How Does A Small Company Make A Big Company Successful?

tl;dr: As a small company, focus on two things with big companies: “1. What can we, the small company do, to make the big company successful? 2. What can I do, as a leader of a small company, do to help the people I’m working with at the big company be successful within the big company?”

I was on the phone yesterday with the head of corp dev for a very large tech company. He and I had never talked before so it was an intro meeting, although brokered by a long term colleague at that company. It’s a tech company we’ve had many interactions at many levels with over the years – some good, some bad, some complex, and some perplexing. Over a long period of time, these interactions, and many others that I’ve had with other big companies, have shaped my view on interacting with large tech companies.

When I started investing in 1994, I was involved with a few large companies. My first company (Feld Technologies) was one of the first Microsoft Solution Providers (Dwayne Walker, are you still out there somewhere?) At the beginning I was still working for AmeriData when I started investing. AmeriData was a public company, a voracious acquirer (we acquired 40 companies in three years), and a very fast growing business (they were less than $50 million in revenue when they acquired Feld Technologies and over $2 billion in revenue three years later when GE acquired them.) For a short time I was connected into GE via their acquisition of AmeriData (I still have my GE business card with the “meatball logo” on it.) During the same time, I started working as an affiliate to Softbank which was a large Japanese company acquiring minority and majority interests in lots of US companies. By the time I co-founded what became Mobius Venture Capital, Softbank (our sponsor – at the time we were called Softbank Venture Capital) was the key investor in Yahoo, E*trade, and a number of other large US-based Internet companies.

I used to think that these large companies had a clear view on how to help small companies. I was seduced by Microsoft’s Solution Provider program into thinking that Microsoft had the long-term interest of Feld Technologies (and then subsequent companies that I invested in, including ePartners, Gold Systems, and NewsGator) at heart. I participated in a number of meetings with Yahoo in the late 1990s as a member of the Softbank team and listened to the vision of what Yahoo wanted to do to help the ecosystem. I spouted all kinds of garbage and nonsense about what we were doing as part of the broader Softbank ecosystem to help advance the cause of Softbank while at the same time helping startups everywhere, especially the ones we had invested in. I had the notion that whenever I ended up in a meeting in GE, I could get GE to do something with one of the companies I was an investor in to help them out. When I invested in the Feld Group, we even set up an initiative to help startups getting connected into the very large Feld Group clients, which included companies like Southwest Airlines, Delta, Home Depot, First Data, and Burlington Northern.

For over a decade, I heard and made happy talk from two directions – that of the investor in a startup and that of the partner of a big company that was looking to work with startups. That we were building an ecosystem. That we’d do all kinds of vague and unspecified things together in the name of innovation. Many drinks were had, many conversations were enjoyed, and many plans were hatched. And very, very little got done.

Around 2004, after the dust on the mess that was my world post-Internet bubble settled and I shifted into a mode where I grinded it out at Mobius until we started Foundry Group in 2007,  I decided I was thinking about it completely wrong. I came to these conversations wondering what the big company could do. Sure, I considered the skills and capabilities of the startup, but I was always trying to figure out and anticipate how the big company could help the startup.

Wrong, wrong, wrong, wrong, wrong.

My first adjustment was realizing that whenever I counted on a big company to do something to help a startup, I generally was disappointed. Often, even if the big company wasn’t trying to harm or limit the small company, they often did. This is what causes so many VCs to be wary of corporate investors, especially ones who come to the table with strings attached to a financial investment. But I saw it in all of the partnership dynamics, product roadmaps, build vs. buy decisions, shifting leadership and goals, and conflicting big company product teams. It’s not that the big company couldn’t do something to help a startup, it is just that the startup shouldn’t count on it as a critical input into its success.

Then I realized that the big company has no fundamental obligation to the startup. For a while, I carried around a purist thought of mutual innovation. I got involved in huge investment efforts on small companies to try to satisfy the needs of a big company in the context of a partnership. I’m not talking about a sales situation – separate that out – but rather a long-term business partnership, joint development, or technology partnership. In these cases, the large company puts up no money, but people engage to work with the small company. And the small company puts huge effort into the project for free with the hope of a payoff at the end. The opportunity cost for the big company is tiny while the opportunity cost, and often the direct costs, for the small company is enormous. In hindsight this is a clear imbalance. It’s easy to fix and align the parties, either through money flowing from the big company to the small company, or via clear rules of engagement between the two, but if you assume the big company has no fundamental obligations to a startup, you can’t get hurt too badly.

