There are very few people in Silicon Valley who have such a precise grasp on what defines success of early-stage startup companies than Eric Ries. And there are very few people who so consistently exceed my expectations when I hear them speak. I find myself nodding – even when the topic is one I don’t expect to agree with such as “fail fast.”

This week was no exception. I interviewed Eric for an hour for - This Week in Venture Capital. What’s awesome is that the ThisWeekIn team now does time coding so you can go directly to the section in the video you want to hear (you need to click on link for video and then below the video in YouTube the links to the exact times will take you to that section in the video).

We had a wide-ranging discussion which included discussions of Eric’s early career (including his failures), how he came to focus on the Lean Startup movement (at the encouragement of Steve Blank who was an investor in the company he co-founded) and what he wants to do next.

Importantly we also discussed:

• should startups raise small amounts of money or large?
• should companies do spreadsheets / plan / have a hypothesis for success?
• what is the difference between a “pivot” or a “double dribble” (changing your business completely)?
• when is the right time to go big with PR?
• how do you handle internal company morale?
• how should you organize teams in a startup? (functional workgroups vs. product workgroups)
• what is the importance of social media? what is wrong with today’s social media?
• what lessons can we draw from Steve Jobs successes?

Eric is so damn good. I could have gone 2 hours. If you have some time I promise he doesn’t disappoint. Or if you’re pinched on time the summary is below and the time coding can help you watch a brief snippet on topics that interest you. And make sure to pick up a copy of his book.

Oh, and if you didn’t guess, the title, “if you don’t have a discrete hypothesis you are incapable of failing” is, of course, an Eric Ries quote. There are many in this episode. Check it out.
Timecodes:

00:00 Welcome, our guest is Eric Ries, founder of the Lean Startup Movement.
00:45 Intro to Eric
01:17 Background, before the Lean Startup
01:53 Yale during the Dot Com Bubble
3:35 The real entrepreneurs come out during a down economy
4:15 Eric’s startup history
6:30 Why did it take so long to ship?
8:17 How did you decide to go with either shrinkwrap or web only product?
9:14 What was the root cause of the failure of your first company?
11:00 Mark on over-hyping PR
11:50 Startup problems!
13:43 Why would you talk to journalist? Why waste energy?
14:20 People go too fast to internationalize
14:45 Eric: The vital function of a startup is to learn how to build a sustainable business
15:40 Discussion of Awe.sm
17:30 Can you make startups science?
19:30 A teachable moment for entrepreneurs: HAVE A HYPOTHESIS! What do you do better, different, or what do you want to achieve?
20:42 Looking for the “Up and to the Right” charts
21:20 Starting points for business should be a problem
22:10 Eric: Innovation Accounting
22:53 Eric’s book: The Lean Startup
24:00 Big money vs. Little money
25:40 The fundamental goal should be to eliminate waste
26:44 Too much capital is not good
26:54 Mark on the negatives of the “Fail Fast” movement
27:45 Eric: The thing that is supposed to fail fast is your bad ideas, not your company
31:10 Mozy Pro Ad
34:00 Imvu
35:29 Why people use social media. Will these norms change?
36:30 Eric: Social media is great for people with social capital
38:00 Should you use avatars?
40:05 What happened after Imvu
41:00 Transitioning from software to writing
42:20 Did agile development influence you?
43:20 The inception of Lean Startup
44:45 Telling an entrepreneur to focus is like telling a fat person to lose weight
46:18 iOS Vs. Android
46:50 Engines of Growth
48:30 Vanity metrics
49:00 Startups are all naked in the mirror
51:10 Astrology and causality in startups
52:00 Actionable metrics
53:35 Opposition to departmental silos
54:20 Semi-autonomous teams
57: 00 How do you rectify company mission and customer demand
58:00 Apple is iterative
1:01:01 Why Steve Jobs got fired
1:01:45 Fenwick and West AD
1:03:03 So what comes next?
1:03:35 Eric: what is society going to do? Most people are working on failing ideas.
1:05:35 Middle class job of the next generation: software development!
1:06:05 The skills gap
1:07:15 The “College Deal” and why it needs to change
1:09:50 We need education!

I’ve often wanted to let people see what a VC pitch is like to help new entrepreneurs have a better sense of what it’s like to present.

Obviously having a camera on will add a small bit of an artificial result because I don’t want to ask as much confidential information and with the camera on people are obviously a bit nicer.

But this interview is fairly authentic. If you like it I’ll do more and continue to strive for authenticity.

So here are Sahney Nager & Ryan Weber of Smarketplaces. I really like them. But I also asked some tough stuff. The video link is here.

Hope you enjoy.

Feel free to provide any feedback on the format or how to make it more authentic. And wether seeing pitches of useful to you or not.

Chris Dixon is one of my favorite people in tech and writes one of the few blogs I read religiously. If you don’t read it and you care about tech & entrepreneurship, you should.

He’s thoughtful about markets, investors, products and is always very well reasoned in his arguments. I’ve also found him to not be dogmatic either. He and I once took different sides of an debate about whether “VC signaling” in early-stage deals is a serious problem or not. We had a very sensible debate on the topic on VentureHacks sponsored by Nivi and including Naval Ravikant. If you haven’t checked that out you really should.

He is the CEO of Hunch, company that I believe is solving a very big problem that I have been telling entrepreneurs needs to be solved for the past 2 years. If he implements it well I think it will be a very big business.

Chris runs a popular web interview series on TechCrunch so is used to being the guy asking the questions. So it was fun to turn the cameras on him for 45 minutes for a special “NY edition of This Week in VC” and hearing his views. I think you’ll really enjoy this video, but as always I have summary notes for those with less time. Hopefully it will entice you to come back and watch the show at a later time!

These notes graciously provided by Adam Besvinick, who is a summer associate at ff ventures run by the affable John Frankel, who will also be on the show soon. If you like the quick summary notes, please check out Adam’s blog on tech, entrepreneurship & VC as a thank you.

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Sometime around 2003/04 my technology team turned me on to “Spolsky on Software” a periodic newsletter served up blog style from Joel Spolsky of FogCreek Software, a maker of bug-tracking software.

Blogs weren’t popularized yet so it was an oddity for me to read the founder of a software company spewing out advice. But I loved reading them and so did my team.

So it was a thrill for me last month to be able to have dinner with Joel and shoot the breeze. I asked him if he’d be willing to allow me to interview him for This Week in VC and we filmed it in the offices of Stack Overflow – his new company. I loved every moment of our discussion other than the video angle, which I think I’ll be more particular about in the future

You can watch the video here or …

As always we have notes: graciously provided by Daniel Wolchonok, the founder of RentMaps whose request of me for typing up the notes was to come and speak at Yale where he’ll be getting his MBA starting this fall so I’ve agreed to it. But if you like the notes check him out on Twitter or his website. Thanks.

Background:

Joel Spolsky studied Computer Science at Yale University (class of 1991). Upon graduating, he went to work at Microsoft. It wasn’t like joining Facebook today – other students had never heard of it, and asked questions like “is that like a Macintosh?”.

Joel moved to Seattle, and worked at Microsoft for three years as a program manager on Excel 4.0 and 5.0. He then went on to work at Viacom and Juno in NYC. After leaving Juno, he founded his own software company, Fog Creek Software. In 2008, he founded StackOverflow, and it has become the foundation for a question and answer platform called StackExchange.

His Tenure at Microsoft

At Microsoft, Joel was responsible for defining the specification for a programming language for Microsoft Excel. This ended up developing into Visual Basic for Applications, the strategy for programmability in Microsoft Office.

Defensibility in Software

How did Microsoft de-throne Lotus?

Microsoft Office ended up beating its competitors because it was able to read and write to file formats other than its own. For example, Excel was able to read files from Lotus, and was able to save the file without losing any information. The important lesson in order to gain market share was that in order for new users to try Microsoft Excel, they had to be able to work with the files their coworkers were creating.

Lesson: You don’t want your customers to feel locked into using your software. It helps with sales cycles because customers know that they can switch away if they so choose. While customers will be willing to try your product, they think two steps ahead. They want to ensure they can easily migrate to a new system.

What do you think of Facebook’s privacy model?

