Yearly Archives: 2007

When the CFO leaves…

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Sitting here at LAX, I read in this week’s Economist that George Reyes, CFO of Google will retire this week. Immediately, red flags arose everywhere in my brain.
A long time ago, I learned a valuable lesson which I believe to be true. Here it is:
When the CFO leaves a company, sell ALL your stock NOW.
My first encounter with this concept was when the CFO of Yahoo! left in mid-2000. At the time, all of us working there were still giddy (and incredibly naive) about Yahoo!’s prospects and that the stock price and all our fortunes would continue to grow unabated and unstoppable.
Boy were we wrong.
Smarter minds might have said that we could have read the signs, and that we should have been more realistic about the stock market and how high it could climb, and that the word “bubble” and its ability to “burst” should have been something we were watching for. Perhaps we could have crunched that data by ourselves, listened to the experts more carefully, and determined that maybe we should have gotten out before we lost everything…and then some.
In the midst of our giddiness, we saw our CFO leave the company and gave him a big party, wished him well in the creation of his foundation, and hoped that he could just play golf til the rest of his days.
And we all kept right on basking in our giddiness and our virtual fortunes and let it all ride. We let it all ride right down the drain in late 2001 when the market and Yahoo! stock crash landed big time.
That is, all of us except for the CFO who left and kept a huge chunk of the value of Yahoo! stock before it crashed.
Why would the CFO leaving be such a signal that it would be time to get out of a stock or not?
Here is why:
1. A CFO typically has tons of buddies in the financial world and has access to data, analyses, and information that you or I would never get hold of.
2. CFOs come from a career where all they do is think about money, how to make it, and how to keep it. Their analysis of the market is arguably in a much different place than those of us who don’t deal in money all day long. They are NOT going to haphazardly throw away money if they can help it and will bail at the first moment’s notice when they think they’ve topped out in an opportunity.
3. The letter “C” in their title means that have access to company information and analysis far more detailed and confidential than any of us can access. They can see if the company and/or the market is going sour long before you or me.
4. CFOs are master number crunchers. When it comes to money, they can do all this math in their heads far faster than we can with all the calculators and computers at our disposal. For sure, they will be able to calculate when their company and/or the market is going to level out or turn downward a lot faster than we can.
If a company’s prospects are flattening out or going downward, you can bet that the first person to take off and cash in his earnings will be the CFO. Staying on faith is highly doubtful; nothing personal, mate, but money is money and a money guy is not going to bet it on faith.
But if the company’s prospects are good, then why would a guy like the CFO leave?
So I hate making predictions but instead I’d like to offer up a hypothesis, with Google as a participant in this experiment. The hypothesis is, based on what I just posted here, that because the CFO just left from a company that has seen its stock go meteoric since IPO, Google’s prospects and growth have started to or will shortly flatten somewhat. This, in a market such as we live in, will basically trash the stock as the markets hate it when a company goes from super-growth to normal/consistent growth. Trashing the stock is something that CFOs can sense and that is why he is leaving in order to preserve his earnings in Google stock.
I wonder if my hypothesis is right? Let’s wait and see….!
P.S. To all my friends at Google who may be reading this post: I am sorry if I have such a dire outlook, but remember it’s only for Google stock, not the company. So don’t quit but SELL SELL SELL….

