“Unjargoning” The Investment Process

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When you’re building a new business, “it is hard enough to fight an IBM or a Google or a Microsoft or a YouTube” says Fred Destin. You shouldn’t also have to “fight the jargon of the people who are funding you. So what I’m trying to do is help entrepreneurs get inside the mind of the VC so they understand how funds are managed, what investors look for, and how not to get screwed.”

That’s exactly what he did in this interview. Fred is a venture capitalist with Atlas Venture.

Fred Destin

Fred Destin

Fred Destin is a Partner in the technology group of Atlas Venture. Atlas Venture invests primarily in early stage technology and life sciences businesses in the U.S. and Europe. Fred focuses on software and technology-enabled services and digital media infrastructure and applications.



Full Interview Transcript

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Here’s the program.

Andrew Warner: Hey, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. And what that means is I do interviews with people in the Internet business, entrepreneurs, venture capitalists, marketers, talk about how they built their businesses and bring back their ideas to you so you can go out there and build your business. As I say over and over, hopefully you’ll come back and do an interview here after you do that.

So you have an idea. How do you get it funded? Joining me is Fred Destin, a venture capitalist at Atlas Venture, which invests primarily in early stage technology and life science businesses. His firm’s investments include Daily Motion, the video sharing site that he says his firm got a lot of flak for investing in but which has grown to over 75 million unique users every month. He also sits on the board of directors of Seedcamp, a program that helps jumpstart the entrepreneurial community in Europe and beyond. Fred, welcome to Mixergy.

Fred Destin: Thank you. Welcome to the home of early stage venture capital.

Andrew: All right. Fred, you do a lot of explaining. At Seedcamp, I saw you explain the venture capital process. You spend time blogging about the process. Why do you do it?

Fred: I have a friend, a guy called Sean Park and you should go read his blog. It’s called the Park Paradigm. And he made a very important point to me one day which is people hide behind jargon as a way to make simple things complex. And I think the same is true of venture capitalists and the same is actually true of most industries which is the fundamental business of funding a company, giving it money and helping it grow should really not be that complicated. But it’s been made complicated because hiding behind legal notions, hiding behind complexity of structuring is a way for people to keep control. And I think there are distractions from the fundamentals of how you build a business, how you create the alchemy within a team and help it grown, and that this for me has no place in what we’re trying to do. It is hard enough to fight an IBM or a Google or a Microsoft or a YouTube in the case of Daily Motion without having to fight yourself, without having to fight the jargon of the people who are funding you. And so what I’m trying to do is help the entrepreneur get inside the mind of the VC so they understand how funds are managed, what investors look for, and how not to get screwed frankly. There’s a few things on which you can get badly screwed, and if you explain them right to people, they can go and practice self-defense with people trying to take advantage of information asymmetry.

Andrew: What kind of jargon? What is it that’s getting in our way?

Fred: Well, I think generally speaking especially in the world we live in of product centric founders, their expertise may be around designing, measuring, the right analytics. Their expertise is not going to be around whether a form of anti-dilution is particularly aggressive. So they go through a deal process which is usually an emotionally draining time for them, because they have to go fundraise. They have to go sell themselves. They may not be where they’re most naturally at home. So they have to go through this whole show business exercise, and at the end of it they’re very excited because they get a term sheet. And then it’s a race to the legal experts and help them close the deal as fast as you can and maybe not realizing that in the context of transforming the social contract with the investor into a legal document they’re actually going to leave some important things on the table. And notions of control matter. Notions of dilution, etc., matter a lot. And I think it is natural for the investor to try and play on the notion that there is a timing that is definite. There is a pressure to get the deal done that is well defined, and you’re out of your zone of comfort, so pass the buck onto me, I’ll deal with the execution. In reality, this is where founders get really hurt in the long term. And I would like to give them the tools to fight back because I don’t think this is how value gets created. I think fundamentally you build great businesses and in the process of doing that you create value for everyone.

Andrew: All right. And you said that they get screwed. How have you seen entrepreneurs get screwed?

Fred: So the classic ones, you have to watch the self-serving argument that some VCs make, which is hey, don’t raise too much at too high a price. It’s actually based on wisdom and experience, because if you raise way too money too early when you’re not quite sure how to spend it and you listen to an investor who wants you to take the company to the moon way too quickly for even your own level of comfort and then gets into hire some sales guy as CEO who fundamentally doesn’t understand your business, you end up spending $25 million, or whatever the amount is, and maybe your market timing was too early, maybe your product market fit wasn’t where it should be. You end up at the end of it with a stack of liquidation preferences that is kind of weighing on you. It’s like this new gravity that’s pinning you down, and now you’re screwed because there’s this mass of capital above you that just comes and pushes you down from an ownership standpoint, creates a sense that you can’t fail anymore because you have so much responsibility for taking all that money and puts you in a difficult place. So I actually think the number one mistake you can make is raising too much money and then handing the problem over to professionally hired CEO who doesn’t fundamentally understand what you’re trying to do.