“I guess people don’t care about that stuff”. Joel believes that consumers don’t believe that the data that is stored in Facebook is very important. If they have uploaded photos to Facebook, they know that it’s stored somewhere else on their computer so they’re not concerned about getting them out. In terms of privacy, users are more concerned about shredding their credit card bills rather than the intricacies of their privacy settings on Facebook. Joel is more concerned about the fact that it’s a closed garden, and being a vendor is very difficult because there is such a limited ability to control the experience.

Working at Juno

What did Juno do?

Juno provided a free email service. Free email providers (like gmail or hotmail) didn’t exist, and you had to pay a separate fee to dial up companies like AOL to access the internet. Juno used your modem to to download and send email, and it was paid for by placing ads in the email client.

Eventually, Juno provided free access to browse the internet in addition to sending email. The experience was paid for by placing ads at the bottom of your internet browser.

Juno IPO’d while Joel was there, and it was the first “broken” IPO of the dot-com era. It debuted in the morning at $13, ended the day at $11. It was the first internet company to lose money on its first day on the public markets.

What did you learn at Juno?

Joel met his co-founder for Fog Creek software and learned a valuable management lesson. While it was not a widespread problem, there was an element of micro-management at the wrong levels. Smart, capable managers would not hesitate to make decisions instead of allowing their employees to make them. Because the managers couldn’t make every decision, they would make random decisions and then move to another area. This left very smart employees feeling very frustrated because their managers would interfere intermittently and at random moments. It took Joel awhile to realize that “If you’re hiring very bright people, let them do their damn job”.

15 minutes

The role of Product Managers at Technology Companies

Do you see product managers as a hindrance to software development?

Companies historically have structured their development teams in different ways. Microsoft and Apple have a role of product manager as different from a program manager. A product manager is responsible for:

• Talking to customers
• Pricing information
• Marketing materials
• Going to trade shows

A program manager would traditionally be responsible for:

• Writing the detailed specification for how the software should work
• Communicating with the developers who write code
• Working with writers to create documentation
• Interface with program managers about features and product roadmap

A program manager was expected to be be able to convince programmers in the prioritization of features and how to implement the software, and to be the central person who drives the roadmap of the product. The program manager was the key person at the center of the product, yet wouldn’t have anyone reporting to him/her. Instead of using seniority, the program manager would have to convince others based on the merit of their ideas.

What about a world without program or product managers?

It depends on how customer feedback is incorporated into the product. If developers get the feedback and can integrate it into the product, it will ultimately be successful. For example, stackoverflow developers use the product every day, and they can’t help but interract with their uers. Joel doesn’t think he could design software for something in which he doesn’t have expertise.

Mark: Google had trouble dealing with customers and contracts because they historically were so engineering driven. The technologists would say “tell the customer we won’t ship on time”. While that happens sometimes, it was a challenge for Google because it frequently had trouble adapting from an engineering driven culture. The role of a CEO is to find the happy medium so that:

• Salespeople do not blame engineering and marketing for a lack of features
• Engineers don’t blame salespeople for making them work weekends to help them hit their quota

Lesson: As CEO, it is your responsibility to educate everyone and mediate the difficult tensions that can arise by removing excuses. One way to do this is to make everyone the “CEO of their job”.

As an example, Joel says that there is a chief revenue officer who is solely responsible for bringing in revenue to StackExchange. He is responsible for bringing in revenue from advertising and their careers offering. Jeff Atwood is the person responsible for product and user experience across all of their sites.

What is the best reporting structure for an engineering team

There is no perfect structure. Engineers often want to be able to move around and work on different projects, rather than be pigeon-holed into working a particular team or feature set. Within a small startup with 3 engineers, everyone will work on all aspects of the site. As you grow, each group may have its own engineers. As an example, there is a team devoted to the careers section of StackExchange, and another team dedicated to the core engine. They both have their own responsibilities, but at the end of the day they’re all working to drive revenue either through a great user experience or through empowering employers to search for prospective employees.

29:45 minutes

Leaving Juno and Blogging

How did you leave Juno? What happened to the company? When did you start blogging?

Joel ended up leaving when Juno ended up switching from providing free e-mail to free internet access. He felt that the decision process was very broken, and he wasn’t able to impact it from the bottom of the organization. After Joel left, Juno merged with NetZero.

When did you start blogging?

Joel started Joel On Software shortly after he left and before founding Fog Creek. At that point, only four bloggers were really doing it. It was called a “weblog” at that point. The first CMS to allow publishing on a blog was called EditThisPage.com, which had been built by Dave Winer. Dave Winer would read the posts as they were written on the site and drive traffic to posts he liked. Joel benefited from this, and in a relatively short amount of time Joel was able to gain a fair amount of traffic.

34:45:

What posts are you most proud of?

“How MIcrosoft lost the API war“. Joel feels that it was a gigantic and enormous loss for MIcrosoft and the repercussions can still be felt today. A lot of it does seem like conventional wisdom today, but back then it wasn’t.

How did MSFT lose the API war?

Microsoft became obsessed with COM, OLE and felt that it was the future of software development. They didn’t focus on building for the web and they lost a great opportunity to win the transition to browser based applications.

Building on top of platforms

What does Joel think about building applications on the Twitter platform?

It is extremely rare to build a platform that third parties can build on top of and be very successful. Excel at the time Joel was there was a big business, but today is a billion dollar business. Even though it has been wildly successful, the number of businesses built on Excel never exploded the way that building applications for Windows did. There’s a big business in Finance working with Excel, but that’s an outlier.

There are very few examples of large, successful companies emerging on top of a platform. Twitter had a fundamentally flawed strategy from the beginning. They took care of the stream, and let others build the client applications. They didn’t think about monetization from the start, which has hurt them because they’ve had to pull the rug out from under the companies working on twitter clients. Joel doesn’t empathize with the twitter clients, he feels that they didn’t make a smart business decision.

Lesson: The only way business building on top of twitter can survive is by combining multiple streams into one. You couldn’t build a twitter client long term. It’s only obvious to the world now.

Joel is skeptical about building on the iOS platform long term. He feels that it’s not a great platform for vendors because they have no control over whether Apple allows your application in their marketplace.

Mark: Apple is like China, they have introduced an incredibly amount of innovation to the market. They’ve forced the entire industry to innovate and change. They have been successful simply for pushing the telecom companies, Microsoft, and Google to innovate. They’re well within their right, but it’s short sighted. Steve Jobs shouldn’t have the veto power over the marketplace. Make it open, make it free and incentivize people to make money doing it. Then you can buy, and compete in the marketplace.

Joel: Microsoft had an entire department for other companies to write for Windows. Everybody joked how Excel got special treatment (special APIs, etc which were never proven), but there were a bunch of people at Microsoft whose job was to help Lotus work on Windows.

46 minutes:

Joel on the battle between MySpace and Facebook

Joel felt that MySpace completely missed the opportunity to build a platform, and were clueless about the decision they made.

Mark: MySpace understood the desire of users to put videos on their site as well as images, but didn’t want to tie into services such as YouTube. News Corp (MySpace’s owner) felt that Youtube had made a fortune off of their content, and made a strategic decision focus on internal innovation and become more closed at the same moment that Facebook decided to become open. It was a concious business decision from the top. This was the moment where Zuckerberg (20 something entrepreneur) schooled Rupert Murdoch.

47:50:

The creation of StackExchange

Where did the idea for StackOverflow come from?

Stackoverflow was created in 2008. Joel wanted to combine multiple things: reddit, digg, xbox 360, Q&A sites, Wikipedia, and forums. There were 9 best practices across all of these items and Joel wanted to combine all of them into one site to help programmers get answers to their questions. Programmers were having trouble getting answers to their technical questions (the market leader was a site called experts-exchange). The site put answers behind a paywall, and programmes loathed the site for its tactics. He asked himself: programmers know how to make web sites, why couldn’t programmers create their own site and answer their own questions?

Joel was too busy with FogBugz to work on it, but ended up working with Jeff Atwood. Jeff had recently quit his job to be a full time blogger, and they decided to form a partnership to work on it together. Jeff built the first version of StackOverflow with a bunch of old colleagues, and it launched in August of 2008.

What was the original model for StackOverflow?