Investors and Entrepreneurs: Joining the Herd and Not Being Forgotten

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These last few weeks have been really hectic. For a while, it seemed like I wasn’t looking at any new deals whatsoever. I resigned myself to working on the companies I had signed up with but also could see that my work with them was starting to taper off in an expected fashion.
But then it changed. All of a sudden, a flurry of new opportunities came down and I found myself meeting with companies every week. It actually got fairly hectic, meeting up with entrepreneurs and actually going through some due diligence processes with a few companies. But one by one they dropped off my radar. As they dropped off my radar for a variety of reasons, some interesting observations came to light about the way startups and investors strategize with each other.
The Entrepreneurs’ Perspective
The most sought after entrepreneurs/startups get deluged by requests from angels to invest in them. Typically, they are also pursued by venture capitalists who also like what they see and want to participate. The availability of money to these entrepreneurs creates an situation where they can pick and choose the money they receive. I’ve seen them go in these directions:
1. They go directly for the big VC investment and skip angels altogether. Let’s face facts: raising money sucks. It’s time consuming, you get a lot of negativity from people who don’t believe in you, and you’d much rather be building something than begging for money. So why not skip all the nonsense and just take the big money and go back to building your business and hiring people you need.
2. They take the VC investment but only bring on some angels who are either high value or friends. Similar to 1., they get the big money but only bring on those people they like or those angels that can help them later.
3. They delay VC funding to push up their valuation, and only pick a handful from the crowd of angels wanting in. The most bold of entrepreneurs who are on to a good thing will press their advantage by not taking big money now, which could mean they have to give up more of their company at this point, and wait to build their business a bit more which raises valuation for later and, thus, gives them a larger advantage for not giving up so much of their company later in exchange for a large VC raise. They instead raise a smaller amount (ie. $500k – $1MM) which gives them the ability to run for enough time to build their business to a more valuable state.
4. They want angels who are active investors and can bring value to their company. More and more I speak to entrepreneurs who only want angels who can help them in their business versus just bringing money alone. It makes sense; angels who can help are more motivated to help because they have skin in the game. It does make for a tough environment for those angels with only money to give.
5. They are limiting the number of angels and/or investors. Managing a lot of investors can be troublesome to entrepreneurs. Simply cutting all the paperwork (ie. stock purchase agreements, stock certificates, etc.) can cost more money. Collecting the money can be tough for those angels who are dragging their heels in transferring the cash into your account. Dealing with nervous investors can be a draw on resources as you need to respond to their requests for information and calming their anxieties about whether or not you’re going to make money for them.
This all goes out the window for those entrepreneurs who don’t have something hot enough to attract lots of investors.
The Investors’ Perspective: Herd Mentality, Joining the Herd
As an investor, I want to get in on the great deals. Finding deals that are good but are hidden can be really tough. It’s more often that there is a common opinion about a startup and that everyone wants to get a piece of the action.
I try to do my own due diligence. I also try to form my own opinion about a startup. But I do find it difficult to ignore what others’ think about a company. Over these last few weeks, I’ve looked at bunch of deals where there was a large number of investors trying to get in. But I’ve somehow lost out on a number of them. Why was that? Some observations:
1. Herd mentality is inescapable. For some reason, when many people think you have a hot deal, then you tend to think so too. They must know something you don’t, or you bank on someone else’s expertise, or you just don’t have time to do all the due diligence yourself. Thus, I tend to look more seriously at deals with lots of interest, even when I tell myself I’m going to be disciplined enough to do all the due diligence on my own.
2. The investor herd piled in, wanting to invest into a startup. It’s a common scene around the valley. The hottest deals get shopped around the most popular and prominent angels who are all high value and high profile. They have lots of money and value to bear on a deal. But they also have their friends who come in on the deal. So a combination of being able to keep in an entrepreneur’s mindset and haivng the herd not forget about you, thus keeping you in the entrepreneur’s mindset, helps to get you into a deal…or not. I have not been really part of any investor herd before so it was literally impossible for me to stay in an entrepreneur’s list of investors as they get deluged by a huge number of people and can barely manage the flow of communication. I know I’ve been dropped off investor lists because of not being part of a herd.
3. Joining a herd became a worthy goal. As I thought about reasons why I missed out on deals over these last few weeks, I started thinking about how I could join a herd. I don’t like to bill myself as a guy who can do lots of investor intros now, but knew I could get there in a few years as I worked with more and more people. But now I think about the networking aspect more, and using entrepreneurs to introduce me to some prominent angels and VCs around the valley. Slowly but surely, I am starting to not be forgotten amongst the investor herds, which is a good thing. So far, I think a combination of personality and value has helped me stay in the mindshare of herds. I meet people and show them that I’m a cool guy and not a wonk, and that my experience can actually help a company that we may all be investing in, and things seem to be happening.
4. I am trying to standout in a herd. If you demonstrate that you can bring high value to the company, staying in the list of investors for a given entrepreneur becomes easy. I can sometimes stay in a deal where other investors with lesser or no value to a company beyond just cash get dropped. I have found a great variance in entrepreneurs in whether or not they find value in what I could bring to their companies. If entrepreneurs don’t find value in what I bring, then the probability becomes much greater that I will get dropped from their investor lists.
5. I need to constantly follow-up on deals I want in on. In the past, I’ve relied on entrepreneurs to contact me when they’re ready to talk investing. However, a number of them have dropped me simply because I didn’t do my part to stay in their mindshare. Shouting loud via email or phone works well and helps a lot.
Lots to keep track of in the ecosystem of investors and entrepreneurs in order to not be forgotten amongst the herds of investors roaming Silicon Valley.

