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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Brutal Honesty Delivered Kindly

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In yesterday’s post Mentors 4/18: Be Direct. Tell The Truth, However Hard, Joah Spearman left a very powerful comment about empathy.

“The older I get the more I realize that truth is something that is best coupled with empathy. Ultimately, you have to seek to understand before you can be understood and part of telling the truth is knowing that you’ll never know someone else’s truth until you hear it directly from them rather than assuming you know what someone has experienced or what’s best for them.”

This made me think of a deeply held belief that I hold with my partners at Foundry Group – brutal honesty delivered kindly.

When I invested in Moz, I thought a lot about TAGFEE, which is Moz’s code that reflects their core values.

Transparent
Authentic
Generous
Fun
Empathetic
Exceptional

I especially keyed in on Transparent, Authentic, and Empathetic as these three are core personal values of mine. However, these three ideas often come into conflict. It’s hard to be transparent and empathetic at the same time. Consider the situation where you fire a person. Legally, you likely have some constraints on what you say, limiting your transparency. You want to be empathetic to the person you fired, so this again limits your transparency (or, if you are transparent, you likely aren’t being very empathetic.) And then, at a meta-level, you will have some internal struggles with your authenticity around this situation.

The tension between the concepts is helpful as it makes you think harder about how you comport yourself is difficult, challenging, or complex situations.

The solution between me, Seth, Jason, and Ryan is to be brutally honest at all times but deliver feedback kindly.

While I’m sure we hold back on occasion, especially when one of us is unclear on what is going on, we subscribe to the notion of brutal honesty. We try hard to be fair witnesses in the style of my wife Amy, saying what we believe to be the truth. When it’s a hypothesis, we frame it as such. When it’s an assertion, we state that. When it’s something we feel strongly about, we preface it appropriately. And when it’s a fact that we are certain of, we are unambiguous in what we say.

No matter how difficult, sharp, upsetting, or confrontational something is, we always deliver the message kindly. We are not decedents of the Stepford Wives and we each have our own personalities, so “delivered kindly” means something different for each of us. But we never mean malice, harm, or disrespect. We are quick to own our opinions, especially when we are wrong. And when on the receiving end, we listen, and try to understand the other person’s truth, as well as our own, and then reconcile them.

If you sat in a meeting with us, you’d see no yelling. No pounding on the table. No grandstanding. No aggressive body language. No passive aggressive behavior. But you would hear a lot of brutal honesty, And you’ll hear it delivered kindly.

Capital Is Cheap And Labor Is Expensive

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I was on an airplane for the first time for business in a while and when I woke up from my nap I found my self staring at CNBC on the DirecTV seat back display. I never watch CNBC so I was attracted to the talking heads, who were silent since I didn’t have earphones in. I kept thinking I was watching ESPN with all the sports metaphors, blinking lights, constantly changing headlines, and tightly coifed and good looking men talking at me in rapid fire.

Between a headline about Carly Fiorina exploring a run for president and Zebra Technologies equipping all NFL players with tracking devices I noticed one about companies who were raising prices to inflation proof their business. At least, that’s what I thought it said since it flashed up there quickly between a headline about “Steel is on Fire” and then a video of Warren Buffett walking around without a headline so I had no idea why they were showing him.

The inflation proofing headline stuck in my head. We’ve had a very long period of low to no inflation, at least based on the way the government calculates it. While my cynicism around government math and how inflation is calculated is substantial, there isn’t much question that since 2008 capital has been extremely cheap. Fred Wilson wrote a great post titled The Bubble Question a while ago where his punch line was:

It is the combination of these two factors, which are really just one factor (cheap money/low rates), that is the root cause of the valuation environment we are in. And the answer to when/if it will end comes down to when/if the global economy starts growing more rapidly and sucking up the excess liquidity and policy makers start tightening up the easy money regime. I have no idea when and if that will happen. But until it does, I believe we will continue to see eye popping EBITDA multiples for high growth tech companies. And those tech companies with eye popping EBITDA multiples will use their highly valued stock to purchase other high growth tech business and strategic assets at eye popping valuations. It’s been a good time to be in the VC and startup business and I think it will continue to be as long as the global economy is weak and rates are low.

But I think cheap capital is only half of the equation. The other half is ever increasing labor costs across all aspects of the wage chain. When I was in business school in the 1980s, we talked a lot about the productivity paradox. The premise was that computers and automation would drastically improve productivity, making labor less important as tasks were automated, resulting in lower cost of labor.