Joel and the team started out by building three independent sites: one for programming questions, another for PC buffs, and a third for server administration. That was called the “trilogy”. After that, they created a white label version of the software called Stackexchange 1.0. Joel saw the opportunity to create another software business (because that’s what he knew). The idea was to sell it to companies to leverage internal and external knowledge, but it was flawed because he saw it as a software business.

Joel found out it was a bad idea. The software is not difficult to build and the hosting element has become a commodity; the hard part is building a community. That’s the unique element, the people who you can convince to come to your site each and every day.

Lesson: Joel had been building a community of readers since 2001. Jeff Atwood had a community of people built up from his blog. The community they had developed was extremely valuable and is what differentiated StackOverflow from the free, open source alternatives that were created in response to StackExchange.

Spolsky: The era of software was a narrow period of time. Before 1980, customers purchased hardware and software was bundled for free with the hardware. Microsoft was brilliant because they realized they could sell software and make a hefty profit from it. Today, we’re in a post-software phase. The software isn’t the valuable asset – it’s the ability to tap into a community that is truly valuable.

Building Communities

Lesson: Whatever you choose to do in your career (another plastics moment), think about how you’re going to capture a community. Stop blogging to your friends. Start blogging to your customers and your intended audience.

Spolsky: It’s more than the community, it’s a behavior. People have a behavior that when they have a question, they come to StackOverflow to get an answer. Some people go to our site to help others and answer questions. Instilling a behavior in a lot of people is a very difficult task. Facebook is a great example in that they have created a habit in everyone so that they login almost every single day.

58 minutes:

Spolsky: You could make the argument that SO wouldn’t have worked unless I had spent 10 years building a community of programmers. At the end of Joel on software, a post would get 100,000 views, a popular post would get 1 million views. On StackOverflow, we get that in a day. In order to take the original community and build into the success of today, it’s all about natural progression and growth. Below is a graph of the wordwide usage growth of StackOverflow. It was a constant, constant growth rate that started with their original communities and continued to expand and grow over time.

Distinct Communities

How do you keep an audience as a blogger and on the network of StackExchange?

It’s important not to have content drift. If you talk about your core mission and then blog about your vacation, you might lose your audience. People have two or three interests, and if you stray from that consistently it drives people nuts.

Lesson: if you’re passionate about two different htings, have two differnet blogs. Don’t try to put it all in the same stream. The reason we build distinct communities is that if you don’t have 200 active people contributing to a site, it won’t take off. We know that because we’ve done research into what it takes to launch a new community. If you can’t find 200 people, you don’t have enough of a community, you won’t get answers to your questions.

Monetizing StackExchange

The original business model for StackOverflow was to help employers find good programmers. If we could build a community for the best programmers, we could build a good marketplace for employers to understand the capabilities of job applicants. Right now, the only thing they’re monetizing is the technical sites. For example, the StackExchange site for auto mechanics is free and they are not trying to monetize the site.

Pageviews are so cheap to deliver, that if you can monetize a small fraction of them, then you can run a very nice business.

How do you find developers through StackOverflow?

It’s really simple: jobs.stackoverflow.com

It’s really spread out. If you check out the StackOverflow users page, it shows the top 36 users. It shows where they’re located, and it’s really interesting to see where the top users are located. None are in Silicon Valley, one is in New York City, they’re spread out across the world (France, Estonia, St. Louis)

How do you get to the top of the rankings?

You have to answer a lot of questions. To get reputation, you answer questions and they’re peer reviewed. It’s a great way to recruit because this person is able to impress their peers and has gained their respect through a very democratic process.

Is StackOverflow subject to gaming?

Not really. When you have a lot of page views, it’s hard to game the system. We’ve modified the system over time to punish bad behavior. Users can push down spam, so every single user is able to police the site and ensure that the best content wins.

Why do people answer questions?

There are a bunch of incentives:

• Desire to help people by sharing knowledge (Yelp)
• Social currency
• Desire to be an expert (Wikipedia)
• Trying to get discovered for a job someday
• WoW and social gaming addiction.

However, we have built in controls so you don’t get too addicted. You can only gain a certain amount of reputation in a day.

Fundraising:

Fog Creek was bootstrapped. Raising money in the ash of the dot-com fallout was not a possibility. Joel had an audience of Joel on Software, and they iterated slowly over time. Fog Creek now has 35 people.

With StackOverflow, Joel raised money through venture capital. They looked around and felt that the engine that powers StackOverflow was much better than anything else out there (forum software). They thought it would become obvious to everyone, and they had an opportunity to take advantage of the “land grab” situation. If they could raise money and go from 3 to 30 people, they could accelerate their ability to create communities. After 2 years, they realized they were onto something, had great growth curve, revenue, customers, and raising money was very very simple. Union Square Ventures is an investor. They have raised two rounds of funding: a series A and a series B.

I’ve just finished a week away from the office for Spring Break, which was much needed. I’m now back & ready for action.

I took the opportunity this past week to publish summary notes of some of the VCs and entrepreneurs I had interviewed on This Week in VC.

Back to regular writing this week so check back in.

One of my goals in doing the show was not only to educate entrepreneurs but also to put a human face on many of the VCs in our industry as VCs can be hard to get to know. We’re a busy bunch.

Today’s post is on the delightful Richard de Silva. Here is the video link or click on the image above.  Notes below provided again by Ramin Vaziri of ChannelStack. Thank you. (if you get some value out of the notes consider checking out his company or Twitter feed)

TWIVC Summary – Richard de Silva

What did you do before VC and how did that lead you to VC? (1:00 – 3:40)

Richard De Silva started off as a journalist with the Washington Post after growing up in D.C.  He then worked in consulting which gave him a broad base of business experience working with the newspaper, cable, and advertising industries.  In the late 90’s he saw the internet boom and helped start IronPlanet.com, a construction equipment marketplace that is nearing an IPO.

How did the experience of pitching Iron Planet to investors affect you as a VC? (5:00 – 5:55)

Yes it gives him an appreciation for anyone who puts themselves on the line risking rejection.  He does not bring his Blackberry to meetings and hopes to give entrepreneurs the same respect he wanted.

Startup after Iron Planet? (6:00 – 7:30)

Yes an online video startup in ‘99 that helped large media companies encode and distribute their videos through portals.  The idea was right but the timing was early and required a pivot into being a software company.

How did you get into VC? (9:30 – 11:30)

In 2002 after exiting his second company he was attracted to the variety of being a VC.  He was introduced through mutual friends to Highland Capital.  At the time consumer internet venture capital was still suffering from the collapse of the Tech Bubble.  But it was an attractive time to enter because the successful internet companies were scaling and in need of capital.

Are you thematic in your investing or entrepreneur focused? (11:40-14:15)

Both.  The fund is organized into sectors and each VC forms forward looking themes within sub sectors.  But ultimately great people drive the ideas and Highland Capital is proactive in reaching out to entrepreneurs even at early stages.  So it is a combination of markets and people.  Richard coincidentally cites Mike Yavondite’s Qiigo as an example; Mike was a guest on TWIVC later that day.

In 2003 one of their first investments was Qiigo, Mike Yavondite’s company.  The contextual ad market was attractive.   Google Ad Sense was just getting going.  Highland Capital did a systematic search for who could build a stand-alone contextual ad search company and met with six or seven companies including Mike.  Mike built a white label product that let large publishers leverage text based ads by building their own marketplace rather than using Ad Words.  ESPN, Forbes, AOL were customers.  The company later sold for around $300 million.

Tell us more about Highland Capital (14:30 – 16:30)

Richard started as a principal and over a few years built a strong track record under Bob Davis and was promoted.  Highland has been around for 22 years currently investing the 8^th fund which is $400 million.  They also have a separate $300 million fund focused on bricks-n-mortar consumer retail.  The in invest in IT (Software + Internet + Healthcare).  Since 2006 they have added offices outside of Boston including Menlo Park, Europe, and China.   Richard De Silva is based in Menlo Park with three other partners, there and 5 partners in Boston.

What gets you interested in a startup? (16:35-19:35)

The entrepreneur’s story and what brought them to their startup business.  Understanding the motivation and path they have taken up to this point.

How does someone get access to you? (22:00-33:00)

Usually through some sort of referral, it helps assign priority.  Richard’s email address is public but it is hard to manage all the inbound cold emails.  He appreciates aggressiveness have been occasional cold phone calls and he believes that is a lost art.  However Highland is very proactive in contacting entrepreneurs they are interested in.

