Venture capitalists at work how VCs identify and build billion dollar successes

For your convenience Apress has placed some of the front matter material after the index Please use the Bookmarks and Contents at a Glance links to access them Contents Foreword by Gus Tai .vii Foreword by George Zachary ix About the Authors xi Acknowledgments xiii Introduction xvii Chapter 1: Roelof Botha, Sequoia Capital: YouTube, Xoom, Green Dot, Dropbox, AdMob Chapter 2: Mike Maples, FLOODGATE Fund: Twitter, Chegg, Digg, Demandforce, ngmoco:), SolarWinds, ModCloth 11 Chapter 3: George Zachary, Charles River Ventures: Twitter, Yammer, Millennial Media, Jambool, Scribd, Metaplace 23 Chapter 4: Sean Dalton, Highland Capital Partners: Starent Networks, Altiga Networks, Telica, PA Semi 39 Chapter 5: Alex Mehr, Zoosk 55 Chapter 6: Howard Morgan, Idealab: Overture/GoTo, Citysearch, eToys, Snap; First Round Capital: Mint, myYearbook 75 Chapter 7: Tim Draper, DFJ: Baidu, Skype, Overture, Hotmail, Parametric Technologies, Focus Media, AdMob 91 Chapter 8: Osman Rashid, Chegg 101 Chapter 9: Harry Weller, NEA: Groupon, Opower 115 Chapter 10: David Cowan, Bessemer Venture Partners: LinkedIn, Smule, Zoosk 133 Chapter 11: Michael Birch, Bebo, Birthday Alarm .149 Chapter 12: Mitchell Kertzman, Hummer Winblad Venture Partners 165 Chapter 13: Scott Sandell, NEA: Salesforce, WebEx, Bloom Energy 177 Chapter 14: Gus Tai, Trinity Ventures: Blue Nile, Photobucket, Modulus, zulily, Trion Worlds 191 v Chapter 15: Steven Dietz, GRP Partners: DealerTrack, TrueCar, Bill Me Later, Koral, UGO Entertainment 209 Chapter 16: Paul Scanlan, MobiTV 219 Chapter 17: Ann Winblad, Hummer Winblad Venture Partners: Hyperion, The Knot, Dean & Deluca, Net Perceptions 237 Chapter 18: Jim Goetz, Sequoia Capital: AdMob 253 Chapter 19: Roger Lee, Battery Ventures: Groupon, Angie’s List, TrialPay 259 Chapter 20: Ken Howery, Founders Fund: PayPal, Facebook, SpaceX, ZocDoc 275 Chapter 21: Alfred Lin, Sequoia Capital: Zappos 289 Chapter 22: Kevin Hartz, Xoom, Eventbrite 301 Chapter 23: Eric Hippeau, Lerer Ventures; SoftBank Capital: The Huffington Post, Yahoo!, Danger 315 Chapter 24: David Lee, SV Angel: Twitter, Foursquare, Flipboard, Dropbox, AirBnB 327 Chapter 25: Ted Alexander, Mission Ventures: MaxLinear, RockeTalk, Enevate 337 Chapter 26: Robert Kibble, Mission Ventures: Greenplum, Shopzilla, Sandpiper Networks 353 Chapter 27: Rajiv Laroia, Flarion Technologies 365 Chapter 28: Jim Boettcher and Kevin McQuillan, Focus Ventures: PCH International, Starent, Pure Digital, PA Semi, Aruba Networks, Financial Engines, Centrality, DATAllegro 379 Chapter 29: Mike Hodges, ATA Ventures: Tellium, Zoosk, Biometric Imaging 393 Chapter 30: Alan Patricof, Greycroft Partners: Apple, AOL, Office Depot, Audible, The Huffington Post 409 Chapter 31: Ben Elowitz, Blue Nile, Wetpaint 419 Chapter 32: Vish Mishra, Clearstone Venture Partners: PayPal, Overture, Cetas, Mimosa, Ankeena, Kazeon 429 Chapter 33: Rich Wong, Accel Partners: Angry Birds, Atlassian, AdMob, 3LM 437 Chapter 34: Randy Komisar, Kleiner Perkins Caufield & Byers: LucasArts, WebTV, TiVO, Pinger, Transphorm 443 Chapter 35: Peter Wagner, Accel Partners: Fusion-io, Opower, ArrowPoint Communications, Riverbed Technology, Redback Networks 459 Index vi 471 Introduction For years, this question has played in our minds: why some start-ups defy all odds and become multibillion-dollar successes while many others fail? Is this purely a stroke of luck or is there a science behind the success? If so, what are the common characteristics among successful start-ups and entrepreneurs? To find answers to these questions, we went straight to the source and asked the venture capital investors who were part of some of the most notable successes of our time In this book, you will hear leading start-up investment practitioners discuss, in their own words, how they identify promising ideas, markets, products and entrepreneurs, and how they helped build game-changing companies We explored with them the lessons learned from not only the successes, but also their failures, to identify the factors that separate the two groups and also to draw the common patterns Finally, we asked them what advice they would give to entrepreneurs aspiring to build the next Google, Facebook, Groupon, or Twitter To provide you with a 360-degree view of how to build successful start-ups, we have included interviews with several phenomenal entrepreneurs and exceptional start-up operators We explored with them the end-to-end journey from formation to exit and discussed the most common operating challenges along the way, and how they tackled them As you’ll read in the pages to come, many interesting revelations and patterns emerged One of the most surprising revelations was that many successful companies arose out of non-consensus, unconventional, and in fact contrarian ideas Most people didn’t think those ideas would succeed at all, let alone become multibillion-dollar companies In each of these cases, the entrepreneurs had a very strong intuition and access to asymmetric information based on their predisposition toward, and early exposure to, a potentially huge untapped or emerging market opportunity Groupon, Twitter, and Facebook are great examples of that Given the general market disbelief, these companies enjoyed very little competition until they broke off the chart On the other xvii hand, the riskiest start-up ideas tend to be those most people can see are