As the technology industry rapidly evolved, the notion of non-productivity kept coming up. Nicolas Carr’s HBR Article “IT Doesn’t Matter” was probably the capstone piece around this and how companies could take advantage of the commoditization of IT, rather than how IT was a transformative input into companies and societies.

Suddenly, in 2010, technology was disrupting everything and the technology industry was booming. By 2013 everyone was talking about a bubble, even though the companies being created this time around were substantial. Once again, wages for IT employees and computer scientist were skyrocketing and suddenly coding schools were popping up everywhere, to the point that people are now saying that Computer Programming Is a Trade; Let’s Act Like It.

Capital remains incredibly cheap, so it’s flowing into wages. But that’s only at the high end of the market around technology jobs. At the other end of the spectrum, we have the famed jobless recovery with the elimination of massive numbers of jobs that previously existed, especially in industrial and Fortune 5000 companies. While this is happening, we have an entirely new class of entrepreneurs, or self-employed, being created by companies like Uber.

Yeah – this shit is super complicated and it plays out over a long period of time. In fact, it might only be really possible to understand what is happening in hindsight. But the combination of cheap capital and expensive labor has created a very powerful economic dynamic which right now is driving massive innovation across virtually every industry sector around the world.

We know that extremely low cost of capital will not last forever. We know that eventually there will be real inflation again. And we know that wages can’t increase endlessly. I wonder what happens to the allocation of capital, entrepreneurship, and the impact on society when capital gets expensive again?

What Should You Do When Someone Rips Off Your Site Design

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I recently received the following email.

I am in a bit of a dilemma and would really appreciate any insight you all have on what to do.

Last month, my team worked with a designer to create a new homepage for my startup. Yesterday, I saw that another company ripped off our entire site design. They have also just recently pivoted into doing exactly what we do.

You can compare the two sites here: Us Them a week ago Them now.

It doesn’t feel right that they can so brazenly steal someone else’s work like that. You would think they would have a reputation to uphold.

Anyway, my question for the group: How can we turn this negative into a positive for us?

My response was:

Welcome to the world. It sucks, but it happens all the time.

There are two approaches:

1. Ignore them and just kick their ass.

2. Make a big deal about it as a way to get more attention for you. Do this in a classy way. Don’t be whiny about it.

So you know, I generally choose option 1. I find that option 2 is very hard to execute and usually a distraction. But if you can do option 2 correctly, especially for a consumer service like yours, it can generate a lot of interest.

After a week or so, a draft blog post, and a little more back and forth the sender concluded:

For a quick update on this front, I think I did want the noise, to hopefully drive more awareness and because I was still kinda mad.

But, after putting it out of my mind for a few days and focusing on making progress on our product and marketing strategy, I feel calmer about the whole thing. Best case scenario we embarrass them – which doesn’t seem as fun anymore now that I’m not as actively mad – and get some sympathy and signups. Worst case scenario it backfires on us. Either way it’s a distraction and a lot of noise that isn’t really my style.

Our team is better, our technology more scalable, our wit sharper. They are right in some ways to make their site a cheap knockoff of ours – our site is great. But they’re fighting a losing battle. So I’m gonna go with option A of ignoring it and kicking their ass.

So yeah, your advice ended up being right on. Thanks for suggesting I sleep on it for a few days and again just for being responsive and helpful overall – it really did mean a lot.

I was proud of this person. The high road is always more fun, especially when you toss boulders down on the person on the low road and crush them before they make any progress toward the top of the mountain.

How Can This Be A Billion Dollar Company?

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I was in the bathroom this morning catching up on all the blogs (via Feedly) that I hadn’t read this week since my head was in a bunch of other things. I came across one from Nic Brisbourne (Forward Partners) titled I’m a stock picker. I wish he had called it “This Unicorn Thing Is Bullshit For Early Stage Investing” but I think he’s a little more restrained than I am.

My original title for this post was “How Can This Be A Billion Dollar Company and other bullshit VCs ask early stage companies.”  It was asked by VCs to several companies I’m involved in last week. While I get why a late stage investor would ask the question when the valuation is in the $250 million range, I really don’t understand why a seed investor would ask this question when the valuation is in the $5m range.

