How Pinterest Will Transform the Web in 2012: Social Content Curation As The Next Big Thing

The most interesting wave hitting the social web in 2012 is social curation.  This was kicked off in 2011 as Pinterest's growth was noticed by Silicon Valley and a number of companies quickly followed suit - Snip.It launched as a social information curation platform, Quora adopted boards for a similar purpose, and Fab.com launched a structured social commerce feed.

In this blog post I will discuss the evolution of social media from long-form to push-button, the emergence of social curation on sites such as Twitter and Tumblr, and the move to structured sets of curated content on Pinterest and its brethren.

But first, the meta-trend....

...Social Media: Evolving From Long Form To Push Button
In the evolution of social media over the last decade, the trend has been a move from long form content, which has high friction of participation (both on the production and consumption side) to ever lower requirements placed on a user to participate in a conversation.

1999-2004 Blogging Platforms.
Blogger (launched in 1999) and other early social media sites were longer form blogs.  The bar to write content was reasonably high.  These sites effectively had two separate users bases: people who wrote the content (1% or less of users) and people who read or consumed the content (99% of users).  Yelp (2004) is basically a food blogging platform where reviewers will go on about how their boyfriend was mean to them during dinner, before actually reviewing the food.

2004-2007 Status Message Networks.
Facebook (2004) and Twitter (2006) transformed social media by moving from long form blogging to short form social snippets in the form of photos (Facebook) and status updates (Twitter).  This decreased the friction to both producing as well as consuming content, leading to extremely broad participation by a global user base.

2007-2010 Push Button Interactions.
Some interesting organic user behavior emerged on Twitter, as users would "re-tweet" content as a way to re-broadcast another person's content to their own network.  Similarly, Tumblr (2007) mixed long, medium, and short form content with an additional affordance "re-blog".  Re-blogging allowed a user to repost a blog with a single button, allowing users to essentially curate content without producing any original content.

Twitter and Tumblr made it easy to re-tweet and re-blog other's content - the first step in social curation of the web (red arrow above indicates re-blog feature on Tumblr)

In parallel, push button private content curation emerged as Instapaper (2008), Evernote (2008), Read It Later (around the same time) all launched applications to allow users to collect and later read content.  However, none of these services had a strong social component.

Foursquare (2009) was one of the first networks to generate social content more or less entirely off of push button interactions.   By checking-in, you broadcast your location to your friends, creating content without actually needed to type a single word.

However, all of the social services continued to serve content as a time ordered stream.  Moving from a stream to a structured collectible set of content was the next innovation in social media....

2010-Now Structured Sets And Social Curation.
Pinterest (launch 2010) was one of the first sites to take push button content generation (via bookmarklets and "re-pinning") and structure it into sets of curated content called "boards".  This allowed users to collect content from across the web, as well as from other users on the site.  In some sense it took what a site like Tumblr had been doing but transformed blog-like streams into structured, curated collections users could share.  Importantly, it was easy for new users to consume these sets of content visually as structured sets, and to share these sets with others.

David King has pointed out an interesting insight - by constructing content in a structured set versus a stream, sites such as Pinterest and Snip.It have prevented stream-based sites such as Facebook from becoming a compelling place to consume the Pinterest or Snip.It content (which contrasts with e.g. Instagram or other stream based sites).

Pinterest boards are not as consumable on Facebook as stream-based sites such as Instagram, carving out a large new social media market for this behavior.

This new affordance is currently being adopted by other sites leading to all sorts of interesting behavior including:

• Collecting news and information.  Snip.It (2011) was an early product to allow for social curation and structured sets of news and information based content.  Recently Quora (launched boards end of 2011) entered this market by adding "boards" for curating content from across the web to its core Q&A product.
• Commerce.  Nils Johnson (one of the smartest social commerce guys out there) has pointed out how Fab.com recently used a Pinterest-like affordance in its "feed" to drive social curation of products.  (See image below on how closely the Fab UI mimics Pinterest).  It is similarly likely Pinterest will monetize in a number of interesting ways on the product discovery and commerce side.
• Social media.  Storify (2011) has added an additional structured curation layer on top of Twitter.

Pinterest UI above, Fab.com UI below.

As you can see the Fab UI has followed the Pinterest one.