What’s your point of view on next generation video entertainment? (34:30 – 37:00)

The first phase was just getting all the content online via YouTube.  The second phase will be who can get the right combination lean back, lean forward, interaction, enhanced data, and make it fun.  He is starting to see this occur in sites that are verticalizing content.  An example is Metacafe, a Highland Capital portfolio company.

Tell us more about MetaCafe? (37:00-40:30)

Highland invested in Metacafe a couple years ago.  Initially it was a UGC site that competed with sites like YouTube and Veoh.  It had a strong user base and 50 million monthly uniques.  It has become a short form premium destination that is verticalizing content in category channels.  They aggregate other people’s content and curate it into categories.  The curated approach gives advertisers and publishers more comfort in knowing the quality of content they will be amongst.

Why do you think Veoh didn’t succeed? (40:30 –41:30)

They had a very expensive burn rate at the wrong time.  They had a great team and interesting technologies.

What drives people to Metacafe? (41:30-42:00)

A lot of the traffic comes from search.  Social, Facebook, and Twitter referral is meaningful.

Do you think the impact of social media is effecting Google’s search business? (42:00 – 43:50)

Richard thinks it already is.  People are starting on Facebook rather than search and this is starting to happen. But Google is still showing great financial performance.  He does think there are opportunities in vertical search.  Fansnap is an example, search for ticket purchases.

StubHub seems like the leader.  What is Fansnap doing? (44:00 -49:30)

About half of StubHub inventory is ticket broker inventory and some of the largest brokers are investors in FanSnap.  Opportunities in vertical search exist where the sources of data are somewhat hidden and can be unlocked and displayed in an innovative manner.  Microsoft Bing Tickets is being powered by FanSnap.  Bing is very open to 3^rd party elements in their index that create a differentiated user experience.

Do you agree that Google SEO optimized results for high volume search terms are broken? (49:35-51:30)

Yes.  The Page Rank system has been gamed and is leading to many spammy results.  Improvements have been made and further changes to the algorithm are being made.  However these unknown and unforeseen changes could lead to new problems for sites.

Do you think a multi-channel distribution strategy is important to guard against unforeseen changes? (51:30 – 1:02:40)

It is important to leverage the fastest growing platforms but anticipate changing terms of service.  Mark and Richard go on to talk about platforms, timing, and simple reiterative product design.  Mark thinks there are many opportunities to improve poor search results in Google products like Gmail and YouTube.

What do you think about accuracy of video search? ( 1:04:00-1:06)

It is important for brand advertisers that their ads appear next to accurate search terms.  One of Highland Capital’s portfolio companies, Affine Systems, helps solve this problem by extracting search terms from the video images.

If you read this blog often you’ll know that I’m a huge fan of First Round Capital.

They have totally changed the way you run a VC firm, investing heavily in systems & events for their founders that are pushing the boundaries of the way our industry works.

One example is that they introduced a program where their founders can pool together shares from their company and exchange them for a small portfolio of other First Round Capital companies. I’m a huge fan of this innovation.

What people don’t know is how First Round got started and often people know less about the amazing background of one of its co-founders, Howard Morgan (everyone tends to know Josh Kopelman as one of the highest profile players in our industry overall). But now you can learn the origins first hand on this YouTube video as well as how to approach them, how they make decisions and what innovations they’ve introduced.

I have sat on a board with Howard and have known him a few years. I am simply blown away by his industry knowledge, contacts, detail orientation and hard work. Howard is successful enough that he doesn’t need to work. It is clear that he is simply passionate about being a VC and participating in this industry. I think you’ll enjoy hearing him, but if  you’re in a rush check out the summary notes below.

Big thank you to Ramin Vaziri (aka RamVaz – a regular live watcher of our show. I feel like I know him better personally since he’s always in the chat room during the show asking questions). As a courtesy if you enjoyed his write-up please check out his startup company, ChannelStack.

Bio

Howard Morgan earned a PhD in Operations Research/Computer Science in 1968.  He then went on to teach Computer Science at Cornell, Caltech, and University of Pennsylvania.  Through his research he helped bring ARPANET to Philadelphia in 1973.  In the early 80’s he left academia to work on venture capital investing with Jim Simons, Renaissance Technologies.

The discussion with Howard Morgan starts off by acknowledging Josh Kopelman as a co-founder of First Round Capital.  Prior to First Round Capital, Howard had invested in two of Josh’s companies Infonautics Corp. and Half.com.  Infonautics went public in 1996 and Half.com was sold to eBay in 2000.  Josh and Howard began co-investing as angels and in 2005 they started a $10 million fund.

They decided on a one year vintage fund structure because they were not sure they wanted to be VC’s over the long-term.  They decided to run the fund close to home in West Conshohocken, PA where they still have offices.  During the first year of the fund they took forty-eight trips to California!  In 2008 they raised a much larger fund $132.5 million and opened another office in San Francisco.

They chose the name First Round Capital because they thought capital would be deployed most efficiently at smaller seed stage rounds considering the cost to build an internet business had come down drastically.

Investing Strategy

Howard states the most successful angel investors are the ones who can place many small bets, increasing the possibility of hitting a home run.  He also says it is important to be able to participate in follow on rounds so as not to get “crammed down”.  First Round Capital makes 20-25 investments a year with an average size of $500k.  They follow on when milestones are met.

Investor Involvement

Initially they are very hands on, this is baby nurse mode.  Hopefully after twelve months a Series A round can be raised and the new VC’s will share nurturing duties.  At this point First Round will still be involved but step back to a more passive baby sitter role.

First Round Capital’s Tools, Techniques, Processes

First Round Capital invests heavily in its own infrastructure to help add value to the portfolio companies.  They did not take salaries during the first two years and invested more money in the firm than they received from management fees.  They have sixteen people on staff.

• CEO Network – CEO’s from the portfolio companies are introduced to each other.  This becomes a support group and allows them to help each other succeed.
• The Exchange Fund – This allows the entrepreneurs to diversify their founders stock into other portfolio companies stock.
• CEO Summit – Two people are invited from each company to attend an event with big name speaking guests.  These speakers help coach CEO’s on important executive decisions.  It is also a good opportunity for CEO’s to mingle with VC’s who might lead future rounds of fundraising.
• SecondRound.com – This is a proprietary CRM system that was built to help manage the fundraising process.  A portfolio company looking to raise another round of capital can use this tool to research and connect with VC’s.  It also helps First Round Capital track communications and helps them introduce the CEO to the desired VC’s.

The Biggest Deal That Got Away?

Howard answers Twitter and Zynga.  First Round was an investor in the podcasting company Odeo before they made their pivot to Twitter.  Odeo returned investment funds back to their investors when they decided to create Twitter.  Twitter wanted to raise money for this new venture at a pre-money valuation which was quite a bit higher than First Round’s $10 million limit.  First Round Capital’s pre-money range is usually between $3-5 million.  The same limit also kept them from investing in Zynga.  They have since made a few exceptions but not many.

How do people get access to First Round Capital?

Office Hours – Two or three partners post a sign-up sheet to meet with entrepreneurs.  These partners travel to a city and take ten minute pitches from the entrepreneurs.  A few deals have been funded through this program.

It is possible to submit a plan through email but it is not the best approach.  A better approach is to get a warm introduction through a lawyer, VC, or entrepreneur.  First Round Capital receives about 2500 submissions each year.  From those, 1000 get a quick no because it’s not the right fit.  The next 1500 get a 10-15 minute phone call to decide if it is worth following up on.  Then 500 of those get a one hour meeting.  100 get serious due diligence where the entrepreneur meets with several people from the firm.  Ultimately, only 25 will be chosen.

How to get from first meeting to second meeting?

Personal qualities are the first filter:  integrity, intelligence, and not too dogmatic. Then they consider if it is a big enough market.

Is a completed product necessary to get funding?

No.  But Howard comments wire frames or some progress toward a product should be achievable given how inexpensive it is to produce.  Mark comments on the importance of being able to ship product.  Howard agrees and cites a quote from Stephen Sondheim “Having just the vision is no solution, everything depends on execution.”    He contrasts incremental improvement against postponed perfection and states the importance of execution and the ability to ship product.  He says many people often have similar plans but the best execution wins out.