Now there is other stuff, usually has to do with you’re running out of money and before you run out of money your investor basically tells you, “Keep going you’re doing well. Keep going you’re doing well,” whilst the partnership this investor belongs to has started to change its mind and doesn’t think maybe that you’re credible or backable as an entrepreneur or that your strategy’s working out. And they will tend to keep their cards close to their chest because they want to keep the option value as late as possible whether they think you should go outside for funding or they should be giving you the money. And you often find people come to the end of the road, they’re a few months from going bankrupt and suddenly you have to fire half your team and you’re in scramble mode to try and raise more capital. And you end up with the big wash out rounds, the horrible valuations. And again I think, in a way, if investors were more transparent about telling people early, “Hey, I don’t think you’re on track. I think you’re failing,” or, “I don’t buy the strategy you’re following. My partnership doesn’t believe in it, and hence we’re going to have to think about alternate sources of capital,” as a social contract point again I think that helps entrepreneurs understand, react, adapt and usually save themselves rather than getting into these horribly tense situations where bridge funding comes in at the last minute, people want to reduce the cash fund but it’s too late anyway. Change the strategy, reassemble the 747 in flight and change the captain and you end up with only your eyes left to cry and 3% of your company. Usually that’s when it goes really wrong. And it always has to do with alignment, and alignment is based on understanding. So I’m trying to bring understanding so it helps with alignment later on.

Andrew: How hard is to be honest and level with an entrepreneur, to say something like, “We just don’t think you’re fundable.”

Fred: If you start from the viewpoint that your job is to be loved by everybody, you have a problem because the reality is we’re putting money to work and somebody, an entrepreneur, has mortgaged their house and taken on people, whatever it may be, and it’s a very serious business to them that they’re building a company around it. And for you, it’s aligning the portfolio. Of course, I care deeply about every company, but I know some of them are going to fail. So there’s an inbuilt incentive for the investors when companies go wrong to almost don’t break too much glass, let it die on the vine quietly.

It is definitely harder to go out to the entrepreneur and say, “Hey look. You have a year and a half left of cash, but I don’t believe in what you’re doing. Go try and sell yourself or find another source of money,” or whatever it may be. Now I did it in the case of a company called Realeyes 3D, my first ever investment for Atlas. Turned out, great CEO, guy called Benoit Bergeret, nice guy, tried to reinvent the company three different ways, moved to the West Coast, upended his family life to try and make it happen. I told him almost two years before he was running out of money I said, “Benoit, you don’t need to martyr yourself over this business. The market piece is not working out. The pricing of what you sell has basically gone down to zero,” and for all the thought I put into strategy, I had no clue where to take the business. And so I kind of gave him the option to say, “For me you can try and sell the asset. You can try and fund something different with it, etc., but don’t go martyr yourself for me because I don’t believe in it. I’m actually going to step off the board. I’ll support you through whatever M&A, fundraising, etc., you want to do. but I can’t be there for you because I’m not, fundamentally I don’t believe in it and I don’t know what to do with the asset.”

Now turns out that guy almost took it as a personal challenge and went out and tried everything he could to make the company successful and ultimately couldn’t but fought really, really hard. And so I came out of there thinking, “Hey, it turns out maybe I was wrong and I should have kept the holy fire going.” But at least the guy had the option. He made the choice knowing that I allowed him to fail in a way which was, “Hey. It’s not working out. Don’t spend ten years of your life with that thing that I fundamentally don’t know how to make function.”

Andrew: Okay. One more thing you and I talked about before this interview. You said you like when people posit ignorance. What do you mean by that?

Fred: I’ll tell you a story of a company that’s not one of mine. I met this guy called Boris Saragaglia. I’m probably saying his name wrong. And he’s the founder of an online shoe company in France. So 25, 26 and he was my kind of entrepreneur. Basically went out and said, “I know nothing about shoes, retail or online marketing. I do know about math. So let me go out and find and test and iterate around where do people buy shoes and how do I track them, how do they react to certain brands and just run the math.” It was like slow burn, multi-channel, iterate, optimize, iterate, optimize. And I tell you every time I’ve tried to make an assumption of where people and what they look like demographically, usually almost always get it wrong. And then the speed at which these populations evolve is so fast anyway that you get it wrong even when you’re right.

So with a company like Zoopla, one of my companies that do online real estate, we ran the business on a three-month budget and a one-month product roadmap for the best part of two years. It was basically around don’t bother with long term. Just measure, push out, iterate, trust your instinct as to what you’re going to test but then go out and really do a fast situation on it. At some point of course, the company coalesces and you have to start making choices and bets and put real resources behind it. But I think as a venture capitalist and as an entrepreneur, you kind of have to posit ignorance for a longer time than most people realize when you’re testing the market, when you’re doing pray and spray, when you’re doing product marketing.

Now it is a very scary thing to do for an investor, because you want the plan and the milestones and when am I running out of cash. We’re kind of trained to think that way. So you have to go back and say, “You know what? We’re just creating overhead. Go back to basics and do anything that stands in the way of fast testing is almost your enemy. And anything you think you know about the market, unlearn it. It’s going to inform your choices but unlearn it. Make a mental effort of positing ignorance.” And I even try to do that around deals. Because what is the one thing that happens to a lot of VCs? You do an investment, you get burned because maybe you were right but you were five years too early. And then when the market does come around you think, “I’ve seen this market before. It’s impossible to make money. There’s too much friction. I’ve lost money there before,” blah, blah, blah. And you miss the real inflection points. So I think it’s very important that every year, every time you look at something, you have to go back and posit ignorance.

Andrew: Every year go back and posit ignorance?