great ideas Hence, there is so much competition that it negatively impacts everything from gross margin to valuation Surprisingly, most successful start-ups were not started with a goal to build a billion-dollar company They rather started with a desire to solve a meaningful “pain point”—a VC term for a problem that causes people a lot of frustration This is usually something that affects the entrepreneur personally and directly Then the entrepreneur does a wonderful job of solving the problem for a small group of customers Eventually the entrepreneur, with the help of venture investors, finds a way to expand the solution to a very large group of customers This doesn’t necessarily put management before market, but rather it emphasizes the fact that the best companies are created when great teams intersect with large market opportunities Whereas entrepreneurs focus on identifying and solving these burning pain points, venture investors try to find those extraordinary entrepreneurs who are trying to solve potentially huge problems in a meaningful way Venture investors tap into their tremendous network of contacts and “pattern recognition”—the art of leveraging lessons drawn from past successes and failures to identify a combination of factors and behaviors that may point to promising markets, entrepreneurs, products, business models, and so forth Together, these build a “prepared mind” or “gut feel” about the emerging market opportunities created by the tectonic shifts in customer behavior and the enabling technologies that can be successfully applied to those shifts Entrepreneurs are true visionaries, and venture investors are great pattern recognizers with an experienced toolkit of how to build companies—and how not to build them Successful start-ups are created when a trusted relationship and line of communication is established between the visionary (entrepreneur) and the pattern recognizer (investor) for two-way knowledge transfer In discussing the characteristics of the successful founders, the words repeated most often are extraordinary passion, intelligence, authenticity, intellectual honesty, dogged persistence, risk-taking, and integrity Many of these entrepreneurs were scarred by past failures, were hungry to win big, or came from humble backgrounds They also had this fact in common: they were hardly known to the world before starting companies that made them successful and famous Most of these successful founders also paired with one or more co-founders rather than going solo The co-founders they partnered with had not only complementary skills, but more importantly, a long history of working together They had built a great chemistry with each other well before they became co-founders xviii It’s also clear from the interviews that most successful start-ups have an “A” team of 30 to 40 people stroking together in harmony towards a common mission This gives them ten times the productivity advantage over their competitors These teams come together when the passion, intelligence, and charisma of the founders serve as a talent-magnet to attract some of the best people in the industry to solve the toughest and most challenging problems for their customers The first 10 to 12 hires in the start-up team are extremely important, as they determine the DNA and culture of the company and, in turn, its success trajectory It’s quite interesting to notice that successful start-ups are extremely adept at “rapid iteration and fast fail.” This technique of quickly trying things out is one of the most important characteristics of the “A” team and it becomes a core part of the start-up DNA Successful start-ups use it to figure out a product/market fit and optimize everything from product features to pricing Successful start-ups also end up making drastic changes to their original plans in what’s called a “pivot.” Only a small percentage of such pivots—one in ten—are successful, though The successful pivot is a function of the “authenticity” and “intellectual honesty” of the entrepreneurs, where a deep knowledge of the market space and its fine nuances, combined with their ability to quickly adapt to new market realities, plays a key role in determining the effective degree and direction of the pivot The journey to a successful pivot has a logical progression without any leaps from one strategy to the next, and the domain knowledge of the founders remains relevant in the new plan The interviews also reveal how important market timing is in determining start-up success It’s probably the most overlooked concept by the entrepreneurs, and they usually end up being too early or too late to the market Many companies fail not because they are too early or too late, but because they don’t recognize or admit that, and change their plans and cash burn accordingly Equally revealing is the fact that the so-called “first mover” advantage is not that important for start-up success, unless you can turn that early position into a sustainable competitive lead An example might be a consumer internet company that would leverage the network effect to build a massive and sticky user base—like Groupon But usually a successful start-up might be coming to the party late, yet with a better solution and better execution of its strategy Remember, Google was the 99th search engine to launch and Facebook launched a couple years after Friendster and LinkedIn These findings are just the tip of the “knowledge iceberg” hidden in this book