Gonna Need A Lot of Flowers

Jay Gibbons, a designated hitter for the Baltimore Orioles, lined a foul ball into the stands earlier this afternoon. Unfortunately, the foul ball hit a spectator in the ribs. Even more unfortunately for Gibbons, the spectator was his wife. Thankfully Mrs. Gibbons is reportedly bruised but okay overall. On the other hand, Jay Gibbons will be sleeping on the couch until 2019.

3 Additional Investor Preso Tips

Guy Kawasaki's 10/20/30 rule of investor power point presentations is a great guide on how to pitch your startup to a venture capitalist. If you are preparing to pitch and investor, Mr. Kawasaki's post is a must read and rather than rewriting his article I'll just add three quick tips that I learned from my experiences with Cryptine Networks.

1) Never send your power point slides in advance to anyone

If you follow the 10/20/30 rule, your slides don't convey the entirety your key points without explanation. Sending your slides in advance allows your audience to build assumptions without your guidance. This bit me a couple of times at Cryptine Networks in two different ways. First a VC asked me for the slides, in addition to my executive summary, in advance of our introductory meeting. I was happy to send my slides to him, but it really wound up disrupting the flow of the meeting. The problem was that the VC felt he understood my pitch from the get go and asked me to skip several slides. This is kind of a catch 22 situation because if you don't skip the slide(s) you risk losing the VC's attention while you bore him/her with information they think they already know and if you do skip them you risk the VC missing key points. I skipped the slides but it was clear the VC hadn't really understood the points I was trying to make and that hurt me for the rest of the presentation.

The second case where I really lost a great opportunity was when a VC asked me to send my investor preso to one of his experts as initial due-diligence after my second successful meeting with him. After his expert had a negative reaction, I was able to convince the VC to share his feedback with me anonymously. To my dismay the expert was skeptical over issues that I always address in the spoken part of my presentation but not directly in text of the the slides. In fact, I agreed exactly with what the expert was saying and felt that I had legitimate answers to his questions but unfortunately there was no way for me to discuss the issues with him directly. If I had pushed for a webinar instead of just sending my slides I just might have raised my seed round from one of Sand Hill Roads most famous VCs. That mistake really hurt.

The point in both cases is that your investor presentation is not merely the slides. Its what you say, how you emphasize it and the dialogue that ensues with your audience. While the slides themselves are important, they are not sufficient alone and sending them in advance has no upside. If an investor asks you to send your pitch slides in advance, a perfectly legitimate response is "I use a sparse presentation style so my slides are meaningless without my explanation and I'd prefer to wait until we meet to share them." Executive summaries are much more appropriate to share in advance. But that said, if an investor will only meet you if you send the slides in advance, by all means take the meeting.

(I think Mr. Kawasaki may have addressed this issue in the Art of the Start, but I can't find my copy for confirmation and my experience suggests that the point is worth repeating.)

2) Make the most of your meetings

In the first example I mentioned above where sending my slides to the VC in advance derailed the meeting, I was still able to get valuable introduction to a prospective CEO for Cryptine Networks from the VC even though he didn't want to invest. I knew that as a group of first-time entrepreneurs, management team (and myself as CEO) was going to be viewed as a weakness. Thus, when I explained the management team slide I got in the habit of asking the VCs if they knew of any potentially good CEOs for the company and I was surprise how often I got favorable responses. It is definitely possible to use this strategy for almost any weakness. For example, one could say: "Here is the business model that we are considering, but I'm curious to know how you think we can maximize our ability monetize traffic?" By addressing potential weaknesses as open questions you can also help establish key milestones with the VC even if s/he isn't ready to invest. After I established key milestones I sent follow up emails every time I knocked one of them down, which allowed me to turn mediocre initial meetings into positive second meetings several months later. If you have a bad meeting with an investor, at a minimum you can benefit greatly from simply attempting to understand why it all went wrong, but I believe that much more opportunity is always on the table.

3) Wednesday at 10am

VCs are fickle because they see a lot of bad pitches and it is really easy to lose their attention. The best way to keep a VC's attention is to have a great pitch. However, there is no need to stack the odds against yourself by scheduling a meeting for 4:30pm on Friday afternoon. Everyone is starting to think about the weekend late on Friday afternoon and if your pitch falters the VC is going to be that much more anxious to get of the meeting early. 11am and 1pm are also bad times because venture capital is a relationship business and going out to lunch is common. 9am isn't great because the VC maybe just getting into the office and therefore be 20 minutes late to the meeting instead of just the mandatory 10. Mondays are bad because most VCs have staff meetings and many people are grumpy and/or hung over from the weekend anyway. Tuesday is much better than Thursday, but long weekend trips can effect both days. If the VC is running to catch an afternoon flight you've got a short leash on Thursday morning. If the VC stayed in Tahoe for an extra day than your Tuesday is his/her Monday. But everyone is in the office on Wednesday. Thus, Wednesday at 10am, 2pm and 3pm are the time slots most likely to optimize your VC's attention span. Tuesday at 10am, 2pm and 3pm is an acceptable substitute followed by Thursday at 10am, 2pm and 3pm. To keep this tip in perspective, if an investor can only schedule a meeting at 4:30pm on Friday, by all means take it. However, if you do have flexibility shoot for 10am, 2pm or 3pm on Wednesday.

