short, it would be an absurdly dumb move.

Secondly, most venture capitalists are simply too busy working with their portfolio companies, managing their limited partner relationships, and balancing hectic lives to simply run off and start a company. Last I checked, a career in venture, if you are fortunate enough to build one, has a lot to recommend it. I love what I do and would wager that I speak for many of my colleagues in that regard. I, for one, certainly have no intention of leaving everything I have built over the past 15 years to steal someone else’s business idea, no matter how compelling. It would be much better to find a way to partner together and see this idea to fruition.

2. The Liability issue. For most venture investors, signing NDAs can only expose us to liability.  I probably meet with 200 companies a year and review investor collateral for another 200 or so. That figure is probably typical for a partner at an early stage venture fund. If I signed NDAs for every entrepreneur that requested one, I would never get anything else accomplished. Simple numerical probabilities dictate that eventually I am going to meet with another company that is intending to do something similar to a company that I have met with previously. [There are few “truly” original ideas out there, the saying goes.] Should I decide to subsequently invest in that company, then I and my fund would be exposed to litigation by an entrepreneur whose appeal for funding I may have earlier spurned and/or who is now convinced that I either stole his idea outright or I am using the “confidential” information he shared with me with the new company we just funded. In either instance, my fund and I now have an expensive lawsuit to grapple with, regardless of its questionable merits.

3. The Adverse Selection problem. We call this the “adverse selection” problem because oftentimes the companies that seek an NDA from us most aggressively are the ones that usually “have” very little–hence, their perceived compulsion to protect their largely unprotectable idea. The question it begs here is that ‘if your idea is that easy to steal, then there probably wasn’t much there of interest to us anyway.’ This is a subtle but important distinction for entrepreneurs to understand. Any experienced professional investor knows that if a portfolio company begins to gain traction, competition is a given. Indeed, in so many markets, competitors are almost literally lurking in the shadows watching while the early entrants validate the market and (hopefully) stub their toes. In short order, the marketplace is teeming with me-too companies and other competitive threats. If a portfolio company’s business is so easily stolen in such an eventuality, then someone wasn’t doing their homework at the venture fund.

Now, to be sure, there are times and circumstances where NDAs are absolutely a requirement and where they should come into play. Meetings with potential joint venture partners and/or certain vendors is one obvious place where NDAs should be considered. Another circumstance would be when a company has very specific and very sensitive technologythat could be enormously compromised by its disclosure. Truth be told, we see perhaps three or four companies a year where the technology is in such a state that an NDA would be appropriate. The rest of the time, the NDA request only serves to send the wrong message to investors and bogs down the process.

Like in most circumstances when pitching businesses to investors, your mileage may vary. In other words, a good entrepreneur needs to assess the circumstances he or she is operating within and decide what demands and burdens he wants to place on his prospective investors. Too many, and he sends the message that he is a naive entrepreneur that has both failed Entrepreneurship 101 and will likely need a lot of hand-holding down the road. Given how busy most of the good venture investors are already with their existing commitments, that alone can sink a prospective investment.


The Forbes Midas List is out. Let the gloating and grumbling begin

25 Jan

The Forbes Midas List is out. Unless you have been under a rock since the Clinton Administration, you will know that this has nothing to do with a list of muffler shops. Forbes has been putting out this compendium of ‘top tech dealmakers’ for a while now and it seems every year the hue and cry over bruised egos (and schadenfreude) gets a bit louder. There is some merit to this.

 I tend to place “lists” put out by large business-centric magazines up there with tarot card readings in terms of their weight, relevance and accuracy. That said, from a pure “social experiment” perspective, I do find it fascinating how people’s opinions vary so widely over this particular list and how that variance is not always correlated with whether that particular grumbler or gloater made it on the list that year.