Summary: 2012 Will Be The Year of Curated Sets
2012 will likely see an acceleration of structured, push button, social curation across the web.  Why?  Because most users don't want to take much effort to produce content, and consuming content in a structured manner (especially photos) is also much faster.  Just as the first wave of social media has transformed the consumption of information, this next wave of social curation will fundamentally change how users find and interact with content over time.

Many thanks to Nils Johnson and David King for conversations that led to some of the insights in this post.

You can follow me on Twitter here.

Stepping Back: 5 Questions To Yourself Ask Yourself About Your Startup

Every year (or quarter) it is worth taking a step back from the day to day emotional roller coaster that is a startup.  It is worth making the time to reset your directions and ask the "big picture" questions that can drive the success or failure of your business.

Questions to ask yourself:

1. Do I Have The Right Team In Place?  

• Your business has undoubtedly changed in 2012.  Are there holes in your team you should fill?  
• What sort of org do you want in each quarter of 2012 and how do you proactively get there?  
• Are there people on the team who are underperforming or a bad fit?  How do you remove these people from your team and when do you do it? (Hint: don't wait)

2. Do I Have The Capital I Need?

• When do you run out of money?  Do you have at least 18 months of cash left?
• Should you raise money in 2012?
• What milestones do you need to reach in order to raise money (if that is your plan)?  
• Who do you want to raise money from?  How do you build buzz and relationships with that person now?
• Can you reach profitability in 2012?  What are the tradeoffs to doing so (e.g. shrink the team?  ramp sales?  roll out new pricing)?

3. What Should I Be Doing Less Of?  Or More Of?

• What are things that you spend time on that did not help you in 2012?
• Can you stop doing these things?  If not, can you outsource them?
• Where did your team waste the most time in 2011?
• How do you make sure they spend time effectively in 2012?
• What was the biggest barrier to productivity for your team this past year?
• In hindsight, what were the activities in 2011 that created the most value for your business?  
• How do you make sure your team spends its time on the most important things? 

4. How Is My Product Doing?

• What do users love about your product?  What are 1-2 things you can do to build on this momentum?
• What do users hate about your product?  Do you need to fix these things?
• How much traction does your product have?   Where does distribution come from?  
• If you are early stage, are you working on the right product?  When do you decide the product is working/not working and what do you do about it?

5. What Can I Do To 10X My Business This Year?  

• Is there a market shift happening that you can exploit in 2012? (e.g. Android penetration?  Rise of Pinterest for distribution to commerce sites?  Something else?)
• How can you think bigger and bolder in 2012?  What are 1-2 big audacious product / partnership / other goals you should swing for?
• How do you focus on the big swings despite everything else you are doing?  

Any other questions you think are worth asking?  Let me know in the comments section.

You can follow me on Twitter here.

Other posts you might like:

10X Your Business

Benefits of Thinking Small

Are You a Visionary Entrepreneur

20 Questions To Ask Yourself Before Raising Money

Questions VCs Will Ask You

4 Ways Startups Fail

You Dont Need a Good Idea To Start A Great Company

Is Your Startup A Cash or Equity Business?

How To Choose A Board Member

A number of companies I know have closed series A or B rounds recently.  The entrepreneurs' next step after closing a venture round is often to finalize the structure of the company's board, including choosing the independent board member(s).

WHAT DO BOARD MEMBERS DO?
The members of your board are the most important people you will ever "hire" for the company.  For an early stage company, your board will often:
1. Select the CEO of the company.  This means the board may be able to fire you from the company you started.  Part of the board's job is to hold the CEO accountable for deadlines, plans, and deliverables.
2. Block or push for major events in the company's life (future fundraises, acquisitions, selling the company etc.)
3. Provide great strategic advice or become pain in the butt, medling overhead.
4. Help with recruiting senior executives or key hires.
5. Teach you about nuts and bolts of the business, or processes as you scale.  Depending on the stage of the company and the sophistication of the founders and their executive team, board members may help you understand the process to set e.g. your first financial or strategic plans, coach you on how to manage larger and larger multi-functional teams, or other nuts and bolts of building the business.

For later stage boards, board members will be involved with compensation committee, financial audits, etc.  So the board of a company may evolve quite a bit from an early stage company to a public one.  This post is focused on smaller startups (e.g. 5-200 people in size).