The turning point for me was a specific time I experienced a large company totally fuck over a long-term partner that had gone all in on their relationship. This large company benefited enormously – both directly (via product sales) and indirectly (via market reputation and customer love) from the small company over a period of several years. But, one day, the large company decided to do something that drastically undermined the business of the small company, and no level of effort could generate a discussion between the two companies about it or a path forward that was supportive of the small company.

I realized that was a consistent pattern in my world. Large companies have whatever agenda they have. They have no responsibility to the small company beyond whatever legal contract exists, which often is heavily weighted in favor of the large company. Strategies change. Executives change. The macro changes. Exogenous forces, that the small company can do absolutely nothing about, regularly cause havoc for the large company.

Rather than be mad, hate the large company, feel like a victim, or behave like an abused spouse or child that sticks around and keeps coming back for more, accept that you are fully responsible for your own destiny. And that instead of expecting something from the big company, you should be focusing on doing specific things that help the big company while advancing your goal as a small company.

It was subtle to me at the time, but totally obvious to me now. In the conversation I had yesterday, I gave some direct, constructive feedback on situations where startups I’m an investor in had felt abused, mistreated, or deceived by the big company. But I was clear that none of these were fundamentally issues for the big company. They hadn’t done anything illegal, but they had damaged their reputation with me and with many VCs and entrepreneurs I knew. I was willing to give feedback from my perspective, but I had absolutely no expectation that the company would do anything about the past or behave differently in the future.

This corp dev leader was gracious. He listened, accepted the feedback constructively, suggested that the reputational dynamic mattered a lot to him and the company, and acknowledged that the only way to improve was to keep trying. I said I was always happy to start with a completely clean slate and try again. But for me, this doesn’t mean having false hopes and expectations that something magical will happen. Instead, I start from the focus with every engagement point of “what can we, the small company, do to help you, the big company, be successful.” If I can’t figure that out in an unambiguous way that we, the small company, can afford to try, then it’s not worth the engagement.

JFK’s words, “Ask not what your country can do for you – ask what you can do for your country” echo in my mind. Modify it slightly as startup: “Ask not what big company can do for you – ask what you can do for big company.

How To Raise A $150 Million VC Fund

One day in 2009 David Cohen and I were talking. Here’s what I remember the conversation being.

David: “I’m seeing so many seed deals from all the mentors and people I’m running into around Techstars but I’m not sure what to do with it.”

Brad: “Why don’t you raise an angel fund and just invest in them as a seed investor.”

David: “Do you really think I can do that?”

Brad: “Absolutely – you’re a great investor. Raise a small fund – $5 million. I’m in for $100,000 so you’ve got your first LP. I’ll help you get it done.”

David: “Ok – let’s go.”

And that’s how it started. Today, Techstars announced that it has raised its third fund, Techstars Ventures 2014, and closed it at $150 million. It follows two other funds, called Bullet Time Ventures, that were a $5 million fund raised in 2009 and a $25 million fund raised in 2011. The whole fund family is now being called Techstars Ventures going forward.

Shortly after that conversation (either the same day or the following day) my partners at Foundry Group (Seth, Jason, and Ryan) all committed to invest in the fund. We made a bunch of intros for David and he reached out to a number of the successful entrepreneurs and a few investors (as individuals) around the Techstars network that existed in 2009. Before he knew it David had $2.5 million lined up. He then did a first close and started investing. Within six months the balance of the $5 million was committed and he closed the fund.

By the time the dust settled on that fund, Bullet Time had made seed investments in about 50 companies, including GroupMe, SendGrid, Twilio, Orbotix, and Uber. Of the 45 other investments, some are zeros but six years later there are still 30-ish companies cranking away.

I’ve been an investor in a large number of VC funds dating back to 1996, including a bunch of the current generation of seed funds. Bullet Time 1 is one of the best performing funds I’ve ever invested in. It’s useful to remember that in 2009 there was some success starting in the current cycle, but we were on the tail end of the global financial crisis, the word “entrepreneur” hadn’t become part of the overall American lexicon (the White House still called things “small businesses”), and Uber was three guys and an idea.

In 2011, Techstars had begun to grow meaningfully as an organization. We had programs in Boulder, Seattle, Boston, and New York. We were starting to experiment with corporate partners through programs like Techstars Cloud, which we did with Rackspace. David was now visible as a highly desired angel investor across the country.