I view the Forbes list in a similar prism that I view the business school rankings that are also an annual event (and cause similar hand-wringing, griping and boasting.) Both lists are exceedingly hard to do well or accurately. How does one really measure performance? What are the metrics? What is the timeline? In the business school rankings case, it is now fairly evident that a lot of those metrics are now “gamed” every year by certain schools and their alumni. Regardless of this widely reported fact, the rankings continue to come out each year. They sell a ton of magazines and they cause many a business school administrator sleepless nights and indigestion. Accuracy be damned.

My sense is that the b-school listings are by and large of little value–and I say that as someone whose alma mater business school is typically in the top three every year. The problem I have is that the respective magazines just seem to juggle the top three or five schools in their rankings annually to keep readers coming back. To make things interesting every couple of years, an outlier school–one that typically comes in around #15 in most years–breaks into the top pack. This gets a lot of attention for a few months (and the school in question puts that in all their brochures, ad nauseum) but the next year we are back to the usual suspects and life goes on. How helpful is this? As to the Forbes Midas List, I see a similar dynamic. [In the interest of full disclosure, I am not on it this year.]

Just as noteworthy as the business schools that went from, say, #15 to #2, and then back to #15, there are many “dealmakers” that were in the top tier in the past year on the Forbes Midas List that completely dropped out of the top 100 in the latest iteration. How can this be? Does this not only serve to undermine the entire point of such a list?

Yes, the partners from Kleiner Perkins and Sequoia Capital swapped the top two spots this year. Are you really that surprised? It reminds me of a Bruce Springsteen quote riffing on a less admirable quirk of our culture: “It’s all about who is number one this year. Let’s celebrate him and then let’s get him out of the way so we can celebrate who is number one next year.”

Other outlets, like Venture Beat (which has a good rundown of this story), will go into the pros and cons of how the list is assembled, whether it really helps, etc, so I will recuse myself from that debate. My biggest gripe is that the presence of attorneys and investment bankers seems to go against the purpose of the List. The investment banking and venture capital businesses are fundamentally different, so appearing on a list of “dealmakers” together is silly and undermines the value the List has; and, I say this as a former investment banker! Other than in rare circumstances, bankers and lawyers are not “investors” in venture deals, per se. How, then, should they be lauded in the same way as the venture capitalists who found the winning deals and nurtured them along the way to a healthy exit?  

While I applaud all my colleagues who were acknowledged this year, for the Forbes Midas List to be truly relevant (and to properly acknowledge the best of our business) further refinements are required. Stripping out the bankers and lawyers is one obvious step, but a more transparent process and clearer metrics are also needed here.

 [UPDATE: Forbes’ Erika Brown and I had an exchange the afternoon this post appeared in which she elaborated upon the methodology used to arrive at the Midas List. She also conducted an interview a day or so following with VentureBeat’s Matt Marshall, available here. My principal criticism, the presence of bankers, lawyers and other ‘service providers’, remains intact for the most part. Forbes’ own explanation for its process is to include professionals who “deploy venture capital to create wealth for their investors and build valuable, long-lasting companies.”  My argument was that bankers and lawyers clearly provide a value but that they do not meet the threshold of the magazine’s own methodology. They may take companies to the public markets and/or assist in mergers, acquisitions and the like, but they are not investing their limited partners’ capital into these companies, in most circumstances, and should, therefore, not be included on this List. Ms. Brown, however, reminds us all that this is largely a cloaked industry and that Forbes, at least, endeavors to provide some rankings, regardless of how flawed, to acknowledge those in the field. To that point, I agree that this is not an easy undertaking, I applaud Forbes for adding as much rigor as they can to this process, and I am optimistic that as Forbes’ methodology improves, so too will the List and its significance to the industry. JT]

Whitman to retire from eBay

22 Jan

Across major news outlets came reports today confirming that eBay CEO Meg Whitman will be stepping down. There is little satisfaction in saying ‘I told you so,’ or the like, but we called for a management change at eBay earlier this month and stand by the reasons cited in that posting along with the comments made by others in the blogosphere calling for her to step down. She is expected to depart the top job at eBay within weeks, though the timing “remains fluid.”

eBay shares closed today (1/22/08) at $27.23, down $1.10 or a loss of almost 4%. The stock has been on a prolonged and precipitous slide since its peak of $58 in late 2004.