A Bit of Yahoo! History: Crocodile Hunter Visits Yahoo!

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This was just posted onto the Yahoo! Alumni group in Facebook. For those of you who don’t feel like joining the Yahoo! Alumni group to watch this video, here it is. This video was created for a Production Conference and was shown at dinner time. Later, it became the main new employee video for many years afterward.

Those were the good ol’ days…(sigh).
NOTE: Sorry about the other player. I uploaded to Videoegg and didn’t realize until later that Videoegg only allows 5 minutes on the video. I’ve uploaded it to my account now but it seems that my server can be slow to load the video. But at least you can watch the full version now.

The Three Faces of My Schizophrenia

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In working as advisor and angel investor to startups, I find that I can be schizophrenic at times. Three faces I wear, when dealing with entrepeneurs:
INVESTOR
Characterized by:
1. Paranoia about losing my money.
2. Saying “sell the company”; starts when my return crosses about 5x my investment, and becomes a yell when my investment hits 10x.
3. Motivated by what my terms say for Notes.
4. Recommending courses of action which generate a lot of cash for the company, which increases value of the company and thus my investment.
ADVISOR
Characterized by:
1. Recommending courses of action which build the company.
2. Seeking the best ways to create product and do business.
3. Balanced view towards generating revenue in the company versus building product, which can be at odds if, for example, we’re talking about advertising and internet users.
4. Might recommend against selling the company given what I have seen when bigger companies absorb smaller companies.
5. Seeks the best employees and resources to do the job. Pushes those resources to build the company bigger and faster to exclusion of other things like sleep.
DAVE SHEN HUMAN BEING
Characterized by:
1. Tends towards recommending humanistic approach to treating employees.
2. Wants to grow employees, sees them as learning over time, nuturing them to be better.
3. Coaches people to balance life, work, and family. Asks what makes people happy and what keeps them motivated, encourages people to find this in the company.
If you’ve been in the startup game for a while, you’ll know that these three faces I wear are often at odds with each other and conflict in goals. For example, how can I counsel people to balance work and life and go home at 5pm to make time for family when as advisor, I want these guys to work 24/7 because the startup needs it, and as investor, I want them to work so freakin’ hard so my money isn’t wasted?
When I start working with someone, one of the first things I tell people is that I can be schizophrenic. They always laugh and sometimes I can see that they don’t get what I mean; the more experienced ones snicker and thank me for being upfront!
It can disconcerting to have a guy like me advising you to do one thing and then tell you to do something else in opposition to what I just said a while ago. It’s because I do wear many different hats, and the forces within me struggle every day to push/pull me in several directions. It’s a challenge to find a balanced answer, and I like the challenge of finding a solution that satisfies all of my three “identities”. I just hope I do not drive any of my entrepreneurs nuts by my triple schizophrenic state…