Google's False Lesson for Entrepreneurs

Over a couple of Oreo Cookies and glass of milk earlier this evening my mind wandered to the subject of why I dislike Google so much. I've written previously about how I don't think there are many (any?) lessons for early-stage entrepreneurs to learn from Google, how I believe so much of the company's success is derived from luck and how much their hubris turns me off. However, I've never been fully satisfied with the post because it doesn't quite express exactly where my feelings come from. Yet, somewhere between dunking my Oreo in milk and stuffing my face, it dawned me that Google really bugs me because it seems like so many entrepreneurs in Silicon Valley misinterpret a key lesson from Google's success.

Google is routinely sited as an example of a company that won because it had the best technology. I couldn't disagree with this statement more... No company ever wins because they have the best technology. Success is built upon creating a meaningful value proposition, communicating it effectively and executing in sales. Having the best technology may or may not be a part of this formula.

This false lesson from Google seems to be most dearly held by entrepreneurs with engineering backgrounds. Its rare that I meet a software developer in Silicon Valley that prefers Windows to Linux or Unix, which ironically means that the most glaring example that the best technology does not always win is staring them in the face 8+ hours per day.

There is no doubt that some of my feelings towards Google are irrational and therefore I'll probably never be to fully explain them but this post helps me get a little bit closer and vent on a day when another Googlite has started making angel investments.

VentureBeat Controversy

VentureBeat posted an article that is drawing a lot of criticism for being blatant self promotion. The guest post by Auren Hoffman is a rant of why the author dislikes evite. Many people share the belief that evite's service isn't up to par. However, the post's criticism of slow servers and poor user profiles seems weak, but more importantly it fails to mention that Mr. Hoffman is an investor in a new evite competitor until the very end when he plugs his investment as a possible solution. Furthermore, his description of why his investment might be a plausible alternative is merely his statement of "I love this site." There is nothing wrong with Mr. Hoffman explaining why he made his investment, but the post should have been titled as such, rather than "Why I hate Evite."

This brings up the question of how standards of journalistic integrity apply to blog media sources. It is clear to me that this post would not have met journalistic integrity standards for a traditional media source like the San Jose Mercury News. On the other hand, I have no problem plugging a friend's company on this my personal blog. If I like a service or want to help a friend out, that is my business. However, I do expect objectivity from traditional media sources. Yet, do blog media brands like VentureBeat, TechCrunch, GigaOm and SiliconValleyWatcher represent a new middle ground?

One great aspect of the blogsphere is that there doesn't have to be a definitive answer to this. Matt Marshall can have one take and Michael Arrington can have another. Personally, I think its great that Blog media sources have been able to adopt the informal and conversational nature of blogs but I do expect them to uphold the same standards of journalistic integrity as traditional media.

I think Matt Marshall is an excellent reporter. He did a great job at the Merc and I've read almost every article he's written for SiliconBeat and VentureBeat this year. Mr. Marshall has enough credibility with me that I can get over any single incident. That said, I have no intention of continuing to read VentureBeat if he does not continue to up hold the same standards of journalistic integrity on VentureBeat that he maintained at the Merc.

Here is what others are saying about the article:

Paul Kedrosky - The Trouble with Investor Bloggers
ValleyWag - How Not to Publish a Guest Post
The Digital Taco Stand - Tainted Commentary?
Matt Ingram - The Honeymoon Seems to be Over, Matt

After a brief Technorati search, I wasn't able to find any positive links to the article, but if anyone else finds them please let me know.

Matt Cain is the Hottest Pitcher in Baseball

The Giants rookie pitcher Matt Cain is quietly putting together an unbelievable performance down the stretch that is helping the team claw (or limp?) their way back into the NL WildCard and NL West races. Cain hasn't given up any earned runs in his last 4 starts for a total of 29 2/3 shut out innings. I don't want to jinx Cain, but it really isn't too early to start talking about Orel Hershiser's record of 59 consecutive scoreless innings pitched. In fact, Cain's only given up 1 earned run over his last six starts and 42 innings pitched. During the 6 game stretch Cain has 5 wins, 42 strikeouts, an era 0.11 and a whip of 0.79. Amazing.