A great board member can add enormous value and truly be helpful to the company.  A terrible board member can truly screw a great company up.  Most board members are neither great nor terrible - but this post will hopefully help you avoid the terrible ones.

THE INDEPENDENT BOARD MEMBER(S)
If your co-founder is your husband/wife, then your VC is your mother-in-law and the independent board member is like your father-in-law.  Just as you can't contract the mob to off your father-in-law, it will be hard to remove a director once you add one, so you should choose your board very carefully.

While some series A investors won't push for the independent seat to be filled for a while (and in some cases at all), others will push for a faster addition to the board.  Steps to choosing a board member:

1. Write a job spec.
This is one of the most important people you will hire.  You should write up what you would optimally want for a board member as a check list or hiring spec.  This should include:
a. Experience.

• Operating experience.  Do you want someone who has operated a company at a certain scale or has started a company herself?   Can they share process or management best practices with you?  What can you learn from them?
• Market experience.  Is there specific domain or market expertise you care about at the board level?  Are they in the information flow in ways that will give you a competitive advantage?  Can they provide intros to people in the market who can help you a lot?
• Functional experience.  Do you want specific functional experience? (e.g. an ex CFO or VP International Sales)?

Depending on your existing board and experiences as a founder, you may or may not care about market experience, functional experience, or operating experience.   Or you may be willing to trade these off as it will be hard to find the perfect person.

b. Involvement with other early stage companies (optimally as a Founder).  People who have not seen a company go from 2 people in a coffee house to a multi hundred person company aren't used to all the bumps in the road that an early stage company experiences.  Things will take longer and will be rougher then expected.  And, unlike a large established company, momentum won't exist.  At an early stage startup, each bit of execution in an act of sheer will rather than an act of momentum.

Optimally, if there is just 1 independent board slot, the independent board member would be a current or former entrepreneur.

Other successful entrepreneurs will be able to relate more closely to a founder's emotional state and provide advice based on their own experiences.  They will understand both the newbie nature of being a founder/CEO and be open to answering "stupid questions" without condescension/judgment.  They will have first hand knowledge of how to build a business as well as understand the bumps that are coming along the way are inevitable.  Finally, successful entrepreneurs can serve as a counterweight to the VC board members in a way that benefits the company, and hence also benefits the VC (see below).

c. Personal rapport and attitude.
This is REALLY important.  You as the founder(s) should have great personal rapport with the independent board member.   They should be someone you feel you can trust, who you would feel good about calling at midnight on a Friday, and someone you think will be able to help you and your co-founder grow both the company, but optimally also grow personally.

The independent board member should be someone you feel comfortable calling up to ask a dumb, newbie question about your business.  They should be someone that if circumstances were different, you would be excited to start a company with them.

Things to avoid on this one:

• The condescending grey-haired operating executive who sees you as a "bunch of kids" & who views herself as part of the "adult supervision".  This typically leads to the founder getting fired as CEO and some visionless "operator" coming in to derail the company long term.
• The micro-manager who confuses being on the board and being your boss.
• People doing it for the potential financial reward rather then impact/excitement about helping you build a business.
• People doing it to "join a board" so they increase their own personal stature.

d. Alignment of vision.
Does the independent board member understand where you want to take the business?  Are they aligned with that vision and direction?   You want a common view of where the industry will evolve, and someone who will support that vision rather then second guess it.  Similarly, you want someone who will take a long term view to building a great company (if that is your intent), rather then a focus on a short term flip.

Look at their background - what has happened to the companies they have started or run?  Did they sell early, and if so why?  What other choices have they made in their career, and how thoughtful are they in hindsight about these decisions?

e. Raw intelligence.
This is self explanatory.  Some folks, such as Marc Andreessen, Reid Hoffman, and Vinod Khosla, are known for their raw horse power.  Notably, the former two took board seats or made investments prior to become full time VCs.

f. Entrepreneur friendly (or long-term relationship).  
A number of VCs will suggest "friend of the (venture) firm" as your independent board member.  These people will often owe the VC more then they will ever owe your company, and when shit hits the fan will vote with the VC.  In other words, the "independent" board seat will in reality be an investor board seat, and you will lose control of the company.