What are the most common mistakes in first pitch?

To say something that is not credible.  Howard gives an example of an entrepreneur wildly overstating a market size.  Chemistry with the entrepreneur is also important considering you will be working together for the next few years.

What is ideal board structure?

For a company that raises a seed round of capital a three person board that includes the CEO, Investor, and an Independent member is fine.  After raising the next round two more seats can be filled.

How to run a board meeting?

• Highlights/Lowlights – summary of key events since the last meeting
• Financials versus Budget – waterfall charts are a good illustration of how management is adjusting the budgets
• Management should communicate how the board can help – strategy, markets, key hires, introductions.
• Executive session – a meeting without management to discuss performance and how to help.

I recently sat down with Matt Coffin, the founder of LowerMyBills, which sold for $400 million but was very nearly a bankruptcy only a few years early, and talked “startups.”

Matt is one of the most transparent, focused & honest startup guys you’ll meet.

You can watch him on YouTube, download in iTunes (for gym or commute) 3/31/11 edition.

Or read the quick, informative summary below the image!

He tells the story of how he was out of cash, stressed out, nobody in LA or Silicon Valley would give him money, he had finally found an investor in Minneapolis but his venture bank was going to shut him down for breaking a “covenant” in their agreement by not having enough cash in the bank. A friend helped him get out of this situation and changed Matt’s life forever. The answer? Given the bank more “warrant coverage.”

Something so simple. Get connected to the right mentors and your business may catapult to the next level. Don’t and you might make one catastrophic mistake that leaves you in the annals of Effed Companies. Matt was one of my inspirations behind Launchpad LA (yes, we’re going to have a program in 2011 – news very, very soon).  I figured if Matt was on the verge of bankruptcy and one mentor changed his trajectory, what if we had a formalized, community-wide program?

Since selling Matt has gone on to become one of the smartest angels I have seen operate. He is very hands-on and helpful – especially for any company looking into customer acquisition. What better than to have capital from somebody who has actually done it in the trenches? Matt’s commitment to re-investing in tech startups is reminiscent to this great Fred Wilson post of “recycling capital.”

Here’s a summary of our interview. Big thank you to Darius Vasefi, of EyeOnJewels for the write up

- Getting started:
o Matt founded LowerMyBills.com in Dec 99, exited to Experian in Jan 05 for $400M.
o The idea: In 99 wife and he bought a house in LA and when he received first mortgage bill and then cell phone bill for $1,300 (lots of roaming fees back then) he tried to find a one-stop-shop to lower his expenses but could not find anything. He typed lowermybills.com was not registered and available so he bought it. Consumers responded to name and concept well, solves real problem,
o Took 4 months to build initial prototype.

- Business model:
o They bought a lot of ad inventory (banner ads/advertising) driving people to signup forms, converting (fill out form) and sold leads,
o Initial strategy was first comparison shopping and then monitoring and upselling on more savings.  They were actually selling long distance at 20-30 mil run rate signing people up on plans. Later they became big business in Financial services lead-gen.
o Their strong skill was online media buying and optimization – they rarely would do CPA deals – mostly buying CPM. He wanted to see all the data himself. As internet crashed media became cheaper so they bought more and their tracking and analysis became really good so they did better.
o CPM model gave him control over the information in the acquisition cycle so he focused on that.

- PR
o Huge on PR, “Be Everywhere” is his motto – fly to NY, proactively everywhere he could get press.
o Early on they hired 3 people from ACT software at once (more team hiring) on staff and supplement it with Agency (in LA worked with First Communications – good). To make PR big you need to find a way to “make news”. Mix it up with different agencies, people run out or creativity/contacts.
o Mark’s message: PR has to start at top of company, has to be consistent-ongoing (can change spending), build authentic relationships with journalists over time- respect them, (similar to raising capital – dots and lines, multiple meetings create patterns, dating…) tell people what you’re going to do and over deliver, people want to invest in people they trust. And if you make money for somebody they will trust you again,

- Fundraising
• It’s like building a relationship, under promise and over deliver.  People want to invest in people they trust – once you’ve made money for someone you can always go back, and even get better pricing.
• Being pennywise and pound foolish not good especially in legal representation – spend the $$ if the person (not firm) is good.
• Going thru nuclear winter make you feel you really belong in the industry.
• Raising money is NOT the End Game: making money (profitable) and selling a business are the end game.

- His follow-on rounds & problems:
• Hit funding nuclear winter, impossible to get anyone to invest in follow on,
• The concept did not connect with VC’s. Once he got connected to CMO of Coca Cola which said to him “people do not want to lower their bills!!!” That was a quick meeting!! [[Point: don’t waste your time on people that don’t “get” what you are doing]] People were not returning his call, he would call people 50 times but no reply,
• Used to drive to work in pain in chest but could not let others know what is going on.
• They were low on $$ in the bank so bank called their loan in “MAC” Clause (Material Adverse Condition). Venture dept provider can not go below a certain cash level – not good to take these deals. Recently venture debt deal are throwing out the cash requirements but banking requirements. –
• They gave him 24 hours to deal with this, no longer dealing with the “nice guy” but rather their workout person who was unpleasant. Called Tim Spicer (c-companies partner) and he told him matt, they only want one thing, more warrant coverage!!! And he said ok got it. So he got a 30 day stay for more watrrant coverage.
• Mark: 10% warrant coverage is like  stock options. Backstopping is when banks feel they are protected by VC’s investing in the company. Icing is the warrant for banks – stock they can buy in future but don’t have to buy so they make their $$ later in the future.
• Raised money from Splitrock Partners (of whom Matt thinks very highly) experience was so emotionally traumatic he came out of it vowing he’d never go thru that again – get cash flow positive RIGHT NOW!!!

[if you don't have experience with venture debt you might want to listen to this bit in the video - we talked a lot about how it works]

- Lean startup:
o It’s situational so some businesses are operationally/people intensive, high LTV (lifetime value) means you can spend more upfront. Good when you’re testing and trying to learn the initial findings – is this a real business/good investor business, concept, replicable model but when you do let it go and GET BIG FAST.
• Mark’s view: too much money can eliminate discipline

- Selling LowerMyBills:
o In 2004 he was getting a lot of call to take more money but was not interested.  He met with 8 companies and got 6 term sheets, decided to take General Atlantic deal and that’s when Experian came back to buy the whole thing. He told them it was now or never.
o On 1/11/05 his daughter was born at 8AM, at 6 PM email showing first million dollar rev day for the company and 8 PM term sheet from Experian to buy the company – all on the same day!
o Everything is for sale but it’s the price that moves the timing.
o Put a timeframe/money – competition in the picture
• Every acquisition includes something called a holdback which is money buyer will hold from the deal for later payment and contingent on meeting some set milestones, % is negotiable.

[if you don't have experience with how it works when you sell your company, you might want to listen to this bit in the video - we talked a lot about how it works]

- On Entrepreneurship:
What makes a great entrepreneur? combination of factors –
• Visionary but also constantly looking to reconfirm hypothesis,
• Consummate evangelist of business,
• Little naïve on the chances – what we’re doing is more likely to NOT WORK Mark: “naïve optimism” don’t know it can’t be done and often looks for it, same thing has made USA what it is now.
• Good listener, take in information,
• Have pulse on what the market wants (hard to train that) cannot take this from customers only. His role in starting company is listening to all the moving pieces and connecting the dots that don’t seem to be connected.
• Mark: this is triangulation – ask 4-7 people and listen to them and get some synthesis from these feedbacks into what they believe is the answer.
• Persistence: keep trying to get attention; don’t stop if you want it bad. Do whatever it takes to get it done. Not taking no for an answer.
• Generally entrepreneurship is not about work-life balance: you need to love it, it has to be your life and you have to devote everything to it.
• Mark – surprised in how many people do not follow-up with investors / Matt: only 5% follow up
• Jason Nazar is the classic guy for follow up, persistent but respectful. (we both love Jason)
• Passion: Have to be able to motivate people, customers, team, yourself. Passion is infectious – people respond to it.
• Confidence is good, cockiness is not.
• If you need money to even hire a developer [means you cannot even excite one person to put in some sweat equity – not a good sign about your ability to motivate people.]
• Domain expertise, want someone that wants to do something big in a market they know, something really adjacent to what they were just doing, doing something 180 degrees opposite is extremely difficult

Finally:

The last bit of the video talks a lot about what Matt has invested in and what excites him.