Ycombinator Demo Day: Summer Class in Mountain View

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I went to my first Ycombinator Demo Day this last Thursday. I wasn’t sure what to expect, except for the fact that a whole bunch of startups created by near-college grads would be presenting their projects. I definitely wasn’t expecting any well-thought out business plans but was hoping to see some really cool stuff.
After the event, much has been written about the companies themselves, and you can read about them at VentureBeat: The Ycombinator List and at TechCrunch: Ycombinator Demo Day: The Summer Class. There has been enough coverage about the companies, so rather than do that I wanted to write about something else regarding the Demo Day.
Usually when you sit through pitches, they can be relatively dry. You see lots of graphs and how big the market opportunity is and it’s usually a more serious and professional presentation.
For Demo Day, I was pleasantly surprised that each presentation had a healthy dose of humor cleverly injected. I found myself chuckling at funny demos, laughing at jokes made at competitors’ expense, and smiling to see them laughing at themselves. During one of the breaks between presentations, I stopped to say hi to Paul Graham (co-founder of Ycombinator) and asked him about whether or not he encouraged humor to be part of the presentations. He said they were actually more humorous during the dry-runs and that he actually pulled them back from being too over the top. I shudder to think what they were like before he pulled them back…!
Sitting through 19 demos for 3+ hours could have been a truly grueling affair. I am glad that the young graduates of this summer’s Ycombinator class threw some humor into their demos and turning a potentially boring, lifeless afternoon into a more lively event.

“The Business Opportunity” and the Epiphany

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I was just recommended this excellent book called The Four Steps to the Epiphany by Steven Blank. It describes a particular problem I’ve encountered with some of the startups I’ve met with.
Some of the entrepreneurs I’ve met with lead with the business opportunity. They say that the market is this big. They have charts and research to back that up. They show millions upon millions, if not billions of dollars spent in this market alone.
Then they present this product that fits into this market. They go on to say that we can attack this market opportunity by building a product to gather all these eyeballs, users, consumers, whatever and then sell this market to advertisers and marketers.
It always worries me when they lead with business opportunity.
Most likely what I discover after is:
1. The entrepreneur is not a model customer of this market. They have come upon this opportunity through research.
2. The entrepreneur has researched business opportunity but has not researched what customers want. While it may be true that marketers spend millions and billions of dollars trying to reach these consumers, the entrepreneur has not asked consumers whether they want the product he is building.
3. I often get a defensive response when I tell them this is an issue.
Which brings me back to The Four Steps to the Epiphany. Author, Steve Blank describes the Customer Development Model, which is an iterative method of figuring out what customers actually want, versus driving a business with financial projections and product development and assumptions that the product will be accepted by consumers. He argues that every successful startup runs by this model, and that running it by traditional product development models brings a huge amount of risk into whether the business will be successful or not.
Reading about the Customer Development Model brought me back to those meetings with entrepreneurs who are trying to build companies using traditional methods. Those meetings left me feeling uncomfortable and ultimately, following my instinct on these matters, I would often let the opportunity go. I am glad to be reading this book, because now it frames my uncomfortable feelings into a way of articulating them better.
As an angel investor, I want to reduce risk whenever possible. I find that when entrepreneurs resonate with the market and are building a product that they are target markets for, then it minimizes risk. This also means that you get extra passion for the product because the entrepreneur wants the product for himself, and you may reduce the need for external research to figure out what customers want, which reduces cost and time which could be used in building the product.
That’s not to say that someone couldn’t be successful if they don’t fully or completely resonate with the product and are the target market. Success is a probability game and when entrepreneurs are themselves the target market and they resonate with the customers, then you stack the odds in your favor by a great deal.