Signs that someone is a "friend of the firm" (FOF):

• They have worked at multiple companies backed by the VC
• They sit on a few boards with the same VCs
• They are likely to get placed in their next job by the VC (e.g. VP of sales who wants to become CEO as their next job)

The best scenario is to find someone that your VC respects, but that you know is an entrepreneur at heart or will be more entrepreneur friendly.  Optimally, you will have a pre-existing, long term relationship with this person that will help you trust each other as the company inevitably hits a hard spot.

Given the importance of rapport and trust in the board relationship, you should make sure to get to know people (optimally over a few months or longer) before adding them to your board.  As such, you should push back if your investor is trying to get you to quickly add an FOF.

g. Respected by the Investors / VC
Part of the independent board member's role will be to remind the VC board member that they should be voting in the company's best interest (rather than the investor's own best interest).  They should have the confidence and insights to push back on the VC when it makes sense to do so.  The independent should help keep the VC "honest".  This does not mean the independent should rubber stamp the entrepreneur/CEOs every whim.  Rather, they are there to do what is best for the company and to remind the VC that their purpose should be the same.

This is easiest to accomplish if both the VC and the entrepreneur respect the independent board member.  This means both of you should spend a lot of time with candidates for your board before adding them.

2. AGREE ON THE SPEC WITH YOUR INVESTORS
Once you have defined what you want, discuss it with your investor and get agreement on the spec.  This helps you call bullshit on them (e.g. when they offer up a Friend of the Firm with no relevant background) and for them to call bullshit on you and keep you honest (when you suggest your best friend from High School).

3. CREATE THE LIST OF OPTIONS
Make a prioritized list of people you would most like to add to the board.  If you do not know them directly, contact them via your investors/advisors or on LinkedIn or AngelList.  A lot of people will reply to a random ping on LinkedIn or AngelList if it seems serious and you have e.g. good backers/investors.  Your investors may have good suggestions for this list as well.

4. SPEND TIME GETTING TO KNOW THE POTENTIAL BOARD MEMBERS
You will have a lot of pressure from your investors to finalize the board.  You should push back on this and make sure you take the time (many months) to find a great person to join.  Just as you would not rush to hire a crappy engineer "just to fill the spot", with a board member (who will be more of a pain to remove than a bad employee) this becomes even more important.

Some questions to ask/discuss with the potential board member:

• Ask them to discuss key directions for the co.  Do they align with the vision and approach you want to take?  Do they have key insights or interesting feedback?
• Ask them how they will help the company.  Where will they pitch in?  What are they good/bad at providing?
• What are their goals/aspirations?  What do they want to do with their career or life?  How does the role on your board impact this?
• Ask them to do something for you.  Try to put them to work and see if they will help with something relevant that they are experience in.

5. CHECK REFERENCES
What do people who have worked with them think of them?  Are they high integrity?  What are the helpful at?  If they are already on boards, what do the entrepreneurs they work with think of them?

6. FINALIZE WHO TO ADD
Optimally you will take a "common nominates, preferred stock approves" style approach to adding the independent board member.  Just like with the Supreme Court where the President nominates the Justices and Congress approves the nomination, the balance of power lies with the nominator (thanks to Naval Ravikant for this analogy).

SUMMARY
To sum it all up, choosing your board members will be one of things that could impact the future of the company substantially.  You should be thoughtful about who you are adding and why, and work with your investors to take the time to be thoughtful about who you add.  Once someone is on your board, they are very hard to remove.

Many thanks to Josh Hannah, Naval Ravikant, Sam Altman, and David King for providing feedback on a draft of this post.

Any other things you used to select the right board member?  Let me know in the comments section.

You can follow me on Twitter here.

---------------------------
Other fundraising posts:

• Series A Crunch
• Questions VCs Will Ask You
• How To Raise A Successful VC Round
• Differences Between Funding Rounds: Series Seed, A, B, C...
• Financing Approaches Most Likely To Kill Your Company
• Put Your Investors To Work For You
• Party Rounds: How to Get A High Valuation For Your Seed Startup
• 20 Questions To Ask Yourself Before Raising Money
• VC Economics: Why VCs Could Care Less About Your $50 Million Exit 
• The 7 Types Of Angel Investors

How To Reply to Angel Investor Intro Emails

I have had a lot of entrepreneurs ask me for introductions to various investors.  In some cases the entrepreneurs use their reply to the intro email as a mechanism to gain social proof, emphasize urgency, and to reduce the friction to meeting the investor and closing their round (see e.g. VentureHacks for great tips).