It’s easy to think that the wife of a well-known & successful VC (Fred Wilson) would have had an easy and storied life of wealth and privilege. I had previously had the opportunity to spend time with Joanne Wilson, Fred’s wife, and knew otherwise.

That’s why I was so interested in having “The Gotham Gal” come on This Week in VC (video link on YouTube, download iTunes, episode 15)) and dispel those myths. In fact, as she tells it, in their early career when Fred was young in VC, Joanne was earning 3x more money. Well into their 30′s “they were living paycheck-to-paycheck” as Joanne had taken time off of work to raise three children.

After college Joanne worked for 4 years in retail apparel at Macy’s where she initially managed sales reps on the floor and then worked as a buyer of clothing. After 4 years of retail she went to “the other side of the business” working for a clothing brand where she sold apparel to department stores and other companies. This is where she first developed sales skills.

She doubled her salary by going into sales. Then after a year she got into the business side and learned how to manufacture, what the margins of the business were, etc.  She left there to join a man running a clothing brand. She came in and took over the business. In 18 months from $1.5m to $12m in sales. She did this because she had great rapport with buyers. She knew their business needs because she had been on both sides of the business.

Below is a nice summary of our interview with some great quotes from Joanne. I think this video should serve as an inspiration to any young aspiring female entrepreneur (and male!) and is worth watching when you have a few moments.

But for everybody else, where are 6 things you could learn from Joanne Wilson:

Sales: until about minute 20

1. Get out of your comfort zone – don’t just work on the things you know how to do or like doing “People tend to gravitate toward areas that they know. Totally get outside your comfort zone. Put yourself in a position to learn things you don’t know” We talked about this in the context of management (in retail her motto was, “get away from the cosmetics department. You already know that”), in sales and more broadly as an entrepreneur.

2. To be effective at sales you need to really understand the business of the person who will buy your product. “[I was effective at sales because] I understood their business. Most people who worked in the business didn’t know how to make a profit & loss. I provided information for my customers to make their lives easier.” Really understanding the business of your customer matters. It’s the key to growing a successful business and is a theme the Steve Blank plays up a lot. I agree whole heartedly. The other money quote she gave that I loved was, “”Totally get out of your office.” Sounds kind of obvious. Not enough entrepreneurs dedicate enough of their day to this.

3. In sales you also need to establish rapport, ask insightful questions & then shut your mouth! “A lot of sales is innate. A really good sales person can get people excited and get people to tell you information they won’t tell other people. Build rapport in whatever way you can. Who knows, it could be fishing or whatever.  Say very little. The less you say, the more the person on the other side gives you back. As a sales person, just ask the right questions and you’ll get the answers you need.”

4. Be a mensch – the world is small than you think and bad karma will catch up to you “We’re in a very small community. Life is too short to be a dick.” There’s no reason to be nasty to your competitors or mud sling. There’s no need to bad-mouth other people. It’s surprising how small the tech community is and the older you get the more you realize how much people from earlier in your life have a way of coming back into it. Be a mensch.

On being a woman, becoming a mom & forming a sense of identity [20-45 ]

5. For women - ”Don’t get off the train completely when you have children. You need to keep your skills. You need to keep your database in terms of connections and the people you know. You need to keep your relationships up.”

“When I stopped working it was quite a shock to our system. Even if you continue working, you’re still responsible for [your kids well being]. I didn’t think about who was going to put food in the refrigerator.”

“The Internet saved my life. I needed something to find my own identity.” She went to work running sales for Jason Calacanis at Silicon Alley Reporter (mid 90′s). The Internet really re-connected Joanne with her former working self.

Invested in “Catchafire,” which is a business that helps people (mostly women) connect with pro bono opportunities where they can put their skills to use. Take a little break but keep your skills fresh.

“There are so many places you can go on the Net where you can find your community. I would tell women to find them.”

6. The current generation of college students want to be entrepreneurs more than rock stars - ”This next generation is going to be very interesting. After seeing “The Social Network” there is an increased attitude amongst this generation (of women) that … why not go into startups? They all want to be entrepreneurs – they don’t want to be rock stars.”

7. To run an effective business it’s really important to hire women in your company & as advisors - “Men tend to pump up their chests more (than women). I think it’s really important (to hire women). Women take a look at things differently. They understand things differently. Make sure they’re on your board, your board of advisors, whatever. Make sure 50% of the people you hire are women. The women are out there.

Certainly if you look at eCommerce & social media – women are the ones using these products. What better to have on your team than someone who understands this at a fundamental level.”

8. Women need to start becoming entrepreneurs at a younger age – “Don’t go to work for big companies, don’t get an MBA, go to work for a startup and start on this path. Start early. In the next generation everybody (including women (are going to write code).”

“The majority of businesses that I’ve been investing in lately are ‘women businesses.’

You can watch it all on YouTube or download from iTunes for free.

Brad Feld is a fountain of knowledge & wisdom. I had the chance to sit down with him for an hour and ask him loads of questions that I thought you’d enjoy hearing. If you have time check out the video (or download on iTunes – Episode 27 - and listen at the gym or on your commute!).

Or, as always, summary notes available below.

Huge thank you to Steve De Long for the write up. I owe ya’ a 20 minute call (or in person next time I’m in San Diego).

This video discusses a wide variety of interesting topics including Brad’s personal history and his beginnings in Venture Capital going back to the mid 1990’s; the beginning of blogging in the VC community and Brad’s seminal Term Sheet series; a relatively deep dive into the Foundry Group investment philosophy including a discussion of their “Themes” and deal evaluation process and much, much more. The following is a brief series of quotes from just ten of the approximately 30 different topics discussed in this incredible interview.

1. Brad on blogging.

How did you start blogging?

“My initial desire to blog came from something that’s always been my approach to investing – I’m a nerd and I love to play with the technology and part of my approach has really been to understand things both at a user level and at a reasonably deep tentacle level. In 2004 / 2005 I was starting to get intrigued with user-generated content. RSS was something that had appeared.” “….I decided well if I am going to be investing in this stuff at least I need to understand what it’s like to have a blog, to be generating content, and it was quite interesting at the very, very beginning.“

“Some of it was about the tools and understanding how the tools fit together and that was quite nascent but at the same time it was also about just the emotional response of going from a subscriber to 10 subscribers to 100 subscribers” “…then what happened is I decided I wanted to write some sort of longer form things and I wrote with my partner Jason Mendelson a term sheet series and we wrote I don’t know 30 posts decomposing a term sheet.”

Is that when it became big?

“Yeah, that was when I changed for me…” “…there was so much positive feedback on demystifying this one element of venture capital. “This time frame – 2005/2006 – web 2.0 was starting. There was a lot of consumer internet activity again…resurgence of things, but it was still mysterious, venture capital was still kind of closed, 1st time entrepreneurs had a lot of questions that were unanswered, and there was still some sort of hand waiving around all the financing stuff and so we took it on….”

2. The value of Pitch Decks; Brad’s personal preferences on deal presentation; and Brad’s practice of accepting cold approaches via email.

Are Pitch Decks becoming obsolete?

“…It’s interesting that the question is pitch deck’s being obsolete versus business plans being obsolete. So very few investors want Business Plans any more. But, in fact, I would rather have an executive summary than a pitch deck. And I would rather, even before the executive summary, have something to play with (a demo)…” It falls in the category of show don’t tell. The problem with pitch decks is pitch decks tend to have a lot of fluff in it. Either it’s a bunch of pictures or screen shots or it’s a bunch of words. Very few people can do a good job with a presentation that is emailable.”

Aren’t pitch decks still the norm?

“I think you have to listen to the queue’s.” “…if you look at a lot of the early stage investors, whether it be Union Square Ventures or First Round or Jeff Clavier at Softtech or Dave McClure – we want to try the product, we want to experience the product, we want to get a sense of how the entrepreneur is thinking about it. You still need the presentation to back that up. If you are going to do the tour up and down Sandhill Road to try and raise your 1st round of financing you need a pitch deck because the vast majority of those meetings you are going to be sitting around a table and you will be presenting to one or more partners and that is going to be your first engagement.”