Fred: I don’t know if I said this, but the only thing I know as a venture capitalist is that next year I’ll know more than this year. And if you ask me what I’ve learned, I’ve been doing this for over ten years, I love it, I’ll tell you that all I’ve learned is to be more and more humbled the more time goes on. So next year, I’ll be a better venture capitalist than this year. At some point, hopefully, I’ll prove that I’m a good investor. I’ll be worthy of David Skok on your interview roster. But in the meantime, the pattern recognition is useful, but it’s predicated on ignorance and humility because you realize you think you know but you don’t really know.

Andrew: Mike Jones, a well-known entrepreneur and I think the top angel investor in Southern California, I asked him what does it take to build a successful company? Or who are the most successful entrepreneurs? And he said the ones who just live and die by the data. Sounds like you’re saying the same thing. Just keep looking to the data to give you the information. But not past data, today’s data.

Fred: It’s an interesting schizophrenic mix because fundamentally instinct matters a lot. So a lot of the great products, especially those that address latent needs, were not built by listening to user groups or panels or whatever it may be. They were built by people who had intuition and fundamental product and design capabilities that said they’re almost kind of sensing what’s in the air and anticipating a latent need that isn’t there yet. Now, once you’ve done that, don’t kid yourself and measure and iterate and don’t fall in love with the product. The schizophrenia comes from this fundamentally trusting your judgment and taking the leap of faith. But then being absolutely, ruthlessly realistic about how well it’s working for you.

What you might end up doing is what Dave McClure has termed as “problem companies.” What problem are you solving? Can I measure the problem? Can I provide a solution? And then you do problem companies. Now they’re great because they’re usually low capital efficiency, you know who you’re going to sell them to. You’re in pure Steven Gary Blank territory of data lives outside the building. Let me go assess the need, answer it in a way that’s efficient. Now I like that. It’s a good way of investing. I also like latent need companies where you’re imagining different things you can do with technology that people don’t even realize they need and you go and serve that. And this is where I think the fundamental intuition and creativity matters. And then measure, iterate, don’t kid yourself, have intellectual honesty, etc., etc., etc. And so yes: data driven? Absolutely.

Andrew: I’m looking at a lot of business books because people now send them to me in hopes that I’ll interview them and the guys who aren’t venture capitalists, who aren’t new entrepreneurs but who are great speakers keep saying, “Build a business plan. Make it interesting. Have an executive summary because that’s all that anyone reads.” What do you think about that?

Fred: It’s one of my pet topics. It’s been said 150 times, “Nobody reads business plans.” Let’s make it official. Nobody reads business plans. You have to think about your audience. So if I’m your audience and I’m a venture capitalist, the number one thing I want to know is do I want to meet this person? So the proxy is social proof, so you get the intro that you want is what Venture Hacks I guess has coined as “social proof.” So find a way to demonstrate social proof to me and secondly, make me want to meet you. And then the first meeting is really not about telling me everything I need to know over 50 pages. It’s just about get me excited about you as an individual. Get my pulse rate up. I will tell you the first meeting I know within five minutes whether I want to fund someone typically. And I’ll know within 15 minutes whether I want to fund your business. And then how good you are as a venture capitalist I think is about how you rationalize yourself back down and do due diligence and tame the emotional response you’ve had to a business. But fundamentally you’ve got to fall in love with it, because you’re going to have to live with it for five to seven years. And it has to get you really excited and you have to see the potential, and then you rationalize your way back down.

Now where does a business plan fit into that process of getting me emotionally engaged with people and a proposal? The answer is it doesn’t. Now once you have the first meeting, what happens next? Well, I’m going to have a few things I really care about. What can you achieve over the next 18 months before we need money again? If you’ve spoken to 50 people within your market, what do they think about you or whatever it may be. There’s going to be specific data items that I can actually consume in less than three hours that I’ll go and ask you for. Show me proof that your audience wants this. Give me references I can call. Show me your operating plan. Whatever it may be. At no point do I want to consume 50 pages of data that is called a business plan. Frankly, it doesn’t fit anywhere in the process either at the beginning or at the end.

Andrew: I have to say for myself, as a young entrepreneur, it was helpful to do a business plan if only because it forced me to think about all the different elements of the business, all the competitive threats, all the opportunities, do numbers to figure out what’s most important to me. The spreadsheet I don’t think anyone looked at, but it helped me understand this is a key driver, how many new members I get and this is a key expense.

Fred: So I think there’s two things here. I think the mental process of forcing you to think through, map your competition, think about your USBs or whatever it is, actually adapt what you’ve been saying into numbers. So something that is not a business plan per se but a business model is very valuable. The only thing I’m reacting to is the 60-page long narrative that some people feel compelled to create because they think somebody reads it is a waste of time.

Andrew: Let me ask you this. I want to take slowly everything that you’ve said so far and then proceed. First thing that you’ve said is you don’t want someone from out of the blue hit you up with a request for money. You want that introduction. Let’s suppose I was an entrepreneur, sitting in the audience here today who said, “You know what? I like Fred. I want him as an investor. At least I want his feedback on why he’s not going to invest.” How do I, as an unknown entrepreneur, come and pitch you?

