May 2011

Posted by David Shen, Director of West Coast Operations

When I say MIT Problem for Startups, it’s probably not what you’re thinking!

The problem I’m referring to goes like this.

You’re in high school. You bust your butt and become valedictorian. You’re at the top in grades, and you’ve proven it through 12 years of school, beating out all your fellow students. You’re at the top of the top and feel great. You’ll probably get an award or two from the school. Maybe you’re Captain of the Math Team or head of Honor Society and gotten awards and/or recognition for that. You’re at the top of your mountain at your school and so you apply to MIT and you get in.

The day you arrive at MIT, you find yourself surrounded by valedictorians. They were all at the top of their class at their respective schools, all scoring 1600 on their SATs, and are all super-duper smart.

The day before you arrive at MIT, you were top of the top in your own world. The day after you arrive at MIT, you’re now…average…amongst your new peers. Everybody is equally smart and excellent, so you’re all now mediocre. And thanks to grading curves, those As you got in high school just turned into average Cs. Was your previous valedictorian greatness enough to get you more than average Cs in a sea of valedictorians?

Boy that sucks, doesn’t it?

This is the problem I’m experiencing with a lot of startups. Everybody says they’re great, except that when I look across all the startups I meet, you’re all kinda average now because you’re all equally great.

That sucks for both you and me.

It sucks for you because there are SO MANY startups and your current greatness is not enough – you have to be even better! This is at all aspects of your startup too. You need to now out-execute more, your product needs to be exponentially better to your customers, you need to out-fund raise everyone else. Everything you do must be even that much more superior to your startup peers. This is even more true against your competitors. Think of all the startups who are doing something that directly or closely competes with what you’re doing, or competes for a little slice of consumer attention – you can’t just be a little better, you need to be a LOT better.

This also sucks for me. My job is to pick which one of you startups is going to win next. But if you’re all great at some level, then even out of the set of greats, you look mediocre. That’s bad! Because for startups at early stage, the failure rate is very high. So no matter how great you really are and/or you think you are, if you are just merely great you blur into mediocrity against all the other startups competing for my investment. This is also a problem from a competitive standpoint since you’ll all have to execute against strong, motivated, super-smart peers. If you don’t become exceptionally great against your startup peers, what chance do you have to convince me that you’ll be the one that will win and not a competing startup?

This is the MIT Problem for Startups and it’s getting worse day by day.

(Authored by David Shen, LaunchCapital’s West Coast Director)

Before I joined Launch Capital, I spent some time with my future manager on how we would work together.  Joining a fund in many ways is like joining a typical company, but in many ways it is definitely not.  I asked him a battery of questions which are unique to working for a fund versus any other company.  Since many people are looking at venture capital as a career, I thought I’d post some of the questions I posed to Launch Capital before joining.  Here they are:

Fund Strategy and Philosophy

1. What is the fund term?  When does the fund go raising more money? How will I be involved in that process?

2. How is the return to me calculated? Is it a carry on the profits?  How are returns distributed to the LPs, and eventually to me?

3. What kind of deal terms do you present when leading?  How is it different at early stage and your later stage investments?

4. What is your message to entrepreneurs?  The deal terms will reflect part of that.

5. How much money would I be responsible for deploying as a goal and in how much time?

6. Are you ok with deploying money into exploratory startups or would you rather not? Or do you only want to look for big opportunities (or as big as they seem at the time)?

7. What kinds of startups do like investing in and why?  What kinds do you want to stay away from and why?  Are there any investment theses I should be aware of? Can I invest with my own investment theses?

8. What is your typical due diligence process?  Can you send me a list of docs you ask for?  Do you have a documented process i can take a look at?  Am i personally responsible for due diligence for all my sourced deals?  Do you send all of this to your lawyer for review?

9. What research resources are there?  Do I have to do all research myself?

10. Would I be signing docs on behalf of the fund or would someone else?

11. How much autonomy do I have? How fast can i really pull the trigger? Is there any approval process necessary at all, however small?  Is there a partnership and partnership approval process to work with?

12. Once we determine “yes we will invest”, what is the typical process from that point forward and how fast can it be?  Who has control of wire transfers of money?  Is there a control system there (ie. someone still must approve all wires)?  I also assume that early stage is going to be faster than later stage?

13. Are there any co-investment rights and if so, how would that work?

14. What are the expectations on failure rate?  Early stage failure rate can be higher than the typical VC failure rate.  If we’re going to go full bore starting with early stage and with larger checks, I don’t want to have some sort of $$ shock if expectations are not set right.

15. On the other end of the spectrum, are expectations set correctly regarding return of capital timeframe?  If we are playing more long term and with bigger checks, the timeframe could be 10 years or more.  Or do you have a timeframe as to when you’d like funds to return?

16. Do you have a detailed strategy statement and mode of operation for the fund?

17. What is the current theses that the fund invests in?  What are the philosophies that are used to determine investments?  Are there any areas that you focus on or stay away from?
18. Is your intention for me to go for board seats at early stage whenever the opportunity comes up or should I be less aggressive? For later stage, will this be different/same?19. Do you have any restrictions on me taking on advisorships?  If I take one on, in whose name do I put in under?  Can I put it in my personal name?  Is it ok to take on advisorships of companies we do not invest in?

20. Does the fund want my pro-rata investments?

21. Is there any notion of vesting of the carry at all, based on my time of service with the fund?

22. Are there any kind of common VC-like fund terms i would be operating under, like clawback provisions and the like?
23. What are the terms if I leave the fund?

24. What kind of accounting type reporting do you do to your investor?  Early stage reporting can be challenging to get specific and accurate info.  What is the resource we can use to do that or would I be responsible for that myself?

25. How often do you present to your LPs? Quarterly? Other? How involved will I be in this presentation?

Management and Operations

1. Can i get an intro to your other team members?  I’d love to chat with them about their experience working for the fund, if they are willing.  it would also seem good that they get to know me also and make sure they are ok with me joining the team…?

2. I am pretty much self managed these days. but who would i officially be reporting to? If so, will there be any kind of performance metrics I would have?
3. Are we indemnified when we work for you?

4. I see you have a blog up.  Can i cross post some entries from my blog to yours?

5. Can I get an office somewhere?  What is the price range?

6. How often do you get the team together to strategize and update?  Do you have any regular update calls/mtgs now and if so, how often?

7. What is expensable and what is not?  Is there an expenses budget I work within?
8. How does the group work together?  What is the interaction style? How does collaboration work?
I included questions on Benefits as benefits in a small company are often much different than joining a large firm with a lot of resources to pay for employee benefits.  I think a detailed look into what kind of health insurance and other benefits is important here.
1. What are the benefits?
2. What are the details of the health insurance?
3. Is there a 401K?