You have said outloud anyone can send you an email, is that fair?

“Yeah, my email address is Brad@Feld.com. My twitter address is @bfeld – tweet me. My Skype address is bradfeld. It’s all on my website. I’m delighted to get emails from anybody. It doesn’t overwhelm me. I’m very quick to say whether or not something is in an area that interests me. (see deal evaluations the Foundry way)”

3. A deep dive into the Foundry Group investment philosophy including an interesting discussion of their investing Themes.

“… our lens is: Internet Software Companies anywhere in the U.S. So if you are outside the U.S. we are not going to invest. If you are outside internet software we are not going to invest. And then within internet software we then have a series of themes and our themes are very broad horizontal themes. For example we have a theme we call human computer interaction, a theme we call Glue – which is a software layer that glues things together on the internet. We have a theme we call Protocol, which are technology protocols and markets built around technology protocols like SMTP for email and RSS. So we have five themes – Digital Life and Distribution are the other two.”

Human Computer Interaction
Glue
Protocol Digital Life
Distribution
Adhesive (new – Glue for Adtech)

4. Deal evaluations the Foundry way, which continues into a great discussion about VC decision-making processes.

“So if you don’t fit within one of our themes we say no right away. I should be able to say no within 60 seconds. So we can say no based on geography, we can say no based on it doesn’t fit in our themes.“… “Then we engage with the product and the entrepreneur and because we know these areas very well we don’t have to spend a lot of time understanding the market or understanding the customer.”

And because you are all investing in the same areas you get an intuitive feel for it?

“One of our principles – and we call them deeply held beliefs – one of them was that we are all going to invest in the same things”… “I think it is useful for the entrepreneur to know what he is encountering because every firm has a different process. And especially if you are dealing with early stage firms where partners might have different areas of specialization but they might have a lot of connective tissue across things. That’s very different than a firm where you have the sector approach. And that’s very different than a firm where you have an IT team and a Clean Tech Team and a Bio Team or an early stage team and a late stage team.”

5. Brad’s start in Venture Capital. Mobius.

“My startup business was acquired and I worked for the company that bought us; which was a public company called Ameridata that bought about 40 companies in about three years. So I was on the front line of this very aggressive rollup and I got involved in helping with the technical due diligence…”

“As a result I got to see some deals and get involved with some deals and I made some investments with my own money. So I was an Angel investor from 1994 to 1996. One of the successful investments was a company called Nigenisis, which ended becoming a public company in 1999. Was about a billion dollars on the IPO” and “was one of the first web analytics companies. I was an early investor in a company called Harmonics which ended creating Guitar Hero … that got bought by Activision and then the rest of the company got bought by MTV and they created RockBand. “

In 1996 got connected up with Softbank which was investing very aggressively in the U.S. And they made an early investment in Yahoo.“ “….a couple of people that worked for Softbank plus me got together and with sponsorships from Softbank created a separate venture fund.”

6. Techstars

Was it David Cohen’ Idea? And how do you know David?

“It was David’s idea.” “Well I didn’t know David. I do something I now call community hours. I used to call it random day.” … “So David showed up on one of these random days. And sat down and had a little brochure he had printed on his laser printer or had taken to Kinko’s and it was this idea for Techstars.”… “And five minutes after he started talking about it I said dude I’m in. Let’s start figuring out how to make this happen.” “…and the premise for Techstars was the worst case we would attract some new smart people to Boulder.”

And how has it worked out?

“It has worked out great. So we had probably had well this is the fourth year we’ve done it in Boulder. We just finished the second year in Boston. And we are just starting our first year in Seattle.”…” Of the Boulder companies there have been 41 companies that have gone through the Boulder program and there is some mortality…” “I guess it’s 5 or 6 that have failed. All the results by the way are up on line. It’s techstars.org/results.”

“I’d say about a third of the companies were people in Colorado already and they obviously stayed and of the remaining 7 companies a year or so there or four of them ended up staying. And so that is a steady import of talent but even more interestingly what it really did is it re-energized the entrepreneurial community.”

7. Venture Capital in Boulder and other smaller communities.

“So having spent a lot of time thinking about this Silicon Valley is a thing in and of itself. So everybody goes through this phase of we want to be the next Silicon Valley. That’s the dumbest thing you could try to do. The thing you should do is study Silicon Valley and try to understand what’s great about it and try to institutionalize within your community some of those things. One of them is this notion that there is a constant influx of new entrepreneurs into the system so new entrepreneurs either out of college or moving there because they want to be there and then those entrepreneurs have easy access in functional ways to experienced entrepreneurs, angel investors, and VC’s.

And that that cycle continues so as the early stage first time entrepreneurs get experience…” “They turn into the mentors for the next generation. And it’s that combination with a long-term view. So I think it takes fifteen or twenty years to build a real entrepreneurial community…”

8. Product Management – Brad and Mark discuss the role of Product Managers in Startups.

One (thing) we have talked about in the past is a lack of Product Managers, experienced technology Product Managers. (in LA and Boulder) Is that true? And how do you overcome that?

“So I think the hardest role to fill in a startup is a Product Management role. Especially one that is growing quickly…” “I used to think you needed to go out and find experienced PM’s. I think you can actually teach people how to be PM’s but there is a certain characteristic that somebody has to have if they want to be a great PM and that is essentially a phrase that Mark Pincus at Zynga uses all the time and that is be CEO of your job. And the PM is the archetypical CEO. If you are a Product Manager for a specific thing you have to deal with it just like a CEO has to deal with the whole company. That is a personality type. And what happens is you have a lot of people that are either engineering or non-engineering that end up in PM roles that can’t think across the whole thing… “

9. On the Startup Visa Program.

“…I’ve been involved with about a half dozen people in creating something now called the Startup Visa. If you go to www.startupvisa.com you can read about the initiative. There is a bill in the House, actually there are two bills in the House, and one in the Senate.”…” essentially trying to create a visa for entrepreneurs, for foreign entrepreneurs, that are trying to come to the U.S. and get investment from U.S. investors.” “It turns out that of all the visa types it is extremely difficult for a foreign entrepreneur, even if he is already in the U.S. on an H1 a student visa or something else, to get a visa that is valid to start your own company.”

Is this going to be bundled into Immigration Reform?

“Well, it could be.”…”My view is it’s a jobs bill. I don’t care that much about it being part of immigration reform. It is actually not adding more Visas’. It’s modifying existing Visa types and what has happened recently is we built a steady drum beat, very solid grass roots momentum and support, plenty of endorsement, Venture Capital community pretty broadly endorsed it. National Venture Capital Group endorsed it. Some Angel groups endorse it. More recently some Chamber of Commerce’s have started to endorse it.”

10. Oblong, Minority Report, and the rise of Spatial Operating Systems.

You have a company called Oblong (in your portfolio) which is a Minority Report type company. What is your vision or Oblong’s vision of where all this is heading…

“So Oblong is here in your backyard as you know in L.A. and one of the founders of Oblong, John Underkoffler, was an MIT Medialab PHd., actually did the fundamental research in the 90’s at the Medialab. And then was hired by Stephen Spielberg for Minority Report. And he is the guy who created the user interface paradigm.”

The Oblong guy, literally?

“Yeah, when people say Minority Report John is the Minority Report guy. And after that he did some other work with Spielberg. And that is how he ended up in L.A. but he had a vision of commercializing this work that he had done and this simple notion that frames it is that twenty years from now we will look back on the mouse and the keyboard and it will look quaint the same way that punch cards look quaint.”

What time frame are we going to see for this to impact our consumer lives?

“They are releasing their first commercial product in Q4.”…” So you will see the instantiation of this first in video conferencing at the higher end. At the low end, you will see it in the context of video games.”…” We actually think the software model that Oblong started with is a more compelling path down than the sort of consumer tech path up. And I think that is because the actual challenge of dealing with a lot of this stuff is very software and compute intensive and not sort of hardware trickery. The hardware trickery doesn’t scale very well. And so you really have a log of software algorithmic stuff that is very, very difficult.”

[there is so much more in the video so if you feel inclined make sure to check it out on YouTube or iTunes (episode 27).]