Fred: I’ll tell you the extreme of people who have no clue how to get to me because I’m new to the US. I’ve spent the last, well basically all my life in Europe except for a bit in Asia. There are people who’ve created relationships with me over Twitter and the blog. Why? Become they do intelligent commentary and I like the way they think. Most entrepreneurs I meet I’m not going to give money to. I also want to meet entrepreneurs who become friends and who are people I like to interact with. I’d much rather interact with entrepreneurs than fellow VCs most of the time. So if you don’t make it about the money, make it about the world of entrepreneurship in Boston and New York, whatever it may be. That’s a good conversation. And then I know you want to raise money, but there are ways to just generally create an engagement mode that is not just about asking me about cash.

Andrew: So talk to you on Twitter, comment on your blog. But the deeper conversations, the one about what the entrepreneurship community’s like in Boston or what’s going on in D.C. or Southern California, how does an entrepreneur who doesn’t know you get to meet you to engage you in these conversations?

Fred: You know, what I do for a living frankly is meet entrepreneurs. So I would say if I have name recognition around you and I’ve never seen you, my propensity, if you then send me an email saying, “Hey, we’ve been exchanging over Twitter or the blog or whatever it may be. I like what you write,” and sucking up to me in ways that are meaningful and the engagement’s kind of real, “Hey, would you mind taking a look at my business?” You know what? Absolutely. Because now you’ve made the effort of producing something, you’ve produced a few comments on the blog or you’ve made me think about a new idea, I will absolutely spend the time to preview your business plan. It’s that simple. And I’ll think about whatever you send me, I’ll think about it deeply and maybe we’ll do a half hour call, maybe we’ll do a one and a half hour meeting, I don’t know. But at least now you get engagement. It is undoubtedly better if it comes through a trusted third party who says, “You should meet that guy.” That’s the most likely to hit home.

Andrew: Let’s talk about that then. Who’s a trusted third party that I might get to know that then would open a door and introduce me to you or to another venture capitalist like you?

Fred: The beauty and frustration of early stage technology is that there is no rhyme or reason as to where stuff comes from. So it goes from my favorite digital media recorder, Shane Burgess in London, Ed Zimmerman, a lawyer in New York, Sean Park angel investor, a fellow entrepreneur usually is good, and there are people that have good filters. So Joe Cohen, my CEO at Seatwave, has only ever introduced me to people of high quality. So when he said you have to go meet Joy Marcus in New York and I was in London at the time I literally took a flight to meet Joy Marcus in New York because Joe said I should meet Joy. And she ended up being the PD for DailyMotion US that was four years ago. But meaningful introductions I will take very seriously. So you have this kind of pecking order of things I’ll pay immediate attention to all the way down to . . . if you really don’t know anyone, that’s what I was saying: build a relationship on Twitter or the blog, that’s fine way of doing it.

Andrew: I feel like I’m becoming a bit of a curmudgeon because I get so much email lately that when I get an email that’s really long, over two paragraphs, even more than one paragraph, I get frustrated. I don’t know if this is internally me or am I recognizing a pattern here which is the shorter emails get responded to by me and by other people faster. So what I’m asking is what’s that first introduction email? What should that look like with you?

Fred: It’s the same issues with the business plan. If you can’t express it in less than a page, it probably means you, as the sender, haven’t made the mental effort of abstracting it to the data points that I need. So I’m Fred Destin. I get 200 emails a day, 250 newsletters. If you’re Fred Wilson, the other Fred, you probably get 400 or 500. So you think about the time required to process email and make a decision around it, the time that I hit enter and I see a full page that is verbose, etc., I’ll probably hit delete. You know why? Because the four minutes required for me to read, process, think about how I should follow up, etc., you’ve just made the bar so high. If you just send me a three liner saying, ‘Sean Park invested in (________) and he thinks you should look at this because . . . and I know Sean and he recommended that. Here’s what we do. Do you mind if we set up a chat or do you want some information?” You’ll get a response guaranteed, because now you’ve been thoughtful, you’ve brought me a bit of social proof, you’ve told me about a comparable, and you said what the action point was and it’s actionable. It’s that simple. You’ve made it actionable for me if you spend the time of making it personal, relevant, and informational.

Andrew: And actionable. I like that too. I try to do that in the emails that I send out when I want to interview someone. The email that I sent you I think was three sentences; the request right at the top, and I think it was social proof line number three which is, “Here’s Fred Wilson or maybe Paul Graham.. He did an interview.” What about this high concept pitch — three words to describe a business? Can you describe most businesses in three words?

Fred: So you’re thinking about Cisco, the network of networks. Or YouTube is the Flickr of videos is kind of funny because that’s the apprentice overshooting the master by a factor of about 50. Listen, if you can, it’s beautiful. The abstraction of marketing down to simplicity itself like that is wonderful. So just as an exercise, it’s got a value which is how far can you take it down until you reach the core essence of what you’re doing in a way that’s extremely elegant. So your business, your complex value proposition, you know your business so well that you think people have to get the richness of it, and to have to explain it takes you a couple of paragraphs. Well, no. You’re not doing your job right in terms of abstract it down to a level where every salesperson in your company, every customer almost will know how to remember you. And that’s the beauty of it which is when everything else is said and done, what do they need to remember about you. When 90% of what you’ve told them is decayed down to nothing, what are you known for? And you know Seatwave is a place to find tickets. Zoopla is the smartest resource for online property. DailyMotion is a place to watch great video. Whatever it may be, but you’ve got to abstract it down to something that is memorable, unique and that’s you whether that’s three words or a sentence I don’t really care. But it just, like Occam’s razor, it needs to be as simple as it should be but no simpler. And simple as it can be but no simpler.