Now, I’ve invested in a few unicorns in my investing career, including at least one unicorn that went bankrupt a few years later (I guess that’s a dead unicorn.) But I’ve also invested in a number of companies that have had exits between $100m and $1b that resulted in much larger returns for me, both on an absolute basis as well as a relative basis, than unicorns have for their later stage investors.

I’ve never, ever felt like the “billion dollar” aspiration, which we are now all calling “unicorn”, made any sense as the financial goal of the company. Nor have I felt it made sense as a VC investing strategy, especially for early stage investors. We never use the phrase “unicorn” in our language at Foundry Group and while we aspire to have extraordinarily valuable companies, we never approach it from the perspective of “could this be a billion dollar company” when we first invest.

Instead, we focus on whether or not we think we can make at least 10 times our money on our investment. Our view of a strong success in an investment in a 10x return. Our view is simple – we don’t really view anything below 3x return a success. Sure – it’s nice, but that wasn’t a real success. 5x – now that’s nice. 10x – ok – now we are in the success zone. 25x – superb. 50x or more – awesomeness.

We also know that when we invest in three people and an MVP, we have absolutely no idea whether this can be a billion dollar company. Nor do we care – we are much more focused on the product and the founders. Do we think they are amazing and deeply obsessed with their product? Do we understand their vision? Do we have affinity for the product? Do we believe that a real business can be created and we can get at least a 10x return on our investment at this entry point?

I recognize other VCs have different strategies than us, especially when they are investing at a later stage. Applying our model, if the entry point valuation is $100m or more, then you do have to believe that the company is going to be able to be worth over $1 billion if you use a 10x filter. But in my experience, most later stage investors are focused on a smaller absolute return as a threshold – usually in the 3x to 5x range. And, very late stage / pre-IPO investors already investing in companies worth over $1 billion are interested in an even smaller absolute return, often being delighted with 2x in a relatively short period of time.

So, let’s zone this in on an early stage discussion. Should the question “how can this be a $1 billion company” be a useful to question at the seed stage? I don’t think so. If it’s simply being used to elicit a response and understand what the entrepreneurs’ aspiration is, that’s fine. But if I asked this question and an entrepreneur responded with “I have no fucking idea – but I’m going to do everything I know how to do to figure it out” I’d be delighted with that response.

How Does A Small Company Make A Big Company Successful?

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Every single day I have multiple conversations and emails from CEOs and people at companies I work with about how to work with Big Tech Companies. You know – Google, Apple, Microsoft, Oracle, IBM, Amazon, Facebook, Twitter, Salesforce, SAP, LinkedIn, Cisco, Yahoo, HP, AT&T, Verizon, Icouldkeepgoingforalongtime.

But this conversation is not limited to just the gigantic tech companies. They include all the up and comers andtheabunchmoreyouprobablydontthinkarethatbigbutare, including a long list of newly public companies or still private but mega-funded companies.

This conversation comes from two different directions.

- BigCo reaches out to LittleCo and has a classic “happy ears meeting” where BigCo talks a great game about all the great things the two companies can do together and how it’s going to be awesome and LittleCo hears what they want to hear, not what has been actually said. And then the giant black time suck hole of the “let’s work together dance” begins. In the typical case, this goes one for months and months without any resolution or action. Eventually everyone gets tired of each other.

- LittleCo reaches out to me and says “Hey – I really think we could be strategic to BigCo. Can you make an introduction.”

My response to each of these is NO NO NO NO NO NO. After I say NO a few more times, I state “You are thinking about it wrong.”

Instead of expecting BigCo to react to you in any way, start from the perspective that if you want a relationship with BigCo, your only goal in life should be to help BigCo be successful.

Start by coming up with a hypothesis about what you are going to do to help BigCo be successful. Then, test this hypothesis. The Lean Startup approach is super helpful here. Test, ship, iterate – just keep trying and keep learning. Use what you are creating to get the attention of BigCo. Don’t spend six months developing a business development relationship. Don’t spend months trying to get the decision maker on the phone before you’ve done anything. Don’t wine and dine endlessly the people you know, or get connected to. And never, ever go single threaded with one person at BigCo, or one BigCo, hoping something good will happen.

Simply go do some shit for BigCo. Be precise. Execute well. Communicate it to the people you know at BigCo. Do it without any formal arrangement. Show BigCo why they care and why you are the one that will move the meter for them.

Then you can start having the business conversation.

As a bonus, this works for sales also. But you probably figured that out already.

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