The conventional thinking is that Whitman will be replaced by John Donahoe, the president of the company’s auctions business unit. This appears to be the safe move but it is unclear whether the more vocal investors will be all that ready to don T-shirt and cap and get behind Donahoe’s heir apparent status. Sentiment seems strong that vigorous, drastic measures are required at eBay now, and that may include bringing in fresh outside talent to reinvigorate the company and mollify the increasingly influential “powerseller” community that drives the eBay marketplaces. Donahoe, like Whitman, comes from the world of management consulting having risen to a senior position at Bain & Company. There are already rumblings that Donahoe is not the guy to lead the charge.

What will be interesting to watch in the coming weeks will be how this selection process is run and what investor response will be if Donahoe is indeed brought into the corner office. Om Malik and others have made the case–rather persuasively, I should add–that his short two-year tenure at eBay has earned him a “B” at best; not exactly the messianic performance one would expect from someone who will be under a lot of pressure to resuscitate a once-great web brand that has drifted of late. My sense is that a bolder choice of CEO is required if eBay has any hope of regaining its lost luster with investors and its standing in the marketplace.

That dreaded first impression…you only get one shot

14 Jan

Brad Feld penned a quick post recently on the inanity of certain wanna-be (or, perhaps, shouldn’t-a-been or never-will-be) entrepreneurs who insist on sending out ‘hey, I’m leaving my job at BigCompany to launch my startup and change the world’ emails…….from their BigCompany corporate email accounts! Hello? Is the caller there?

Brad lays out his case for the abuse that should be heaped upon said offenders, so no sense rehashing it here. My only rejoinder in this space is that I wish to go one better. Mr. Feld and others have opined that with the proliferation of free email accounts, sending any sensitive emails from corporate accounts is positively inexcusable. Little argument there. However, if it is the sender’s intention (as is often the case) to be taken seriously by a possible future investor, partner or employee, a free email domain just doesn’t cut it anymore in 2008.

The truth of the matter is that investors (and, to a similar extent, partners and potential employees) want to see real commitment. Let’s face facts: free domain email accounts are pretty lame. There, I said it. Like it or not, we are painted with the brush of the email domains we use. What, it’s 2008 and you are still sending out email from an account? What are you, a grandmother with blue hair and a busted hip from Toledo? And, to add insult to injury, you are trying to persuade me about your technical savvy….from your account? Really?

The and offenders are a little better, but not by much. A or account tells the recipient you either just got fired, just quit, are chronically unemployed, or are just really lazy about getting something more permanent for yourself. Also, the old excuse that Yahoo and/or Hotmail accounts are web-based and, thus, more accessible doesn’t wash anymore — not since most everyone is getting POP3 email on their phones nowadays and/or can easily access that POP3 email by going in through a Gateway from any terminal with an internet connection.

Do I have a Hotmail or Yahoo account? Sure, I do. What do I use it for? For sweepstakes promotions and registering new products I buy, purchasing things on eBay, Craigslist postings and responses, Evite stuff, and other things that I know will result in a torrent of new spam. But that’s it. No serious personal or business stuff is being transacted there.

So, if you are starting a company drop the $19.95 a month and register a domain name with 5-7 mailboxes. Go ahead, it’ll be OK. You don’t even need to get a website going just yet; just the email account in the name of your company will suffice. Got that? Great. Now, get down to Kinko’s and have some cards done. $60 should get you about 500 four color jobbies. Ok, not exactly the watermarked, embossed cardstock the Sand Hill Road guys are using but they are functional and look a lot better that the old former employer corporate cards you were handing out with all the contact info crossed out and written on the back in Bic pen blue.