Unfortunately, a lot of otherwise savvy entrepreneurs don't follow up with investors well.  You have to remember that every thing you do can signal to an investor a lack of urgency/interest in your company, the fact that you are taking your startup casually,  desperation, or a lack of ability to follow through.  Also, if you don't create urgency or a sense that the investor may miss out on something interesting, then the angel may drag their feet in meeting with you, extending the time of your fundraise.

This post is focused on the small tactics that go a long way upon receiving an introduction.

Example Of a Bad Reply To An Investor Intro 

"Thanks Ivan Introducer for the intro! 

Hiya Angela Angel,
It is great to meet you!  Love to connect!  Let me know what works!
Regards, 

Elizabeth Entrepreneur"

Example of a Good Reply (tailored to an angel round with a lead)

"[moving the person who made the intro to BCC][1]
Hi Angela Angel, 

It is great to meet you.  As introducer said, we are in the midst of a round led by well-known investor and other well known angel is also investing[2].  We have seen really solid traction with user growth of X up Y%. [3]  See below for team bios/key stats [7] 

Our round is coming together quickly so the sooner we can talk the better[4].  Are you free to chat at one of the following times?[5] 

Monday 2pm-3pm;  5pm
Tuesday 1:30pm-3pm, 6:30pm 

We can also try to move things around to accommodate you - we have heard great things about you as a social media investor (in particular your investments in Tumblr and Pinterest)[6] so would love to connect before we close the round. 

Thanks,
Elizabeth Entrepreneur
----------
Team bios [7]

Elizabeth Entrepreneur
-2008-2010 Tech lead at Facebook for newsfeed
-CS, MS degrees from Berkeley
-Side project stupidhipster.com getting 100,000 visits a month 

Carl Co-founder
-etc.
"

What Is The Difference?
I added numbers to footnote the important parts of the email.
1. Move the introducer to BCC.  They don't want to be on the 15 emails it takes to schedule the meeting.
2. Put social proof up front.  All these great investors are part of the round!  Angela angel will want to be part of the club and invest too.  It also means you are more legit than the other random companies trying to talk with the same investor.
3. If you have good traction or a key stat, explain it in 1-2 lines.  This is additional proof that they need to rush to talk to you.
4. Put polite pressure to chat very soon.  You need to emphasize things are on a fast track for you.  If things are moving slowly it suggests no one is interested in your round, which means this investor won't be interested either.
5. Add specific times.  This reduces the friction to scheduling as if you leave it open ended it (a) does not convey urgency and sets up the timeframe within which you will meet and (b) makes the investor work harder to figure things out.  Don't put the burden on them to suggest a time
6. Explain why the investor is relevant.  This helps them understand why they are a good fit for the company.  It also extends the the timeframe you can wait to meet with them if needed without looking desperate (e.g. if the can only meet in two weeks, their experience justifies you waiting for them as they are uniquely awesome for your company, rather then because you dont have other options).  
7. Add team bios (2-3 lines, bulleted per team) + any key stats (if no good stats, just included bios).  People will want to know who you are and why to meet with you.  In some cases, even if the idea is bad they will still want to meet with you if you have a strong background.  This will give you a chance in person to convince them to invest.

Hopefully, the person who introduced you already covered items 2 through 5 or 6 in either their intro, or in the email asking if the investor will talk to you.  If the intro explicitly included 2-3, you can skip mentioning it yourself, but you should keep the other elements in.

You can follow me on Twitter here.

Other fundraising posts:

• Series A Crunch
• Questions VCs Will Ask You
• How To Raise A Successful VC Round
• Differences Between Funding Rounds: Series Seed, A, B, C...
• Financing Approaches Most Likely To Kill Your Company
• Put Your Investors To Work For You
• Party Rounds: How to Get A High Valuation For Your Seed Startup
• 20 Questions To Ask Yourself Before Raising Money
• VC Economics: Why VCs Could Care Less About Your $50 Million Exit 
• The 7 Types Of Angel Investors

Holy Crap! The NY Startup Scene

Every few months I take a weekend to step back and make myself a list of startups doing impressive things.