Andrew: What about your firm, Atlas Venture? How do you sum that up in one sentence?

Fred: Entrepreneur centric early stage capital.

Andrew: Entrepreneur centric early stage capital.

Fred: I just made that up, but I think it works pretty well.

Andrew: I thought I was putting you on the spot there. Hey Fred, we’ve kind of lost the connection or at least it’s not as strong as it was in the beginning of the interview. Let me hang up with you and call you back and we’ll have a clear connection. I’ll be right back. Yeah. It’s a little bit better.

Fred: I’m good.

Andrew: So first email hopefully has an introduction. Definitely will have a short explanation for what the business is and a request for an action from you. We get in the door with you, either for a meeting with you or to pass information on to you. What’s the next step?

Fred: I will have a tendency to try and leave the office and go see people in their environments as much as I can. We’re still in an office in Waltham, beautiful view of the lake. We’re moving to East Cambridge in Boston in a few months. I think venture offices are where creativity comes to die frankly, so we try to stay outside of the building as much as possible. I would say typically for me the first meeting is when I decide to spend time on something. And so the filter in that first meeting’s pretty high. In fact, it’s really where I go and arbitrage where I spend my time. Because, you know, remember my first obligation is to my existing portfolio and there’s always stuff going on if you’re trying to be involved. So the first triage, that first meeting, could never be underestimated in terms of creating a bond. Not explaining everything but creating a bond with someone whether they want to work with you is the primary thing you’re trying to get out of it.

So my next step would probably be to try and spend a couple of hours at a company and just see what they’re like in the flesh and just see what the environment is like and get a bit of a better sense. But there is really no systematic way in which the process runs. So in one case it could be, “Are these people really A+?” So are there simple ways for me to go and check them out, get a few references, make sure they’re absolutely as good as we think they are.

Point B could be, “We think this is intriguing. We have a guy in the segment who’s really, really good. Can I intermediate a call with them and be on the call? Is there an intro to potential clients I can make to see what they’re like in the flesh?” It could also just be around, “There’s something that concerns me around capital efficiency of the model and it seems like it could be really cash consuming and I want to check that out before we proceed.” Or it could be what happened to me at Spotify which is Spotify25 pre-series A. Fantastic meeting, I love digital music and then you get to the end of it and the guy’s like, “It’s going to 45 million Euros pre.” I thought he was joking. He thought I was joking when I said I thought he was joking, and it was a fairly short conversation in the end because it was just priced out of range for me in a meaningful way.

Unfortunately I don’t think there is a systematic process nor should there be. Every company’s unique. People are unique. My talent and education’s going to be different, so is yours and so this is where you have to understand your audience. And as an entrepreneur my only recommendation would be just pick one or two next steps. Again it has to be short and actionable. VCs don’t do big slices of work for a week and a half and then come back. They basically are going to do two meaningful things a week until they decide they’re going to drop everything else and just look at you and try and get the deal done. So when you’re early in these processes it’s just like, “What are the two things I can do this week that are helpful in moving Fred along from A to B?” And effectively what you’re trying to do it you think about it is you’re trying to facilitate the process of your sponsor within his partnership. How do I make you comfortable? What is the actionable item of data that you can get from me this week that’ll help you move to the next stage? And it could be mapping of the space. Few people do this well but I would recommend it. Map your space really well. Who are the clients, channels to market, competition, whatever it may be. But if you just provided people with a clear roadmap of the space that you’re in instead of a list of competitors. And they understand: partners, friends, foes, who are the ultimate customers here, etc., you’ll probably save yourself a lot of time just by transmitting that knowledge across in a simple way and helping move people along.

So I would say just two things a week that are meaningful in moving the conversation. And then at some point, the VC will drop everything else. When we decide we want to do something, basically I tell Alison, my super trusted PA, “Clear the agenda. Even my non-comp calls.” I’m focussed on whatever the next investment is and then everything drops out and it becomes a full on exercise to just get our arms around the company, convince them we’re the right partner, make ourselves feel comfortable, do 15 (________) whatever it takes.

Andrew: I have a note here to come back and ask you about the company that got your pulse rate rising right away. I want to know who they are and the story behind it so that I understand what does it take to get your pulse rate rising.

Fred: I think looking at yourself in the mirror when you f*** stuff up is important. So one of my big misses of last year is . . . I have a friend called, Errol Damelin, and he’s from South Africa. And Errol’s someone you should interview because he’s fantastic. So I’ve known Errol for a few years and he started a company called Wonga, which is about personal lending. It’s basically two sliders — how many days do you want money for and how much money do you want. It’s the simplest consumer interface on the planet. And so Errol got me excited partly because of just the sheer passion of the guy, and I know Errol relatively well but even then he just put the all, the dedication he had to making this a large successful company just came across with a lot of substance and you thought, “Wow. That’s fantastic.” And he had a mixture of this very deep consumer engagement, this absolute passion he was going to build a big business and then he demonstrated to me. So it was all around the user interface, the UX design, the sub-qualities of the brand and then suddenly, unexpectedly, he dumped the numbers on me and it looked like an economic machine. And so he got my emotional side engaged; liked him, liked the product. And then he just came on the back of it with this unassumingly almost started running the numbers. He didn’t use the words, “Oh, these are conservative assumptions.” He just let me come to my own conclusion. He just ran the assumptions; here’s how much we make, blah, blah, blah, blah. And he almost let you run the math in your head. And it’s something that you need to understand is how do you get people, twist the table around. Don’t tell me you’re going to build a huge business. Let me come to that conclusion. And that’s how he got me emotionally engaged. The guy’s a master at pitching. So he started with this soft consumer-centric stuff, and then he let me come to my own conclusions on the numbers while literally sitting across the table going, “Wow. This could be huge.” And he had a smirk on his face and he thought, “Okay, calm down.” He let me come to the conclusion.

