Dinner With Tim O'Reilly At 27,000 Feet And Notes From Foo East

By Dharmesh Shah on May 3, 2010

I’m writing this article on a flight from Boston to San Francisco.  In a weird, serendepitous twist of fate, I happen to be sitting right next to Tim O’Reilly on the flight.  So yes, I really did get to have dinner with Tim O’Reilly at 27,000 feet. foo east

For those readers that are used to pithy, pointed, helpful articles along the lines of “Startup Marketing: Tips From The Trenches”, this may not be the article for you.  This is going to be more of a stream of consciousness thing where I make an (undoubtedly ineffective) attempt to capture some of the things I’ve learned from being on the road the past few weeks at various events and gatherings and having the undeserved opportunity to talk to some really smart people.  You need to prepare yourself because I don’t have a particulaly strong knack for narrative (but I’m good at subtlle alliteration, as the more astute of you may have noticed in this sentence).  This is going to be a bit wordy.  Fasten your seatbelts.  (My apologies to Jason Fried, who is brilliantly brief and whose head would explode if he read this article.  Sorry, Jason, I’m just not that good yet).

So, lets get started.  I’m going to take a LIFO (Last In, First Out for those that are not CPAs or didn’t take remedial accounting in college).  Or, for those that are not into accounting, but watched the movie “Memento”, this is kind of like that, only different. 

So, lets talk about Tim O’Reilly.  He’s sitting right next to me on the plane (working away furiously himself on his laptop and I think subconsciously grateful that I’m such a good seatmate because I wouldn’t dream of being the obnoxious fellow passenger that has nothing important to do and as such can’t help start-up inane small talk).  At first, I didn’t know/realize that it was Tim sitting next to me.  What sparked the conversation was that in another weird twist of coincidence, I am reading the latest issue of Inc. Magazine that just happens to feature Tim on the front cover.  But, that’s not really that important (other than being freakily weird).  What I want to talk about instead is my experience from attending part of the recent “Foo Camp East” (#fooeast for those that are tweeting) in Cambridge yesterday.  So, lets rewind…

Late yesterday afternoon, I took a small, 9–person plane from Nantucket Island (ACK) to Boston (BOS).  I was on Nantucket Island to attend the simply named “Nantucket Conference” organized in part by the ever clueful Scott Kirsner.  More on the Nantucket thing later.  It was a beautiful day in Nantucket.  Almost perfect.  The only reason it wasn’t perfect is that I’m not sure what exactly perfect weather looks like, but in my book, this was pretty damned close for many people.  But, I had to leave that perfect weather and fly back with the lovely @kirstennet (my wife) who was inexplicably understanding about this neet to fly home.  Here’s the (literal) transcript of our text messaging that afternoon (I’m at Foo Camp, she’s enjoying the beautiful weather in Nantucket):

Me (9:27 a.m., from conference room): Good morning sweetie.  I’d like to fly out at 3 pm today so I can attend foo camp.  Do you want to stay here an extra day?  Skies are calm for flying today.

Kirsten (10:11 a.m.):  I’ll pack and come with you.

So, we hopped on a plane and in the taxi from Boston’s Logan airport, I’m like:  “You know, I’m already kind of late for this foo camp thing, would you mind if we just stopped in Cambridge and you dropped me off for foo camp and you go on home with our luggage without me?”  She’s like “sure, no problem” so that’s what we did, and so I went to Foo Camp.  (Note to self:  There are many reasons I love my wife, this kind of understanding is but one).

Foo Camp was a little overwhelming at first.  It might have been because I was kind of jumping in mid-stream (the event started the day before) but the organization was great, there was someone at the registration desk to greet me, give me a quick lay of the land and a free t-shirt.  Foo is mostly an “unconference” (the sessions are constructed “on the fly” and the schedule is kept on a white board and people show up and talk about whatever they’re interested in).  I mostly like that concept, with the one negative being that it’s really hard to tell from some of the topic descriptions what’s actually going to be interesting.  But, it works in a “life is a box of chocolates” kind of way.  Of the sessions I attended, my absolute favorite was “Privacy And Behavorial Economics” conducted by a professor from Carnegie Mellon who had sone some recent research to dig into how people think about privacy (particularly online privacy) and why many of the things that online companies are doing today are diabolically clever. 