One of the things that struck me was the extent that startups coming out of NYC were included on the list for the first time.  It used to be that NY mainly about AdTech and SEO-farm focused "new media" startups.  These companies were often pretty underwhelming.   Nowadays, NYC is definitely undergoing a web renaissance with clusters in social media and commerce.

4 Reasons The NYC Startup Scene Changed

1. Access to Capital.

There is a lot more capital available in NYC today than there has been historically, and it is now provided on "West Coast Terms".

It used to be that NY and Boston was known for ex-Banker VCs who wore ties and penny loafers and asked entrepreneurs to go on a 5 year vest.  NYC has seen an influx of capital in terms of both thoughtful local VCs (such as First Round and Union Square) and angel funds (e.g. Founders Collective, Lerer Ventures), but also a larger number of traditionally West Coast focused VCs have been increasingly willing to fund NYC based companies.  This includes everyone from Accel (Diapers.com*, BirchBox, Bauble Bar), Andreessen Horowitz (Foursquare, Canvas), to Sequoia (Tumblr, etc.) and more recently Greylock (Tumblr).

Almost every NYC startup I know of now makes a trip out west to fundraise, and West Coast angels and VCs have become increasingly comfortable investing across the country.  In parallel, some West Coast VCs are moving to the East Coast . For example, Accel recently opened a NYC office, and one of the sharpest investors I know - Alex Kinnier, recently joined NEA on the East Coast.

Capital is now chasing the best companies no matter where they are (as long as they are in the Bay Area or NY :)

2. Anchor Companies.

In 2002 I somehow ended up with almost an hour 1:1 meeting with Don Valentine, the founder of Sequoia Capital, and the VC who personally funded Apple, Cisco, EA, Oracle and other titans of tech.  Valentine and I spoke about the difference between Boston (which I had just moved from) and Silicon Valley.  

He pointed out that one advantage Silicon Valley had over the East Coast was its preponderance of "anchor companies".  These companies are large tech companies that recruit and import a large number of highly talented people from all over the world.  These talented people then either go on to found their own companies, or to poach management or other talent from the existing anchor companies.  In other words, the fact that Google and VMWare and Intel and Cisco have tens of thousands of engineers each enables the creation and *scaling* of amazing startups with high talent density themselves nearby (e.g. I have seen one estimate that about 1/3 of Facebook's engineers are from Google - which means hundreds of people have switched from Google to Facebook in a short time span).  

In contrast, the number of "anchor companies" on the East Coast has traditional been pretty low (I don't consider IT departments of big investment banks as "anchors" as these organizations are not product focused).  This started to change as companies such as Google built large engineering/product offices in NYC, and has allowed companies to find talent more quickly.  For example, a pretty big chunk of the early Foursquare engineering team is ex-Google, while the COO  of Etsy is also from Google.  This increase in web product/engineering talent density in NYC helps change the dynamic and allows East Coast companies to scale to a larger size without the need to open a West Coast engineering office.

In parallel, NYC has started to get some smaller anchor companies for competencies such as commerce and more recently, social media.

3. Increased Ease of Development.

The cost and speed of development has dropped dramatically.  From AWS to Django and Ruby to all the various APIs and platforms (Twilio, Stripe, etc.) a single engineer can build an enormous amount.  This means a small team can wholesale execute a great product (see e.g. the early days of Tumblr, or stand-alone 1 person teams such as Instapaper.)

This lower bar to development means that despite its sparser engineering and product talent pool, NY startups can get up and running with fewer people and still pull off amazing things.

4. A Social, Design Commerce Focused Environment
People who chose to live in NYC are in an environment that is more art, design, and media influenced than SF, which jives well with the webs shift to social media.  It is not a surprise that companies such as Tumblr and Foursquare have thrived in NY.  Similarly, many big brands and traditional commerce companies are based in NY, which has been a boon to companies such as Gilt Group.

List of Some NYC Startups

Here are some of the startups I think are doing some of the more interesting things based in NYC:

A. Social Media

• Tumblr
• Foursquare
• Instapaper
• 4chan / Canvas

B. Commerce

• Gilt Group
• Lot18
• Warby Parker
• Birch Box
• Etsy
• ZocDoc

Hopefully, some of these startups will get large enough to act as anchor companies and reinforce the cycle of startup creation.  If these companies end up with early exits, they will never hit the scale and talent competencies that will allow them to contribute to the next entrepreneurial startups.