David: “How much do you think I should raise for my next fund?”

Brad: “At least $10 million but no more than $25 million.”

David: “Why those numbers?”

Brad: “You should be able to raise $10 million in a week from your existing investors – you’ve already given them back a bunch of their money. And it’s still just you so raising more than $25 million for a seed fund doesn’t really make sense.”

Bullet Time 2 closed at $25 million and David continued to invest.

On day around 2012 I got a call from Mark Solon. Mark’s a close friend, co-investor in a number of things, and a VC who has been involved as a Techstars mentor and investor in companies since the very beginning. About six months earlier Mark had very publicly decided not to raise a new VC fund with his existing partners for a variety of reasons, but continued to actively manage his firm.

Mark asked me if we could go for a walk. So we did. As we wandered down the Boulder Creek path, he told me he and David had been talking about him getting involved in Techstars more significantly, were both excited about it, but were having trouble figuring out exact roles.

Mark: “We don’t really have enough money in the VC fund for us to be partners it in.”

Brad: “Don’t think about it that way. Be partners now in the VC fund and ramp up to raise a much larger early stage fund, rather than just a seed fund.”

Mark: “Do you think we’d be good long term partners.”

Brad: “Fucking no-brainer. Just do it. Don’t think too hard about it. If it doesn’t feel right, you’ll know early while you are investing Bullet Time 2, well before you raise a new fund. And if it feels good, you’ll be off to the races.”

Mark went all in with David and Techstars and the result is not only Techstars Ventures and the $150 million fund, but incredible growth and progress with Techstars, in which Mark has been instrumental.

Along the way, I’ve watched my partner Jason help David and Mark structure and raise the fund. It’s been remarkable to work with Jason on it – I can play my special role and Jason can play his. All along the way our relationships with David, Mark, and the rest of the Techstars team continues to be magical. Sure, there are moments that are profoundly complex, frustrating, and disappointing, but watching the overall Techstars team, now led by David Brown, and the Techstars Ventures team, which includes not just Mark and David, but three other partners (Nicole Glaros, Jason Seats, and Ari Newman) has been pretty awesome.

It’s incredibly hard work that unfolds over time. Sometimes from the outside it looks like something just sprung to life. The “overnight success” dynamic of our world makes so many things feel like they just happened. Today, it’s nice for the Techstars team to relish their progress. But it’s super important to remember that it’s been hard won every step of the way, starting with a random day in 2006.

And it’s just beginning.

That Didn’t Need To Take An Hour

Have you ever finished something and thought to yourself, “That didn’t need to take an hour?”

In my world, I have an endless stream of requests to do something for an hour. I just looked at my calendar for the next two weeks and almost everything that someone else scheduled and invited me to is for an hour.

In contrast, all of the things I (or my assistant) have scheduled are for 30 minutes. And many of them will take five minutes.

If you schedule a meeting for an hour, it’s remarkable to me how often it takes an hour, even when it doesn’t need to. Three hour board meetings, especially when board members have traveled to them, take – wait for the drum roll – three hours.

During the day, between Monday and Friday, I generally have a very scheduled life. I go through phases where I shift into Maker Mode, now no longer schedule anything before 11am my time (with occasional exceptions), and try to have a very unscheduled weekend. But Monday to Friday looks like the following:

This Week - A Normal One

Over time, I’ve come up with some approaches to deal with this massively over-scheduled life in order to stay sane. Here are a few of them.

30 minute schedule slots: I’ve tried it all. 60 minutes. 15 minutes. 5 minutes. 45 minutes. 37 minutes. The only thing that I’ve found that works is 30 minutes. If I schedule for 15 minutes, I inevitably have too many things in a day and get completely exhausted. If I schedule for more than 30 minutes, I find myself twiddling my thumbs and trying to get finished with the meeting. 30 minutes seems to be the ideal amount to get any type of meeting done.

A walk: If I have a longer, more thoughtful discussion I want to have with someone, I go for a walk. I have four routes around downtown Boulder – 15, 30, 45, and 60 minute walks. All of these walks have the same loop so even when I schedule for a 60 minute walk, I have an easy way to turn it into a 30 minute walk if it’s clear that’s all it’s going to take. Or, if I’m into the first 15 minutes and realize it needs to be an hour, I just extend to the 30 minute segment. My worst case on a walk that goes too long is that I get some steps for my daily Fitbit habit.