Andrew: I see. Do you think it’s a skill, or is it just something that they’re born with? The guys who can get you that excited, who can get you to get yourself that excited?

Fred: I will absolutely state and I believe that this can be learned. The way I put this is everyone has an inner actor. If you’re a geek, don’t try to be Errol Damelin. If you’re a shy person, you’ve got to find a different way of selling that is in tune with your own personality. But in the process, with enough training and enough understanding of the core, first of all of your core strength, the art of underselling, everything at the end is sold and with VCs underselling is by far the best technique. But understanding your core strength, who you are as an actor, everybody has an inner actor and then playing to your own strength, I absolutely believe anybody can train themselves to do this well.

One of the things though is Tim Draper is a guy who’s a bit loony and funny and whatever, but he has one thing absolutely right — it’s show business. And show business involves putting yourself on stage. And Andrew, you do this beautifully well, but you put yourself on stage and you just go outside of your zone of comfort, you reach out well beyond how you normally speak, express, etc. and just learn to be a bit of an actor. And so I think there’s some skill there that needs to be learned, but I think everybody can learn it. And if you’re a serious guy with a deadpan sense of humor and you’re from Finland and you don’t even speak English that well, you can still make it work. You’ve just got to leverage your own skills. You’ve got to understand yourself as a presenter. But I think it’s a life skill that is required as an entrepreneur and if you don’t have it you better develop it.

Andrew: Before Southern California was as big as it got recently, what I would see is entrepreneurs who lived in Los Angeles, who lived in San Diego and wanted to get funding would go into the local venture capitalist office essentially for practice. And then they would go up to Silicon Valley where they really were hoping to raise their money. What do you think of that as a tactic?

Fred: So a few things. There is a tendency now to give people recipes for how they pitch their story. So Dave McClure was at Seedcamp and he did his presentation or whatever it’s called, and it’s generally absolutely right and he does it beautifully well. There’s one thing I didn’t like about it, which is that it’s recipe based. Here are the seven things you need to have in your presentation and the order in which they need to come out. So before you go and train on your local venture capitalist, I would say do the effort of white boarding what it is you’re trying to do. Fundamentally brainstorm the qualities of your company, why they’re unique, how you’re going to address a big market, etc. And don’t start writing your slides too early or trying to tell your story too early. Just go back to basics.

And then second thing is think of anecdotes and stories. As you rightly pointed out at the beginning of this interview with me, people only remember anecdotes and stories. And so you’ve got to bake these in. And before you go train on your local VC, train on your mum, your girlfriend, your employees, your board members. I’m sure most people don’t train hardly enough because they’re very anxious to go out. They want to go out, they want to see the VCs, they want to get the money raised so they can go “back to work.” I tell you the planning piece is going to save you a lot money and possibly evaluation down the line so it’s really worth doing.

Now, training with your local VC? Yeah, why not? I think you learn a lot in these first few meetings as to how people react and where you’re weak. I’m not entirely sure you need to burn a venture meeting to do that. I’m sure there’s a friendly banker or a few people who have been in this game longer. But I can see the logic. Before you go and see Sequoia, go train on the smaller fund down the road. If it works, why not.

Andrew: Tell me about the kind of social proof that works on you and other venture capitalists. That seems big.

Fred: Social proof is almost a bit overused today because if you want to be a bit cynical about it social proof is almost easy to get by now because a lot of people are writing micro-tickets and using that as social proof. So there’s an engineering around getting social proof too. So I care more about who’s leading the project and if who’s leading the project is both, clearly from a team standpoint, but if you’ve managed to build an advisor group around the company that doesn’t take cash. It takes a bit of equity. But it’s whether these advisors are meaningfully engaged. So the social proof for me is that somebody who’s credible within your industry is actually willing to spend their most precious commodity, which is time and attention on you, rather than necessarily money. So they’re going out of their way to call people or to help you out or to spend time with you to refine product or strategy or whatever it may be. And then, I don’t have any rules. I would hate to give people rules. I’m trying to think through recent examples of how we got stuff funded. The best social proof is in the entrepreneur and then how they smartly built a group of people around them that help support what they do. But for me, the fact that there’s an engaged lead and somebody who’s put time, attention, love, TLC around the company matters more than whether you can align a list of names of guys who’ve maybe met you through angel lists and talked to you once on the phone.

Andrew: Do you have an example of someone who’s done it well?

Fred: I’m going to use a self-serving example. When Jeff Fagnan here, one of my partners, started to work on one of our companies called Veracode. Veracode was started with a hacker team, a gray hat team, that was inside Symantec. So started working with these guys, Chris Wysopal and people like that. Got a bit of initial around the IP, went to source Macrovision the rest of intellectual property and then managed to get Mac Moynihan as a CEO around it and then get Maria Cirino, who’s SVP at Symantec, to come and join the board. It took him about 18 months but he completely engineered best IP, credible CEO, great team and then the best possible co-investor coming out of Symantec around it. But it took 18 months; it was a long time coming but just get a relevant group of people with the bar being really high around the project.