Allocation of Shares at Company Formation

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A new entrepreneur recently asked me about how to allocate shares at the company formation stage. I asked around and here are some highlights on what I found:
In talking with my lawyer and some entrepreneurs, you could start with 10MM total but it’s not uncommon to create more upon formation, like 20 or 30MM. The reason for doing this is to not have to file additional paperwork (and incur legal fees) in creating more shares when you need them.
Also, you don’t usually allocate the whole bunch of shares at the outset. Note that the existence of shares does not mean ownership, but only those you allocate. So if you have 3 founders and each has 1MM shares out of a total pool of unallocated 30MM shares, you have officially created 3MM shares but still hold 27MM in reserve. Thus, the 3 people officially own the company at 33% a piece; the additional 27MM does not come into play until they get allocated.
As for allocating a bunch for additional employees, people have allocated about 10-20% of the total for employees and the options pool. As for sheer number, that could be upwards of 4MM set aside for employees, advisors, and board of directors, which is pretty large for an early stage company.
So if you go with 10MM total shares and you want 20% of total for the options/employee pool and let’s say you have 2 founders who want to own the company at 50/50, then you would have 10 MM shares allocated, 4 MM goes to both founders for 50/50 ownership split at 8MM shares total, and then the rest at 2MM (20%) reserved for hiring key people.
FYI – advisors jumping in at this stage typically get .1% to 1 or even 2-3% as options depending on their level of involvement.
Early employees coming in really early stage could get multiple-100s of thousands of options, which rachets down dramatically as the product gets built and time goes on. Certainly this balances with whether or not they get market rate salary or not.
Still, the message is “don’t be greedy”. Incent your employees to get the job done and reward them. Don’t try to hold on to too much or else you may run into trouble later. Same goes for the financing stage. Be prepared to give up part of the company for monies received, but don’t try to hold on to too much or else you may never get funded. On the flip side, be realistic and don’t give away the farm, which could land you in trouble the other way.

Day 12: iPhone Dies…and Lives Again!

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ACK! In an attempt to get my iPhone syncing with both my Mac and PC, I tried a restore of the software which hosed my iPhone. Ugh! I set it updating over night and then in the morning, it’s just sitting there in the dock, locked up. I try a few things and then the screen shuts off…seemingly permanently.
I hold back the tears welling up in my eyes and pack it up, determined to exchange it for one that worked.
I walk into the Apple Store on University Ave in Palo Alto and tell the guy that my iPhone is way dead. He looks skeptical and we walk to the Genius Bar desk where he tells me about an IMPORTANT UNDOCUMENTED function called REBOOT. You press both the round “return to Main menu” button and the top small Wake/Sleep button together for a few seconds, and the thing reboots itself. Thankfully, this brings it out of its locked-up/dead state!
I boot up my PC (which I have with me) and then sync my iPhone with it, restoring the software and IT LIVES AGAIN!
It’s beyond me why REBOOT isn’t in the user manual. But for now, I am glad to have my iPhone up and working again. Just give me my MMS please and everything will be PERFECTO.

Day 11: iPhone Adventure Continues…

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Living with my iPhone has been a real joy. I think I like about 80-90% of it, but it is not quite there to make me toss my SLVR and Treo 680 just yet.
Some more discoveries:
1. According to the message boards, it seems that others have gotten music/video syncing on one machine and syncing calendar/contacts on a PC. I still haven’t gotten this to work. More experimentation required…
2. Where is copy/cut and paste? Geez.
3. I need arrow keys on the keyboard! Trying to make edits by moving the cursor around with your finger is maddening.
4. Personally I hate the auto-complete. It’s wrong a lot of the time and I have to teach myself to look at it constantly to tell it not to insert a word when I hit space.
5. I LOVE THE AUTO SWITCH FROM WIFI TO THE AT&T NETWORK. When I go in my house, the WIFI automatically connects. When I walk into a Starbucks, I auto-connect to T-Mobile. COOL!
6. Browsing on Safari is so cool. It really makes things easier.
7. Need Notes syncing to Outlook. I don’t understand why this wasn’t built in. So strange.
8. Getting faster on the keyboard.
9. I tried out a few widgets. It’s ok for now, but definitely a problem when offline. Also, loading widgets over the EDGE network is totally slow. Forget any heavy AJAX site like Meebo.
10. Definitely need dedicated iPhone apps. Safari based widgets works for some things, but nothing beats dedicated apps on the device.
11. Need MMS!!!! Emailing photos just doesn’t cut it.
I can’t wait for software updates to make this baby work better!

