My VC seminar at HLS had a real treat Monday evening, when serial entrepreneur and venture capitalist, Jeff Bussgang (of Flybridge Capital, formerly IDG Ventures) took time out of his busy schedule to share some of his experiences and lessons learned from his time working on start ups and in the Venture Capital Industry.
Mr. Bussgang, who is an active blogger (visit his blog here) was incredibly down to earth and gave mostly common-sensical sounding but nevertheless insightful advice in plain English. He reminded me once again that speaking with clarity is a sign of true understanding.
My notes from the talk follow below. The post is long, but there are lots of good nuggets of wisdom, first on being an entrepreneur and then on being a VC:
He knew that he wanted to be an entrepreneur from the beginning. Resisted the temptation (and active recruiting) of a V.C. firm who saw value in his undergrad computer science degree and MBA.
Thoughts on Entrepreneurship:
Start-up 1: Athena
In the early 90’s (while at HBS) first start up was an app trying to replicate Lotus 1,2,3 for the emerging OS2 platform. It ultimately was not successful, primarily because they were squeezed by IBM.
Lesson 1): Technology is only as good as the platform.
Takeaway: In developing mobile apps today, we should think carefully about choosing I-phone or Android (or other) as the platform. I personally like Android, but Mr. Bussgang suggests I-phone, as the ramp up for Android will be long and unpredictable.
Lesson 2): Be careful who you are beholden to…they were squeezed by IBM because of their total dependence on 0S2.
Lesson 3): Weak team = weak outcome.
Takeaway: Find the right people for the given project.
Start-up 2: Open Market
Again pursuing his passion for entrepreneurship, Mr. Bussgang turned down another rational offer at a consulting VC firms to join a small firm called Open Market. The firm caught the wave and had a $1.2B IPO with $1.8 mm of revenues at the time. When he left in 2000, the firm was still worth $2.0B and had $100mm of revenues.
Lesson 1): Speed wins. Be First. Be Fast.
Lesson 2): Focus is important. Making the incremental improvements from 80% to 90% and on to 100% of quality is hard…but worth it.
Takeaway: Key is to get BOTH sides of the brain working. Be creative and a dreamer, but bring that down to focus and analytics. Be methodical.
Lesson 3): PR vs PE ratio. Keep the news coming.
Lesson 4: At some point the “grown ups” need to come in to run the company.
Lifetime of the company goes from: Jungle, to Dirt Road, to the Highway. And you need different skill sets (and likely different people) at each stage.
Start up 3: UPromise
In another somewhat “irrational” decision, he left a very large sum of unvested stock options on the table to join a company. It had a very attractive valuation though and had a solid team that raised money with 7 people and 20 slides.
Lesson 1: Great People + Great Idea + Great Comps = Great Valuation (comps were trading at 100x revenue at the time)
UPromise ultimately became a $100 MM revenue company. If multiples stayed as high, it would have become a $10B company. In reality, it was still a nice deal with a $300 mm exit in 2006.
Lesson 1: Save TIME not money. (However, time the market. In a down market, take your time).
Lesson 2: Brand is powerful. Difficult to differentiate between “network effects” of something like UPromise, Ebay, and others, but perhaps the early Amazon where network effects were limited shows a pure “brand” power.
Lesson 3: Build a business using “other people’s money” in the sense that unlike NetFlix, which must use its own balance sheet to promote its brand, you want to find ways to get others to promote your brand.
Lesson 4: Founder transitions are crucial to consider. Bringing in an outside CEO is sometimes necessary but may rock the boat.
Patents don’t matter. People, team, and timing trump any piece paper claiming a patent.
Being Mission Driven from the beginning to the end is crucial.
Thoughts on Venture Capital:
Two typical on-ramps to being a venture capitalist:
1) Apprenticeship Model: Join out of school. Work your way up.
2) Entrepreneurship Model: Make VC’s money by being a successful entrepreneur. Get invited to join them.
Differences between Entrepreneurs and VC’s:
Entrepreneurs are very focused. Narrow and with deep expertise.
VC’s don’t really execute. They find opportunities and match them with people. A mile wide and an inch deep.
VC industry has changed dramatically since 1999 when there was about $40B of capital available. Today that number is closer to $250-300B.
This means there are more funds, with greater capital bases, making funding small deals uneconomical.
IDG Ventures (now Flybridge) saw this as an opportunity and was launched with a smaller fund to address the needs of smaller start-ups.
The dispersion in VC is massive – even higher than in private equity or mutual funds, which makes picking a great fund even more important for institutional investors. By staying focused, Flybridge can stay in the top tier.
Flybridge is focused on being a true service provider and having a high level of customer service to entrepreneurs. From my perspective this makes a ton of sense.
The reputation market for Venture Capital is highly efficient. Reputation is everything.
In general, the Venture Capital business has had an outsized impact on the world and the economy. Approximately 1,000 partners of venture capital firms have invested in companies that employ 10 million employees and represent 18% of the GDP.
Venture Capital and Entrepreneurship are about as American as it gets. Ben Franklin was one of the first great entrepreneurs and we have not stopped since.