So the best social proof for me is going to be vertically focused. If you get a great guy to lend his name who’s been in the Valley a while but he actually doesn’t belong to the segment you’re trying to enter, it has less value then if you’re going after . . . I’ve invested in a company called Blueleaf. It’s kind of hacking asset management. If Blueleaf can get the guy who used to be SVP of Product at Intuit or who used to be on the board of Mint or whatever it may be, that’s highly relevant to me because they’ve now reached across the continent to somebody who’s relevant to their industry who doesn’t know them and is willing to engage with the project and lend their name. But I hate to push rules to people. Again, I posit ignorance.

Andrew: I think on your blog I read Ron Conway’s quote about how every entrepreneur should be funded. Do you believe that that’s possible today, that every entrepreneur can get funded?

Fred: Well, we live in a beautiful world where $100,000 will allow you probably to build a sustainable business if you do it well. I think part of the debate around entrepreneurs should get funded depends what lens you look at the company through. So there’s been a lot about VCs are dead and super angels are the way to go, etc. And I would say that it depends what capital is fit for what purpose. I think every entrepreneur should get funded. I think most of them are completely irrelevant to the kind of money that venture capitalists provide. Which by the way is fine, but it’s the equivalent to the corner shop of old, I guess. It’s the local entrepreneur who started a general contract business now he can start an online business with 100,000, drive two or three million of revenue, and sell it for ten. That’s great. It’s just not the market we’re in but it’s wonderful. And now you can do it with tech and you can do it from anywhere in the world. And it doesn’t matter who your dad was or whether you were born in Bangladesh or whether you went to the right school. You can do it with 100k raised from your local community and knowledge and talent. I think that’s wonderful. I think the whole debate about whether they’re dips*** companies or whatever. None of them are small companies but that’s okay. There’s nothing dips*** about small.

Andrew: That’s a reference to what Michael Arrington said. He doesn’t want to see more companies like that. And I think Sara Lacy on TechCrunch said that’s what he sold his company for.

Fred: I’m sorry to interrupt you. Apparently it’s a VC who said that so Arrington was just reproducing what a VC told him. I think it’s irrelevant. I’m with Fred also on this one which is there is a big pool of talent that can go out and try and build companies and it’s wonderful. The piece where we’d be a bit concerned is sometimes you see two or three companies being started and each of them are vaguely interesting. But you could see if these three entrepreneurs worked together as a team you’d have a phenomenal (________) team. Probably they don’t do it because . . .

Andrew: Like who? Who for example has done that?

Fred: You mean getting rock star teams together from the outset?

Andrew: Yeah. Three entrepreneurs who work together, it seems like a little bit of a challenge because each one of those entrepreneurs has his own vision, even if it’s slightly different than someone else, the reason he’s an entrepreneur is to see his vision his way often. And three leaders feels like they could tear apart a company.

Fred: For sure, if you’re going to get three leaders inside the same business that might be tough. But it’s interesting to read the early days of PayPal where the guy said . . . one of the origins of PayPal is you took people with completely, incredibly diverse backgrounds that were hard to manage, they were all really talented but came from different walks of life and that’s what made the company special. My only point is to say you tend to have single founder companies and the single founder is thinking, “I can take the company from A to C, i.e., pass the launch of a product with a bit of a proof point before I go and hire my lead engineer for example because instead of costing me 20 points of equity he might cost me three or five points of equity.” And if you push that logic too far, I’ve certainly seen cases where you think that’s an interesting project, that’s an interesting guy, but he’s really not the full article. And we may be better off if he actually founded a great technical founder who himself has started another company who he thinks he should be the CEO of and this guy who’s really not a tech founder, thinks he should be the CEO and they kind of have a grown-up conversation about it. And they end up building two vaguely interesting companies instead of a great one together.

Andrew: How about events? If I’m an entrepreneur, I see you at an event. Lots of other people must see you and want to have a conversation with you. It’s a great opportunity for me to get to know you despite all the competition for your attention. How do I do it right? How do I get your attention in a way that I can possibly follow up with you and maybe we can do some business together?

Fred: That’s a good question. I make a point, and this is costing me time and energy, of trying to be really accessible when I go out to events because I like it and I usually meet interesting people. I’m going to make the same comment I made earlier, which is if you make the conversation about raising finance, it is less likely that you’re going to get there versus making the conversation about creating a relationship. Because if I’m standing there and you’re trying to make me assess whether your business is fundable and there’s another three guys listening in, it becomes a bit of a stage. It becomes a bit like the Roman debates on the public marketplace, which is not what you want to do. What you want to do is have an interesting conversation about a mutually fascinating topic and then you’ll say, ‘Fred, it was really nice to meet you. My name is Rachel. Let’s keep in touch and can I come and talk to you about my business?” And if we’ve had a good engagement together, the answer will be, “Absolutely.” If you’re trying to pitch me your business in 35 seconds and then you’re expecting that I’m going to be able to isolate my frontal cortex enough that I can literally deeply think about it and provide you with a small view on it, you’re not understanding the context correctly. So don’t make it about funding, don’t make it about you, make it a mutually beneficial exchange where I’m going to find you interesting and intelligent and want to engage with you more. And hopefully vice versa.