Phone calls: I schedule almost all phone calls, except for ones with high priority people. This high priority ones interrupt whatever I’m doing or get done on a drive to and from the office. If you hang around me, you’ll see that my phone rarely rings (except for Amy) and I rarely make calls outbound as most of my world runs on email or real-time messaging.

End everything early: I try to end everything when it’s done. I jump right in and finish when we are finished. When you give things 30 minutes, you don’t have time to futz around with intros and catch ups. When someone starts this way, I break in and say as politely as I can, “What’s on your mind?” On the phone, I minimize chit chat and just try to get to the point. And, after five minutes when we are done, I revel in the notion that I’ve got 25 minutes to do whatever I want.

I’m always experimenting with new things. What do you do to keep meetings manageable and sane?

We Will Never Need Another Financing

I hear some version of this one all the time.

  • “We will never need another financing.”
  • “This financing will get us to cash flow breakeven.”
  • “This is our last financing before we become profitable.”

It’s probably bullshit. There are so many reasons companies raise more money in the future that even making an assertion like this is generally nonsensical. But even if you, as the founder, believe it, you are still probably deluding yourself.

Now, there are points in time where a company doesn’t have to raise any more money. I’m on the board of several significant companies that are profitable and generating meaningful free cash flow. They don’t need to raise any more money unless they want to. And, there are a few reasons they might want to, but we’ll get to that later in the post.

There are also companies, like my first one (Feld Technologies) that bootstrapped and never raised any money. Well – almost no money. We funded the business with $10 (for ten shares of stock) and my dad personally guaranteed a $20,000 line of credit with his bank. We promptly spent the $20,000 on our first few months of operations, realized there was no more where that was coming from, fired everyone, paid back the line of credit over the next six months from our very modest positive cash flow, and then made a profit – and had positive cash flow – every month for the rest of the seven years of the business up until the day we sold the company.

But I’m not talking about bootstrapped companies. I’m taking about angel and VC backed companies. You know, the ones that generally lose money for a while before they make any money. And need money to fund their operations.

Imagine being an investor and being approached by a business SaaS company that has raised $5 million, has $100k / month of revenue, has been growing at about 5% per month, and is doing a $10 million round. “This is the last financing we’ll ever need” is the lead in statement. My first question is “how fast do you want to grow year over year for the next few years?” When the number comes back over 100%, my next question is “Do your customers pay monthly or annually, up front or in arrears.” Unless you are getting paid annually upfront, it’s highly unlikely that your cash coming in is going to outpace your cash going on on a monthly basis for a while. It’s simple math – give it a shot if you want. Sure, every now and then something magical happens (very high price point, very low cost of customer acquisition, zero churn), but that’s a serious edge case.

Now things are working nicely for you and you are growing quickly after raising that $10 million, but you have a competitor that is chasing you from below and a giant public company who is suddenly attacking you from the top. You decide you need to add a direct sales force to augment the self-service / low-touch sales model you’ve been using. Yup – that’ll be more money. Or you realize that you have massive technical debt because you’ve underinvested in scaling and your AWS bills are now increasing non-linearly with your revenue all of a sudden because of the way you’ve architected things. Or you have a major outage and decide you need some redundant infrastructure. I could come up with 100 more items.

You want to do an acquisition, but the seller wants some cash. Your revenue growth flattens out for a few quarters but you didn’t get ahead of the cost dynamic. There is a macro downturn and 25% of your customers vaporize (Don’t think this happens? Ask one of your friends who was a CEO of an Internet company in 2001.)

Where there is a wonderful fantasy about never needing to raise more money, and it does occasionally turn into a reality, I recommend you not lead with it when you are out raising money. It simply undermines your credibility.

In Santa Fe We Wish We Had The Boulder Problems!

There has been a lot of recent noise in Boulder about growth, challenges, and the impact of the tech community on the city. I stirred the pot a little more with my post The Endless Struggle That Boulder Has With Itself. It generated some private emails, including non-constructive troll-like ones such as “Get the fuck out of town, you and people like you are ruining everything” at one end of the extreme to “It’s so frustrating that the all growth is bad crowd is framing the public debate right now and portraying so-called overpaid tech employees as a major cause of all that is wrong in Boulder.”