Here are a few quick take-aways from that session:

1. People make imperfect decisions because not all the information needed for that rational decision is available to them.

2. Even if they had access to all the information needed for optimal decisions, they often don’t have the “computational power” to process all that information (i.e. just because you have access to a bunch of data, doesn’t mean you can absorb it and factor that into your thinking).

3. The ability to “control” one’s privacy (like Facebook does with it’s fairly granular share X with Y feature) actually causes people to irrationally share more information than they would have otherwise. 

All of these were highlighted in the presentaiton with some brilliant “experiments” that had been conducted to scientifically study this overall phenomenon.  On a side note:  There was a sociologist in the room and he was continuously dubious of all of the studies and kept bringing up the “imperfection” of the experiments.  The presenter did an outstanding job of making the argument that no experiments are “perfect” and that this imperfection does not, by definition, make the experiments useless.  The “reductionist” approach tries to simplify complex systems and control for whatever variables can be pragmatically controlled to try and gain some sort of understanding.  He did that, he was very, very clufeul and I enjoyed the presentation immensely.  My big takeaway was that we all need to think really hard about privacy as we try and colllectively figure out what the “right” balance is in this “what should be public, what should be private, and who gets to decide” debate.

Another session I sat in on was on “Open Platforms: Apple vs. Twitter vs. Facebook”.  Brad Burnham (from Union Square Ventures) led the discussion and Tim O’Reilly was there too.  It was a big topic (particularly given the recent news).  I don’t have notes on a lot of the other stuff that was said, but I’ll share my thoughts (because hey, it’s my article:  Apple is mostly a closed company.  They’ve always been that.  It’s their strategy.  They are closed because they believe that to bring a new technology to market (like the iPhone or iPad), the key is to “control” the entire experience and solve for simplicity and ease-of-use.  Steve Jobs like to control the edges so that he can create a brilliant product — which he is a genius at.  That’s Apple’s thing.  No big surprises there.  Over time, as the market gets more comfortable, it starts valuing price/performance/third-party-stuff much more, and we move towards a more “open” system where not everything is vertically integrated.  Twitter is mostly open — and has been since its inception.  They’ve behaved like a platform provider (or even a utility provider).  Some of the recent developments has created some tension within their developer ecosystem, but as long as they don’t do really stupid things (like making some functionality only available to their internal apps), they should be OK. 

The really big topic to talk about are the recent announcements from Facebook.  There’s big stuff afoot at Facebook.  The two really big announcements recently are:  1) The lifting of the restriction on storing data retrieved through the API (effectively meaning, you can have a partial “copy” of the Facebook information stored in your own database.  2) The ability to convert any web page into a page that behaves like a Facebook Fan Page.  This page then can be “liked” — and most interestingly, the people that “liked” the page can later be sent messages (just as if they were fans of an internal fan page).  Heady stuff.  I’ll be playing with all of this once I get through some of this conference and speaking stuff this week. 

Foo Camp (East) was held at the Microsoft New England Research and Development center (NERD) an exceptionally nice facility in Cambridge, MA (a block from the current HubSpot offices) that Microsoft has been kind enough to make available for all manner of tech-related events.  Hats off to Microsoft for contributing their facilities to the community so readily. 

That evening, there were a series of “Ignite” presentations.  These are (exactly) 5 minute presentations, with 15 slides, where the slides auto-advance every 15 seconds.  It’s an exercise in discipline, constraint, creativity and timing.  It looks like it would be really hard.  I’d definitely suck at it.  Several of the presentations were really good.  One of my favorites was Hilary Mason’s presentation “How To Relace Yourself With A Very Small Shell Script V2”.  Hilary works for bit.ly now and she is awesome.  Tactical tip for Ignite presenters:  I saw one of the presenters had a sliding “15–second clock” on the bottom of each slide.  That worked really well for her, and the audience. 