You can follow me on Twitter here.

*I believe Diapers.com is actually HQ'd in Jersey

Why Fewer Companies Are Successfully Raising Series A Rounds

Update:  Data from TechCrunch supports the post below.  CrunchBase has seen a 33% increase in the number of seeds reported and a 9.6% drop in the number of series A's reported.   In 2008 the ratio of seeds/series A reported were 1:1, in 2011 the ratio was ~2:1
--------------------------
One big shift in the startup scene over the last 18 months is the sheer volume of startups getting started and seed funded.  If we use Y-Combinator as a proxy for the broader ecosystem (which is probably directionally correct, although YC growth may be overall higher due to increased branding as well as e.g. Start Fund and other activities) then we see the following:

GRAPH OF # OF YC COMPANIES PER BATCH*

At the same time, the percentage of startups closing seed rounds seems reasonably static to me (it may even be up).  This means there are many more companies getting founded and then funded at the seed round.  However, the number of legitimate VCs doing series A rounds has not increased.

This has led to a crunch at the series A level, where more and more startups are unable to successfully raise a series A.

Reasons for the Series A Crunch
1. The bar has gone up significantly for what constitutes a company that can raise series A.  This is due in part to valuations going up (so series A are now often $5-10 million raises instead of $3-7 million) but I think it is largely due to the large supply of startups.

2. More startups means that there are more startups doing "merely OK" all competing for the same dollars.  It also means there may be slightly more startups with high traction (e.g. if 1 in 100 get lots of traction, and there are 2X more startups, there are 2X more startups with high traction), which means the high traction startups will soak up most of the investment dollars.

All the VCs I know tell me times are getting more and more busy for them.  They are seeing way more series A deals coming through their doors, but they are funding the same number of deals.  This means fewer startups are successfully closing A rounds.  Those startups that do close round are often further along then the average series A company was 2-3 years ago.

Return of the Bridge Rounds
So what do all these startups do that can not raise a series A?  A subset sell as a team buy, a few go out of business, but an increasing number are going out for a bridge round.  Basically, instead of raising $5 million, I am seeing post-seed startups raise anywhere from $500K to $1.5 millon, at a valuation somewhere between a series A and a seed valuation, with the hope that the additional capital will give them time to gain more traction or scale their business.

Q1 and Q2 of 2012 Will Likely Be Very Competitive For Series A
Many companies who raised a bridge round plan to go raise a series A sometime next year.  Unfortunately, the environment may get even more competitive at that time.  Given the ramp in new startups in early to mid 2011, Q1 and Q2 of 2012 may be even more competitive.  You will not only have the startups seed funded in 2011 raising a round, but also all the startups from 2010 who raised bridge rounds - all competing for the same dollars.

If you add in the risk of a European financial crisis, then early next year may be a tough time indeed to raise a round if you are in the "middling" zone of traction (versus those that will flame out or be team buys).  In contrast, companies with great traction, or a well connected celebrity entrepreneur, will still get chased by all the various VCs as usual.

Some Tips For Raising a Bridge Round
Given the likely high competition for series A dollars in early 2012, if you plan to raise a bridge round I would suggest:
1. Raise enough money to buy you real runway.  Make sure you have the runway to hit the milestones needed to raise a series A.  It will be harder to raise another bridge, and it is always easiest to raise money all at once then have to go out fundraising again 6 months later.  If you think you need $500K, think about raising $750K or $1 million to have extra runway in case it is needed.

2. Diversify your investors.
Adding new investors to the mix may both up the valuation you get for the bridge, as well as expand your network for the series A.

3. Include some insiders from your first round if you can (and if they have been useful).
Having 1-2 existing investors re-up into your bridge will convince new investors to participate at a higher valuation.  However, if you can not get existing investors in a bridge at a good valuation, or you do not think they have been helpful, feel free to exclude them from the bridge round and focus only on new investors.

You can follow me on Twitter here.