You Asked Me About Yahoo!…

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In the last few weeks, I’ve been asked what I think of the recent events at Yahoo!. As an once insider, people think I’ve got some inside knowledge and insight into whether the changes are good or not. To be honest, I do still have some connections with Yahoos, but they get more tenuous each passing day. Still, it’s been interesting polling both insiders and outsiders about Yahoo! and its future.
Since the announcement of Jerry Yang becoming CEO (and Sue Decker becoming President) and Terry Semel leaving, I have thought a lot about what this means for Yahoo!. I also went around and talked to ex-Yahoos and current Yahoos about what they think. It’s been an interesting experience hearing what they’ve had to say.
I have found an amazingly wide range of opinions but there seem to be some trends:
1. Those who just joined Yahoo seem more optimistic than those that have been there for a while. Some guesses as to why this is so:
a. They joined at the current state of affairs, so they must be bullish on the company or else why would they have joined up?
b. They must be bullish or else they would quit. This could be real or self-delusional. Who knows. But they must make themselves bullish or else they would lose all psych in their job, which they arrived at not too long ago.
2. Veterans seem to have mixed opinions. Why:
a. They have more experience in the company and know what works and what doesn’t. They’ve been through change before at Yahoo and can be both optimistic and pessimistic.
b. It seems that this is highly dependent on position and location in the company (see next item).
3. Higher level employees unanimously are bullish on the company. This is not strange; they have signed on to be an exec in the new regime and have to like it. Otherwise, they would leave. And politically they can’t express any fears; it would scare the troops. So it’s been hard to pin down what they REALLY think about the new Yahoo.
4. Pockets of bliss exist. In many small, local areas, people are doing really great work and getting lots done. The opposite is also true, that there are also many areas of despair as well. These folks cite all the typical stuff, like growing politics, impossible to get stuff done, no direction from leadership, etc. etc.
What do I think about Jerry being CEO?
I totally think he should have been CEO a long time ago.
I think that in order for someone to run a company effectively, you must have instinctual knowledge about the industry. We would not put a DOW chemical exec in charge of GM. Likewise, for someone to run an Internet company, you must have some great resonance with the Internet and are in tune with what people want and like.
Who out there could qualify for this? Larry and Sergei are two. Filo and Jerry are another two. I actually think Dan Rosensweig could have done it. He used to run ZDNet and thus had a lot of knowledge about the Internet as well as executive experience. Well, we’re not going to get Larry or Sergei, and Dave Filo is still working on engineering issues. So who is left. Jerry Yang.
Can he turn the ship around?
While I think Jerry is the right person, I also think he has an enormous task before him. Think of trying to turn the TItanic by pushing on it with your hands. In certain crazy and inventive situations, I bet you could actually turn the Titanic that way, ie. if you were Superman, you could do it – this is sort of like answering one of those famous interview questions in a Microsoft interview. So I believe that turning the Yahoo ship can be done, but it remains to be seen whether or not there is so much inertia and momentum that it resists turning fast enough.
One possible consequence of turning the Yahoo ship will be some down revenue quarters over the next year, potentially two years, as restructuring plans take hold, removal of waste, taking down sites that shouldn’t be worked on, etc. etc. However, it will be amazing if revenue can be kept growing in the midst of such change.
Only time will tell. My money is definitely on Jerry Yang to bring Yahoo into its next stage of evolution.