There, now you’re an entrepreneur. No, I won’t fund your company any faster, but I will think more highly of you as will (I would suspect) most of my colleagues who are all similarly afflicted with short attention span disease when it comes to clearing out email inboxes and, unfortunately, passing judgment on unsolicited messages from those seeking to meet me and/or my partners. In this time compressed world we inhabit, when there is so little information to go on, the information that does exist has that much more influence. Make sure the impression you make is the right one; if it isn’t, make the fix and make it promptly.

eBay’s Whitman should go.

8 Jan

There’s trouble in the Kingdom; send a message to the King.

..or in this case, Queen.

It seems a cabal is forming in tech circles, in the media, and the blogosphere around the notion that it might be time for Meg Whitman to be shown the door at eBay. Henry Blodget (yes, that Henry Blodget) makes a compelling case for the prosecution in his blog. So, too, do MSN’s Kim Peterson and BloggingStock’s Gary Sattler, albeit in a more measured way.

If this comes to pass, this will be quite momentous for a variety of reasons. I, for one, will have mixed emotions as I consider her stewardship at the company by and large a success, but — in the aftermath of some questionable moves and clear stumbles (Skype!?!) — not an unqualified one.

Without argument, Ms. Whitman guided eBay through serious competitive challenges in its early days to bring the company to its current status as a bona fide ecommerce juggernaut. Her leadership in those years was the sine qua non of the company’s success as the undisputed leader of online auction retailing. During her ten-year tenure, eBay has seen enormous growth, is now active in 40 markets, and has more than 230 million registered users. As I have alluded to in earlier posts, those coveted but elusive “network effects” that all VCs and management teams strive earnestly to achieve in their own companies (but rarely do so in the real world) are in clear evidence at eBay. There are precious few other companies that can demonstrate that in such an abundant, palpable way. The liquidity of eBay’s marketplaces across categories is what draws buyers and sellers to its platform over all other auction-based retail offerings (Yes, there actually are a few competitors to eBay out there, believe it or not.) Each new participant – whether buyer or seller – that participates in the marketplace thereby enhances the total value of that marketplace and the value to all members. And so on and so forth. Competitors could scarcely land a glove on eBay once its marketplaces grew to that level of liquidity.

But, as they say too often in this rough-and-tumble capitalist world we inhabit, that’s old news. What have you done for me lately, Meg?

I’m only half joking, of course. The proponents of the ‘Dump Meg Now’ brigade loooove to point to Skype as their Exhibit A. I will grant them that, but is goes deeper than Skype. There is also the prattling on about her decision to sign up as financial co-chair of the Romney campaign, or the loss of heir apparent Jeff Jordan (now comfortably ensconced at Open Table and, I would imagine, eating well.), or the debacle of eBay China, or the seller revolt last year over restrictive policies and fees, or the God-awful interface that remains as clunky and unrefined as ever. All worth debating, but my sense is it has been the strategic missteps and missed opportunities in growing eBay beyond its core business that is most glaring. — and, by extension, most responsible for the abysmal performance of its stock. I believe that upon examination, and with all the relevant facts, one can conclude in a clear, measured way that eBay needs new leadership. And that time is now.

eBay peaked early, one might say, but has been unable to broaden into new areas of retailing that other competitors — most notably Amazon — have seemed capable of doing with speed and effectiveness. Some cynics have gone as far as to opine that eBay’s market position and momentum when Ms. Whitman came aboard was such that its eventual and lasting domination of its core market was almost pre-ordained. I reject that argument. To her credit, Ms. Whitman has continued to try new marketplaces and new ideas, but lately they have brought largely unsatisfying results. Some ideas simply made no sense. [Does anyone remember eBay real estate? Hello?] Other ideas that made a LOT of sense and were seemingly slam dunks were left to languish so long that the initiative and the window of market entry were lost [i.e., re-launching eBay Motors’ auto parts marketplace. It’s still the mess it was in 2001 when they were (briefly) recruiting an auto parts expert to build the business. Their bloated, glacial hiring process turned off good candidates, they never ended up hiring anyone, and the idea died on the vine; potentially a billion dollar revenue opportunity, blown.]