Last night I had the great privilege to interview Bill Gross, one of the Internet’s true pioneers. To say he has had an impact on the web would be an understatement. His impact has even helped a small country gain admission to the United Nations. All of that are in this week’s episode of This Week in VC. Summary notes, as always, provide below. It was a pleasure to write them myself.

Overture (Goto.com)

He invented the category of sponsored search. He presented the idea at the TED conference in the mid 90′s and was literally boo’d while he was on stage. I thing I’ve learned over the years is that technology purists hate advertising even when it is that revenue stream that truthfully drives much of our industry.

He created GoTo.com (later renamed Overture) out of a frustration with search. At the time when you did a search on Lycos, Alta Vista or similar for a category such as Cars you ended up getting 9 spam results and 1 proper website to meet your needs.

The idea actually came to him from the Yellow Pages business. He was a life-long entrepreneur and the first business he created out of college (actually, he founded it while he was at Caltech) was a company that manufactured high quality audio speakers. He took out an ad in the Yellow Pages (it was the early 80′s, pre Internet), which cost him $1,000 / month for a half-page ad.

He was skeptical of spending the money but astounded at what a transformational impact it had on his business. What he realized was that the full pages ads were displayed first (say for 3-5 pages) then the half page ads (another 3-5) then the quarters, the eighths. So the Yellow Page business was always “pay for placement.”

Bill’s rationale was the more serious your business was, the more you could afford to pay for placement and therefore the more likely it was for consumers. If it worked in the Yellow Pages, why not on the Internet?

So he launched a company with exclusively paid search. He said it was better than the Yellow Pages because he would provide pricing transparency. Users would know exactly how much was paid for each click.

Heresy.

Google was clear that they WOULD NOT go into this business. Amazon was planning on working with GoTo.com but actually pulled out just before launch. Not because they didn’t want to do Pay-per-click (they are huge buyers of SEM) but because they didn’t want other people to know what they paid for clicks! Funny story, after Bill presented at TED (back when Amazon was still a small company) Jeff Bezos was in the audience. He came up to Bill after the event and said, “clever idea, we should do that with you.” Immediately thereafter Amazon became a large business.

GoTo.com went on to ink huge distribution deals with Microsoft, AOL & Yahoo! – the biggest Internet portals of the day. They were a juggernaut and Google was a small company. Overture was sold to Yahoo! for $1.63 billion – not a bad result, hey? But obviously Google won the war. Bill attributes to two primary reasons. Mostly, Google just had way better organic results (“the loss leader”) so it was always preferred by consumers. Secondly, they had an owned & operated (O&O) website – Google.com – and Overture had shut down GoTo.com at the request of their very profitable and large distribution partners. That gave Google a huge cost advantage.

IdeaLab

In 1995 Netscape IPO’d and browsers started to become more prevalent. Bill had previously created a packaged software company called Knowledge Adventure the produced children’s educational software. He wanted to build direct customer relationships to get product feedback but only 2% of customers would ever return their registration cards.

So when he saw the browser it instantly dawned on him that this would be the greatest customer development tool ever. He thought, “This way any product you launch you can talk instantly with and get feedback from customers.” He had the idea that people would want city guides to tell them where to eat and what to do. So he founded … wait … CitySearch. Yes, long before Yelp or any similar service.

From here he realized that he was full of ideas and if he could attract people to come and run companies based on his ideas he could generate a lot more companies. So he founded IdeaLab with his wife Marcia Goodstein (he talks in the video about working with a spouse and also working with siblings). As an outsider who has observed them together in action I can say that they seem both very complementary in skills sets & temperaments and to make it work they have to be very respectful of each other’s opinions and skill sets.

IdeaLab has created 75 companies, leading to 8 IPOs, 35 or so acquisitions and more than 5 companies worth in excess of $1 billion. And when I say this I don’t mean they funded billion dollar companies – they literally created them. Some IdeaLab successes / brand names aside from Overture & CitySearch?

• eToys
• Shopping.com
• The Wedding Channel
• Commission Junction
• Cars Direct / Internet Brands
• Picasa
• Snap
• Insider Pages
• eSolar
• X1
• And now, of course, UberSocial, Bill’s latest project.

And while they historically had come up with 100% of their ideas and created the companies themselves, they are increasingly open to funding people with great ideas who want to build businesses with IdeaLab provided the companies will stay be in LA (and preferably Pasadena). They are very hands on. In fact, IdeaLab employees around 50 people who are not necessarily dedicated to a single company.

IdeaLab has a philosophy that if they can get a centralized group of expert staff to help with legal, accounting, recruiting, PR, etc. they can build teams that really focus on building & marketing great products. This has been their formula for nearly 15 years.

If you want to hear a ton of other stories like this please watch this special interview with Bill. And if you enjoy the post or video a quick vote here couldn’t hurt Testing HN efficacy / longevity.

Some other things you’ll learn:

• Bill believes that most of the best business ideas come from people solving personal problems that they have in their every day lives. Almost every business he’s ever launched has been this. I totally agree. I’ve talked about this often – the biggest mistake I made in my first company was going into an industry for which I wasn’t passionate.
• He made a comment that really resonated with me, “You need to make sure your product is 10x better than that of your competitors. First, you’re probably exaggerating how much better it is. But also when you’re developing so is your competitor. So if you shoot for 10x better you might hit 3x better and that’s super important to win.”
• Too many entrepreneurs focus on dilution. Bill thinks that most companies your success is usually binary. So the most important thing is to surround yourself with people who can help you succeed. Make sure they’re as passionate about your space as you are (and have strong knowledge of your area). But over-optimizing for dilution is a bad attribute relative to focusing on creating a big & winning company. I further that. My point of view is that most Internet markets create “winner take most” outcomes where the largest player is super successful and disproportionally less for everybody else. Think YouTube vs. the rest.
• Bill’s a huge believer in MVP. When he tells his stories from the 1990′s your realize that he was probably the original “lean startup.” They would give companies $250,000 to launch their products. They would launch quickly and test whether or not there is any demand. If there was, they would green light the project and if not they were likely to shut it down & move on to the next project unless the team was super passionate about continuing. Almost sounds YCombinator-esque.
• Test monetization early. You can fool yourself into believing that there is inherent value in your product but you only really know when somebody has to get out a credit card and part with hard-earned money.
• Don’t think about starting an incubator until you have real operating experience otherwise you don’t really have anything to offer startups. Bill had been an operator for more than 15 years and had had 2 successful companies before ever launching IdeaLab. I commented that many young entrepreneurs I talk to these days have a desire to “go plural” and create an incubator. I think this makes no sense. When I look at the very successful people doing this like IdeaLab, YCombinator, TechStars or Betaworks – they all have deep operational skills and prior successes.
• We talked about patents. Bill doesn’t think you should over invest in them but he does believe in protecting ideas when you have a true invention and many of his companies have done so. I brought up the fact that I find many larger companies abusing the patent system to slow down smaller competitors which is actually anti competitive. We had a nice discussion on this topic.
• In the video Bill talks about how he started his first entrepreneurial venture at 12 doing a mail-order business (very Tony Hsieh of Zappos who did the same thing). His first “real” business came in college where he designed audio speakers. He sold so many that after Caltech he decided to open a retail store. It’s still there 30 years later!
• He bought a copy of Lotus 1-2-3 (a predecessor to Excel for those youngens) and programmed his own accounting software for his business. Yet again, he was solving for his own needs. He turned his accounting software into a product he could see. He loved it because where speakers you could build a product for $400 and sell it for $500, with software you could build it once and have almost no variable costs going forward. Lotus loved it so much they bought the company and Bill went to work there for 6 years.
• Bill tells an excellent story about how IdeaLab became the first company to buy and own it’s own TLD (top-level domain) when they negotiated to buy the .TV domain from the tiny island of Tuvalu. They generated about $50 million for the island, which was transformative in building hospitals and infrastructure. It also is how they financed their entry into the United Nations. This is a great story – best if you hear Bill tell it.

Anyway, we discussed so much more. I don’t have time to type out all the notes. But if you have some spare time and want to hear from one of the most innovative (in the truest sense of the word) people you’ll ever hear from – I think you’ll enjoy watching this episode of This Week in VC.