So, later that night at Foo Camp, I got pulled into a game of “Werewolf” by the lovely Laura Fitton (aka @pistachio) who is a big ‘ole bundle of awesome.  (I’d say that even if I were not involved in her company OneForty, which I am).  I’d never played the game before, but Laura was kind enough to explain the basics to me.  Long story short, I ended up playing the game until around 2:00 a.m. in the morning at which point Danah Boyd, our fantastic “moderator” had to kick us out from the Microsoft facility so she (and others) could get some sleep that night.  And, as long as I’m in name-dropping mode, Anil Dash and Gina Trapani (of LifeHacker.com fame) were there playing all night too.  For the record, don’t ever play poker with Anil.  He’s bad-assed.  But, Gina, you rock and we totally nailed it in those last two games.  It was diabolically brilliant game play.

But, I digress.  So, I was at Foo Camp, and the second “O” stands for O’Reilly and that’s who I’m still sitting next to (thank god I type fast, because I’ve written a lot, and still have an hour and a half before landing).  Tim’s one of the very few successful people that I aspire to be more like.  Don’t get me wrong, I respect a whole bunch of great people who have accomplished more than I can ever hope to, but Tim is in a special category.  He’s got that rare mix of super-smart, hyper-entrepreneurial, highly-successful and, most importantly, cares deeply about his time on this planet and what he can do with it.  I respect that.  I also respect that he exhibits common human courtesy despite his success — which I’ve gotten to experience first-hand, sitting next to him.  It’s hard to respect people that are disrepectufl to others, and Tim is a nice guy even after having a brutally long day/week.  In any case, second to this “generally nice guy” part, what I like most about Tim is that he’s a true thinker.  He can move between various levels of abstraction based on the situation and the need.  He likes patterns.  I like people that like to study patterns.  He’s also been kind enough to meet with my co-founder and I so that we can get his advice and thinking on HubSpot.

Whew!  When I first started this, I thought I was going to write about things from Foo Camp (East) and the Nantucket Conference.  But, this article is already way over the limit in terms of normal reader attention-span, so I think I’m going to wrap it up and save the other stuff for a different day.  I’ve got a ton of great notes from the Nantucket Conference which I’ll try to post later this week.  And I’ll work on being more concise next time too.

I’d like to close with a question: If you could manifest the traits of a successful tech entrepreneur, who it would be?  (I’m not talking about the actual success, but the things that you belive made them successful that you’d like to have more of yourself)

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5 Tips On VC Alignment: Discuss The Exit Before You Enter

By Dharmesh Shah on April 29, 2010

The following is a guest post from Jeff Bussgang.  Jeff is a serial entrepreneur and currently a general partner at Flybridge Capital Partners, a Boston-area early-stage venture capital firm.  Jeff is also the author of the recently released book “Mastering The VC Game”.

One of the hardest things about venture-backed start-ups is achieving alignment.  When there is alignment between entrepreneurs and VCs, all collective energies are directed towards the magic of building an amazing, world-beating start-up from scratch.  When the entrepreneur and VC are out of alignment, the likelihood of success plummets and self-inflicting wounds, rather than market- or competition-related issues, tend to dominate the agenda.business boxing onstartups

In researching my book on entrepreneurship and VC, Mastering the VC Game, the issue of alignment came up again and again from both sides of the table.  Here are some of the best practices I heard from the entrepreneurs and VCs I interviewed:

1. Be explicit from the start.  Naturally, there will be pockets of misalignment – VCs and entrepreneurs answer to different masters and sometimes have different structural objectives.  Making explicit these pockets of misalignment and talking them through openly is often even more critical than the particulars of, say, the deal terms in a financing.  One useful technique for clarifying the various scenarios of misalignment in financings and M&A outcomes is to maintain a simple spreadsheet with the entrepreneur-VC split laid out under different exit outcomes. This distribution of proceeds in the event of a sale is often called the “waterfall,” evoking an image of sale proceeds cascading like a river to various shareholders.  I recommend entrepreneurs be clear at all times and at every financing about what the waterfall calculations look like for each of the preferred and common shareholders.

2. Seek first to understand, then be understood.  I borrowed this one from Steven Covey.  It’s important that entrepreneurs understand the VC’s perspective in all situation and through what lens they are looking at things. For example, if everything goes well, most of the control-oriented provisions in a term sheet never come into play—it’s all discussion, earnest debate, and aligned decisions. But when things go poorly and there are the inevitable disagreements, the VC is often in the driver’s seat to make major decisions. Only in rare circumstances can the entrepreneur retain full control of major decisions after they take VC financing.  Therefore, entrepreneurs need to invest the time and energy to understand how VCs are compensated, motivated and what the particular interpersonal dynamics of their board member are within their partnership.  For example, how much carried interest does their VC board member have in their respective partnership compared to the other partners?  VCs always want to know how the equity is split amongst founders.  Turnabout is fair play.