Other fundraising related blogs:
Questions VCs Will Ask You
How To Raise A Successful VC Round
Differences Between Funding Rounds: Series Seed, A, B, C...
Financing Approaches Most Likely To Kill Your Company
Put Your Investors To Work For You
Party Rounds: How to Get A High Valuation For Your Seed Startup
20 Questions To Ask Yourself Before Raising Money
VC Economics: Why VCs Could Care Less About Your $50 Million Exit 
The 7 Types Of Angel Investors

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*Update: this graph has been updated with data from Harj Taggar, one of the partners from YC.  Many thanks to Harj for the info.

Hire For The Ability To Get Shit Done

I have found that the two biggest causes of having to fire an employee at an early stage startup are a lack of culture fit, and the inability to Get Shit Done.  I don't care how smart someone is - if they are unable to work hard and crank out a large amount of high quality work, they will weigh down your startup.

Inability to get things done may manifest itself in multiple ways including:

• Lack of urgency.  Used to a large company environment where its OK if things take a few weeks longer.
• Easily distracted.  Heavy procrastinator.
• Lazy / doesn't work hard.  Some very smart people are basically lazy.  Don't tolerate this.
• Starts but never finishes things.
• Lack of follow through - makes commitments but does not follow up.
• Argumentative. Arguing incessantly about how to do something rather then just doing it.
• Slow.  Taking a long time to code (or do) something simple.
• Perfectionist.  Tendency to overdesign something and to spend 4 weeks building the perfect implementation versus 1 week building the thing that "just works" for 95% of the time.  Sometimes the edge cases need to be covered, but in most raw startups this is not the case.  On the business side this manifests as someone heavy on analysis, low on "doing".

Unfortunately, this is the fault of the entrepreneur and of the hiring process - too few hiring processes focus on the ability to Get Shit Done (GSD).

Screening for the ability to Get Shit Done.
Here are some ways I have used in the past to check for the ability to Get Shit Done:

• Coding exercise.  As part of our hiring process at Mixer Labs, we would often give people a half day coding exercise.  We would see what tools they used,  how they worked with the team, but also how productive they were.  What was the final output of the half day, and how did that compare to other candidates?  We had a few candidates that went from "did OK on interviews" to "wow, that person is great" when we saw the output of the exercise (and vice versa).
• Personality.
• Follow through.  Did the candidate respond to every email from me quickly?  Did they follow through on everything they said they would do?
• Excellence.  Do they spend the time to become good at anything they adopt as a hobby?  Larry and Sergey at Google would famously ask about people's random hobbies to test whether they were the type of people who focused on excellence and depth of understanding.
• Proactivity.   Do they suggest the right next steps without prompting?  Do they go above and beyond in the interview and come in ahead of time with e.g. a 5 page analysis of where the company should head?
• Homework.  We would give non-engineering candidates a simple task to complete between phone screen and onsite.  E.g. "Come back in 3 days with a 1-page marketing plan for our product."  If they did not finish this on time, or they came back with little insight / shoddy work we would not move forward with them.
• Ask the candidate.  I would often straight out ask people how effective they were at GSD, and how did they compare to their peers?  It was surprising how honest some (very smart) people would be on this.  E.g. "I am average compared to other engineers".  For an early stage startup, average is not enough.
• Reference checks.  Ask about people's Get Shit Done ability in multiple different ways during reference checks:
• What %ile of getting stuff done is this person?
• How does this person compare re: GSD to their peers?
• Give me an example of how this person was proactive?
• How proactive is X versus their peers?  What %ile is this for your company?  For all people of Y-function you have worked with?
• How hard does X person work?
• When has X person been unable to follow through on a commitment?  When has X not come through on a commitment, no matter how small?
• How fast does X accomplish tasks?
• How frequently does X go above and beyond what they are asked for?

With the simple steps above you should be able to optimize for people who are proactive, have good follow through, and Get Shit Done in addition to the other screens for raw intelligence, culture fit, and functional knowledge.

Other hiring blogs:

• Hiring Criteria For Your First 5 Employees
• 5 Myths To Building An Awesome Mobile Team
• Hiring Tip: Graph Interview Performance Vs Years of Experience
• Hiring Tips For Early Stage Startups: How to Get Your First 3 Employees
• Our 10 Step Hiring Process
• When And How To Fire An Employee At An Early Stage Startup

 You should follow me on Twitter here.