In past years, eBay’s leadership position would insulate it from these blunders, but not any longer. Amazon has done a remarkable job building a truly inspired marketplace and is now the benchmark for online retailing. It has become a destination site for a whole host of activities beyond purchases — product research, reviews, community features, etc. Amazon has also beefed up the features and functionality that allow users to sell their own items on the site which, naturally, is one step closer to a direct attack on eBay’s core market and raison d’etre. Craigslist, the quasi-crunchy global bulletin board, is another obvious threat; but to date, Messrs. Buckmaster and Newmark seem content with their current market position and — according to their 60 Minutes profile, at least — do not seem bent on online world domination. We’ll see how long that lasts. If Mr. Newmark starts to change his demeanor, or simply takes a few pages out of the Bill Gates competitive playbook now that Bill G will be hanging up his full-time skates come July, eBay will have its work cut out for it in staving off Craigslist.

Amazon’s stock price has skyrocketed, reflecting the company’s new vitality. In contrast, eBay stock has languished at $30-35 last year and had a lousy 2006. For some shareholders, this alone is grounds for a beheading. For me, the issue is that, quite simply, eBay seems utterly bereft of a clear, decisive strategic vision.  Moreover, this comes at a time when the competitive landscape is changing rapidly. Old assumptions must be reconsidered and new approaches applied. For a variety of reasons, Ms Whitman is not the person to implement the kinds of changes and the overhaul required to right this ship. I believe it is high time to thank Ms. Whitman for her long service and to bring on a more visionary leader with bold new ideas to reinvigorate the company and reassure the rank and file, jumpy shareholders and irate users that the future of eBay is bright, exciting, and compelling.

Dash: a dud? or a defining device?

3 Jan

OK, enough with the alliteration, but it is certainly intriguing to see how much buzz (and grumblings) I am hearing about the much bally-hooed networked GPS system just launched from Dash Navigation. The idea is a simple one and fairly obvious – decouple the promise of Web 2.0 from the browser and make that data available everywhere the user is in a format that is digestible, relevant and accurate. Dash’s approach is an interesting one: how would you like to get restaurant listings, suggestions and reviews from Yelp, or real estate data from, or mapping from Platial, all while behind the wheel or even while in another city? Dash will pull that information with the ease of your in-car navigation system–coffee shops, gas station locations, post offices, etc — while layering in more robust content (reviews, etc) that most in-car nav systems can only hope for. Add to that real time traffic, weather, etc. and you have a fairly compelling little travel companion.

We have been openly evangelical about the broad Location-Based Services space for some time [see an earlier post here], particularly around the convergence of GPS and various content offerings (both private labeled and user-generated), so perhaps we are an easy sell. That said, we suspect that the folks at Dash and their capable investors at Sequoia Capital and Kleiner Perkins Caufield & Byers might have their work cut for them. This is a crowded space and the sands shift fortnightly around these parts. As has been well reported by GigaOm and Venture Beat (here and here, respectively) Dash is expected to be available with a $600 price tag, plus $10-13 in monthly fees depending on the services the user signs up for. This, in a space rapidly being filled by GPS-enabled phones — with new ones launching almost daily — and by hand-held GPS devices (Tom Tom, Garmin, etc) by manufacturers that know the space well and are not likely to give up their cushy franchises without a nasty fight. While we are excited by the emergence of Dash and believe it both validates this space and ratchets up innovation in this increasingly competitive and exciting area, we will be watching closely to see how consumers will react to the seemingly high price point of the device amid clear competitive offerings that surround them.

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