3. Don’t take it personally.  Zynga founder and CEO Mark Pincus put it very well to me when he said, “I tell entrepreneurs:  don't be a victim. It doesn't matter whether you like the venture capitalists or don’t like them, really.  Structurally, they have areas of conflict and areas of overlap with you.  Depending on the way things go, there's a high likelihood that you're going to run into conflict with them at some point, whether they're your friends or not. And what defines great companies and what defines great venture capitalists and great entrepreneurs is not whether or not you run into those conflicts, but it's how you navigate around them.”  The key is to de-personalize this and simply understand what is the job of a venture capitalist and what are their levers.  Mark voiced every entrepreneurs fear, “All that we feel as an entrepreneur is, ‘They're trying to get control of my company. They want to mettle. They want to second-guess me when things go bad and ultimately fire and replace me.’” It’s natural for those issues to come up. So talk about them, as dispassionately as you can.

4. Discuss the exit before you enter.  Before you accept a VC’s money, make sure you are on the same page about your financial objectives and what defines success in terms of ultimate outcomes.  If you don’t see eye to eye on the exit criteria and framework in advance, don’t bother entering into business together.  Some VCs, particularly those with smaller funds, like you to raise less money and operate in a more capital-efficient fashion.  Others, particularly those with larger funds, will push you to go for the bigger outcome.  The nightmare scenario arises when an entrepreneur may be thrilled with a $100 million exit, but the VC doesn’t feel it’s “good enough” and blocks the transaction to play for a bigger win. The VC is swinging for the fences and has many chances in their portfolio to generate enough returns to ensure success for their fund, while the entrepreneur may feel this is their one shot and being a multimillionaire is good enough.  Fred Wilson tells a great story I include in the book about a team of entrepreneurs getting pressure from their spouses to take the $100 million offer and cash out.  Hard to argue with your spouse that it’s worth doubling down on your start-up when paying down the mortgage and putting enough money to pay for college is priority #1!

5. Communicate, communicate, communicate – no surprises. In trying to ensure VC-entrepreneur alignment, nothing helps like clear, transparent, high frequency communication.  And nothing hurts like a lack of transparency.  “No secrets. No surprises,” Dave Balter CEO/founder of BzzAgent explained. “I heard that early as a CEO.  If something new is going to come up in a board meeting that’s not good, put the calls out early to the directors. ‘Here’s what’s going on, here’s why. I want you to think about it. Help me.’ So when we get in the board meeting, they don’t say, ‘What are you talking about?’”  I had one situation where a CEO revealed to me that his technical co-founder was moving to Spain for personal reasons right in the final stages of a new funding process. He was nervous about telling me, but did it in an honest and open way as soon as he found out. His candor was compelling to me, and his plan for recovery was pragmatic and thoughtful, so we still funded the company.

To be successful partners in business-building, entrepreneurs and VCs have to trust each other to be open about their motivations. In the case of the entrepreneur, they may be trying to protect their position of power at the expense of shareholder value. In the case of the VCs, they may be trying to achieve gains on behalf of their limited partners at the expense of the other company shareholders. If entrepreneurs and VCs suspect that the hidden motivations of the other are dominating their behavior and their decision making, they will lose trust in their advice and counsel. That’s when the soap opera stories begin.

In the end, entrepreneurs need to raise the right amount of capital for their business, under terms they can live with (and can achieve under the circumstances) from VCs with whom they have great chemistry and who they believe will be good business partners for the long, hard journey. It’s difficult enough to build a large, valuable company from scratch. Imagine if you get some key decisions wrong and start off with the wind in your face.

But the right decisions and the right VCs put you in a position with the wind at your back, allowing you to focus on all the tough challenges of building a business and creating value in your start-up.

Learn more about Mastering the VC Game at www.jeffbussgang.com.  You can follow Jeff on Twitter @bussgang.

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