We are confident that quite a lot of actionable insights will be revealed xix to you as you read through various chapters We have spent enough years in the venture industry to know some of the most pressing challenges faced by the budding entrepreneurs We also know that there is an ocean of untapped knowledge hidden within the leading practitioners in this industry This is our humble attempt to bring a few buckets of that knowledge to much-deserving entrepreneurs who can learn and apply these findings to their specific situations and improve their chances of building successful companies Nothing will be more satisfying than seeing this book positively influence and lift the success trajectory of the entrepreneurs whose relentless passion, dedication, and dogged pursuit brings great products and services to us against all odds They are a true blessing to the world economy and mankind For the love of entrepreneurship! xx CHAPTER Roelof Botha Sequoia Capital: YouTube, Xoom, Green Dot, Dropbox, AdMob Roelof Botha is a partner at Sequoia Capital, where he works with financial services, cloud computing, bioinformatics, consumer internet, and consumer mobile companies Before joining Sequoia in 2003, he served as PayPal’s CFO and as a consultant for McKinsey & Company In discussing Sequoia Capital’s partnerships with YouTube, AdMob, Green Dot, and Dropbox, Roelof offers insight into the characteristics of special entrepreneurs and their start-ups I love how Roelof translates successful operating and venture experience into identifying promising ideas Tarang Shah: What are the key ingredients in building a billion-dollar start-up? Roelof Botha: To achieve a big success, many things have to come together In some cases, what looked like smooth sailing from the outside was more like a near-death experience; a few small changes, and the outcome could have been dramatically different There is always a healthy mixture of skill and luck involved The key to start-up success is purity of motivation The most successful entrepreneurs tend to start with a desire to solve an interesting problem— one that’s often driven by a personal frustration The best companies are Chapter | Roelof Botha: Sequoia Capital started by people who are motivated beyond money They’re not initially trying to build a billion-dollar company If you think about the sort of sacrifice and endurance an entrepreneur needs to succeed, I just not see how money is a sufficient motivator If I were an entrepreneur, I wouldn’t it just for money I would it because I really care about something Omar Hamoui, who started AdMob—which Google acquired and where my partner Jim Goetz sat on the board—is a great example Omar was a mobile application developer who was frustrated because he couldn’t sell advertising to support his business So he tried to solve the problem by building a mobile ad exchange, starting with emerging mobile developers When we first partnered with AdMob, it was just him, running the company while finishing his degree at Wharton He did this not because he thought he could sell the company for $1 billion—he was just trying to solve a problem for himself Now, to build a successful business, he had to recruit the right people early on The first ten to fifteen people you recruit have a huge impact on the DNA of your business Another example is Dropbox, which my partner Bryan Schreier works with The spark that led to its formation came from personal frustration The founders, Drew Houston and Arash Ferdowsi, were CS students at MIT They got tired of having to walk from their dorm rooms to the computer labs, carrying flash drives back and forth Sometimes copied files would be inconsistent or they’d forget a flash drive, keeping them from accessing a document they needed That led them to ask, in a world where more and more people have multiple devices, why isn’t there a common file system so you don’t have to think, “What documents are on this machine?” I don’t think they had any idea that the company would reach tens of millions of consumers and grow to the scale it has Now they’re focused on making it a successful big business Shah: What attracts you to start-ups and individuals to back? Botha: We listen intently to founders who can clearly articulate an ailment and artfully describe an elegant solution to relieve that pain If they can weave a believable story with a compelling value proposition, they’ll have us hooked We then focus on the size of the market opportunity This isn’t an easy exercise Part of it is having a prepared mind We go to great lengths to be very tuned in to market trends Say someone came to us and said, “We’ve just met the guys who started EC2, and they’re building a cloud infrastructure company that’s providing private clouds to enterprises Do you want to join us in funding it?” If I’d said I didn’t know anything about the subject and ... and their start-ups I love how Roelof translates successful operating and venture experience into identifying promising ideas Tarang Shah: What are the key ingredients in building a billion- dollar. .. times their money and that kind of stuff, but that just does not play in my world That is not what I am in it for Shah: That probably works at a quite later stage much better than at the early stage... tremendous network of contacts and “pattern recognition”—the art of leveraging lessons drawn from past successes and failures to identify a combination of factors and behaviors that may point