Andy Alsop, an entrepreneur in Santa Fe who has spent a lot of time in Colorado, sent me a note with some thoughts about his view and experience from working as an entrepreneur in Santa Fe. I asked if he’d write a longer post from his perspective and he took me up on it. Following is a guest post from Andy that I think adds nicely to the discussion.

Don’t get me wrong. I love Santa Fe and I love New Mexico. This is where my kids were born, where three out of the six kids in my family own property and where I have lived for the past 20 years. This is my perspective on why the Boulder City Council should be grateful for the gift it has been given.

I have chosen Colorado as the place where I want to focus the next chapter of my startup life because of its similarities to New Mexico but with the benefit of a rich and diverse tech economy. Since approximately July of 2014 I have been spending half of my time getting to know people in Colorado and half of my time in New Mexico where I work and where my family is currently based. This has allowed me to spend time in Boulder with some exciting startups and some interesting and successful business leaders.

To give you some background, I moved to Santa Fe, NM from the East Coast in 1995 to start a company with my older brother. Prior to making the decision to move out West I asked myself, “Is Santa Fe the right kind of place for me as a technology entrepreneur?” I thought about it for a while before making the move and decided that I was in love with the beautiful outdoors, the endless blue skies, the culture, the great food and the interesting people so with bravado I said to myself “Hell, I’m smart and hardworking and this whole ‘Internet’ thing is everywhere. It doesn’t matter where I live.” As a result, I founded two startups, one of them a spinout from Los Alamos National Laboratory and have been a part of three other startups all of them based on technology.

I find the debate around Boulder’s “dilemma” to be very interesting because Boulder and Santa Fe share a lot of the same characteristics. Both are similar in size, both have educated populations, both are a short drive from a larger city, both are absolutely stunning in terms of the landscape and the outdoors, both are set in the foothills of the Rocky Mountains restricting their ability to grow in all but one direction and both have a high cost of living and a high cost of housing.

In contrast to Boulder, Santa Fe has a stunted economy because it doesn’t share some of the key characteristics of Boulder – including several of the four elements of the “Boulder Thesis” that Brad outlined in his book “Startup Communities.” Santa Fe’s anemic economy is due in large part because Santa Fe has an older population made up primarily of retirees in addition to federal, state and local government workers and service-based workers. We have one “larger” company based in Santa Fe: Thornburg Investment Management which thankfully provides 250 high wage jobs. There are a handful of other smaller companies in Santa Fe but the majority of our businesses are tourism and services based – restaurants, art galleries, hotels, B&B’s, etc. This makes it difficult to make a living in Santa Fe (see Santa Fe’s Living Wage). You will frequently hear people joke about the fact that to make a million dollars in Santa Fe you need to come with two and to live in Santa Fe you must have two to three jobs just to survive. “Young people” come to Santa Fe based on their attraction to the beautiful outdoors and leave when they realize it is difficult to make a living. Santa Fe ends up being a turnstile for young professionals.

Having attempted to recruit experienced knowledge workers to Santa Fe I would always get the same questions from the candidates – “Where are my kids going to go to school?” (While improving, Santa Fe and NM have some of the worst public schools in the country) and “Where am I going to work if your startup doesn’t make it?” Boulder on the other hand has a great school system and a diverse tech economy so that when knowledge workers are recruited to Boulder the recruiter can say “We have great schools and if this position doesn’t work out there are plenty of other places to work.” That means recruits are willing to uproot their families and bring them to Boulder.

So, when I hear members of the Boulder City Council saying “…locals say they don’t like the tech folks…” and the startup economy is attracting “highly paid white men to the city, and they were pricing out families and others” I can’t help but think – Are you crazy? Having a robust tech economy is what many communities like Santa Fe WISH they had. Our civic leaders have to deal with the higher cost of housing from wealthy out of state housing buyers yet the local workers are trying to survive on minimum wage jobs and the government on an insufficient tax base. As a result I have seen NM increasingly tax everything not because it is greedy but because we have to take care of a far poorer population. For instance, the “gross receipts tax” (NM’s version of a sales tax but it is levied on both goods AND services) in Santa Fe has steadily risen from just under 6% 20 years ago to over 8% now and it continues to climb.

Imagine the problems Boulder would have if it were in the same shoes as Santa Fe and didn’t have a thriving tech economy to rely on?  Be Bolder Boulder and embrace the gifts that have been bestowed upon you. Work with the tech community rather than making divisive statements and see the members of your thriving tech economy as your friend and not your enemy.