Andrew: I see. So I might have read on your blog that you go kite sailing or I hear that you’re a snowboarder or something, I might want to talk to you about that. Or if I saw you had a provocative point on your blog recently, I might want to bring that up and have something to talk to you about there and then we can continue the conversation later and bring up business. Does that sound right?

Fred: Yeah. I think so. I do this job because I love working with entrepreneurs. I have no desire to be an entrepreneur, otherwise I would be one. I’m very happy providing financing and helping architect great businesses to the extent I can. But fundamentally, I do this because I want to meet people. I like it. So you could talk to me about how you’re trying to apply the lean startup concept to starting your business and the stuff you’re finding difficult about it. You could tell me about how difficult it is to recruit project management people round the Boston area. I don’t care what the topic is. But if you’re in my face, trying to pitch me a business and saying, “I need a meeting with you next week,” I tell you my immediate reaction is going to be, “I’m going to go grab a beer or coffee with someone who’s not trying to sell me something.”

Andrew: Finally, I was reading Eric Reese’s blog this morning and he said that there are lies that entrepreneurs tell about their businesses either to deflect from the truth, which is really how they build their companies, or maybe it’s because they just want to get attention for ideas that people get excited about. What lies do you see that entrepreneurs tell? What are the fake stories like, “That entrepreneur really worked like mad.” And the real stories underneath it like, “You know what? He cut a couple of corners and did a few things that were a little gray in the beginning to make money and then used it to grow.”

Fred: You’re hitting me with a relatively complex question.

Andrew: And it’s hard to come up with something on the spot, I can imagine. But I was wondering if there’s anything you see happening over and over. Anything that stands out.

Fred: There’s some cardinal sins. In the beginning when you come in and pitch a business and you’re very early stage, you might have very few assets in it. You might have one deal, one business deal, you might have one person that’s going to join your board, whatever it might be but you’re going to have very few things. The notion that you would misrepresent them and make them grander than they are, which a lot of people do, is a complete waste of time because I’m fundamentally not investing on the basis of the assets you have. I’m fundamentally investing on you as a person. Yes, you tell your story, you spin it but if there’s any misrepresentation as to what you have, even if you think it’s minor, that’s likely to come back and bite you. So you telling me, “I have a deal with Verizon and it’s going to be worth that much, etc.” I’m only going to have a few things that I can hang my hat on and they’re going to help me understand whether you’re a trustworthy person, whether you’re transparent. If you have any difficulty with the relationship that you have with Verizon, to take one example, and you’re trying to gloss over that, it is most likely I’m going to have a call with a couple of guys there and then I’ll find out. And then you’ll destroy a relationship of trust even before it begins.

I’m completely a trust-driven animal, I’m a gregarious animal. So whatever you do, don’t ever do anything that could break trust. Even if you think the rules of the game allow you to be a little bit gray about what you’re representing, just be truthful. Even if you lost Verizon, I don’t care. If I like the project, we’re going to go through a few bumps along the road before you’ve built a real company. So probably the number one thing that annoys me is this kind of misrepresentation that’s so easy to see through about the cash people took, the people they have on their advisory board and how engaged they are, their progress with clients or whatever it may be where you end up wasting everybody’s time and you destroy trust in the process. Trust is the most valuable asset for the longest time in early stage companies.

Andrew: I don’t want to leave it on a negative. Let’s go on an up. What do you see in entrepreneurs that make it? The ones who are really hungry, who are really ambitious who end up actually making it. What do you see that they have in common?

Fred: There’s a great Ben Horowitz post on this and it’s something that I fundamentally believe. So I hate, hate, hate having to replace founder CEOs. And there is nothing more wonderful than seeing… we have a guy called Eric Mosley at Globoforce who scaled beautifully from quite a young age or Chris Ahlberg at SpotFire who scaled all the way. They’re schizophrenic people and they’re wonderful. So in the sense that there is an absolute belief in what you’re trying to do which is grounded in reality, there is a full recognition of your own failings. So the guys that are doing well are the guys who believe anything can be done and keep pushing out these big, hairy goals. So when you think your company’s going to do $5 million next year, ask a different question. How can you do $20 million next year? And it sounds impossible until you’ve asked the question. And now you’re projecting yourself into a positive outcome where you’re making $20 million next year and you’re thinking, “How do I get there?” And it doesn’t sound that far-fetched anymore. So there’s this capability of pushing out big, hairy goals and getting other people to buy into them.

And then there is a notion of self-awareness of where you’re weak. And this is maybe the most underrated quality in the whole world of entrepreneurship. Self-awareness actually matters a lot. So you can compliment yourself early on where you know you’re going to fail. Most people are not good two level managers. So they manage well a team of 20, 30, 40. When you get to two levels, which you eventually do, they fail. So how do I anticipate that? Because it’s a different skill. And just knowing who you are as a person, and so protecting that maverick side of you that pushes big, hairy goals out but then surrounding yourself with people who help you where you’re weak and being self-aware enough to recognize that early so you don’t burn out, so you don’t crash, so you don’t get fired by your investors or whatever it might be.

Andrew: Well, that’s a great place to leave it. Thank you for doing this interview, Fred.

Fred: Pleasure.

Andrew: Guys, thank you all for watching. Fred’s with Atlas Venture. But check out his blog: FredDestin.com. D-E-S-T-I-N.com. I think it’s a really good read. I thank you all for watching. Bye.

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