Searching For Andrew Fife

According to sitemeter, 2.4% of recent traffic to this blog comes from searches using the phrase "Andrew Fife" or the same phrase w/o quotes. I find it both amusing, flattering and disturbing that random people are searching for information about me. On the one hand its flattering to know that people are interested in learning about me. On the other hand, I've always considered my self to be a relatively private person and its a little bit disturbing to not know who or why people are digging up information about me.

I always do quick searches on people before I meet with them to get an idea of their backgrounds, skills and interests. I'm sure that this accounts for some of the search traffic but there are a lot more searches going on than I have meetings these days. There is no doubt that I am bringing publicity to myself by writing this blog and that probably explains the rest of the searches.

As I think while I write, its not that I mind people searching for information about me, its more that I am curious to know who and why people are searching. The good definitely out weighs the bad in this case, so its not really something that I am losing sleep over. However, I am curious to know what other bloggers experiences are with this. If you track your blog stats, what percentage of your visits come from searches of your name? Is 2.4% high, low or average?

SideFlicks Video Widget is Pretty Cool

This summer I've had the pleasure of meeting several people in person who I'd previously gotten to know via the blogsphere. Obviously its not possible to meet everyone, but I'm always interested in finding new ways to connect with other bloggers and I was really excited when my friend Dave told me about his latest project called SideFlicks. SideFlicks is a widget that allows readers to post video messages for each other without having to bother setting up any fancy equipment or even worry about uploading.

I've added SideFlicks to my side bar and posted my first message. If you have a webcam, please introduce yourself, I'd love to get to know you!

I Disagree w/ Paul Kedrosky on VC Bubble Data

Paul Kedrosky wrote a post earlier today disputing VentureOne's claim that the latest funding stats indicate a bubble in venture funding. VentureOne reported that median pre-money valuations rising from $15m in 2005 to $20M in 2006, brought valuations back to bubble levels of 2000. Mr. Kedrosky digs deeper to dispute the implication of a bubble by breaking the numbers down by round. As it turns out first round funding valuations stayed flat at $6M and Mr. Kedrosky writes:

"First-round valuations, the place where bubbles are born, were flat in the quarter. Nothing changed. It is later rounds where valuations are going up, which can be read as a positive sign: Business are delivering results, and investors are paying up for those results. I'm hard-pressed to see why that's a bad thing."

The problem that I have with this is that second round funding valuations jumped from $12.5M to $20M. Not only is that a big jump, but very few startups that raise a first round are unable to raise a second round because the signs of success are rarely clear at this stage. The bar is much higher for raising a series A round than a series B. Few startups look like run away successes or total failures at this juncture so it generally makes sense to invest more capital at this stage to see how things play out.

A 60% jump in second round valuations could mean that the signs of first round startup success appear to be so clear that the perceived reduction in risk has pushed prices upward. However, it seems more likely to me that larger funds are simply bloating second round valuations.

Youtube's Paradox of the Long Tail

There has been a lot of talk recently about YouTube and monetization. Fred Wilson suggested some $150M+ in annual revenue. Others like Jason Calcanis disagree with some of Mr. Wilson's assumptions but he does acknowledge that Youtube could do $20M and TJ suggests that even a minor home page tweak could net $5M in annual revenue.

I don't dispute that Youtube has a lot of value, but I wonder if overtime some of their value will erode. As an aggregator, Youtube has benefited greatly from the long tail of video production. However, that same taste for diversity means that audiences are fractured into small niches. In other mediums like blogs, small targeted audiences are great for advertising. However, in video advertising has always required demographic audience studies to sell advertising. This may be possible around the short head of the most popular videos but I suspect it will be difficult to get a critical mass of survey data about any clip in the long tail in a meaningful time frame to capture the majority of its views. Contextual advertising could also work in video, but it currently requires some type of human categorization beyond simple tags like "funny" or "weird," which makes applying it to the long tail too expensive. Thus, the long tail paradox is that while diversity may help build and audience, when the content can't be easily contextualized long tail audiences will be more difficult to target and therefore more difficult to monetize through advertising.

One of the over-arching trends of the Internet has been the increasing efficiency of advertising. Thus, I'd also question how much longer the value of demographic based advertising will hold. I can't remember exactly where (maybe Battelle's The Search) but I distinctly remember reading that TV advertising, which is demographic based, is far away the least efficient form of advertising. Furthermore, what demographic based advertising is good at is branding. Yet, as barriers to entry fall in new markets and the long tail phenomenon spreads, branding will become less valuable as choices proliferate. Or maybe it will become more valuable precisely because product selection is so diverse, but I don't think so. The bottom line is that my decision to watch a short clip of someone falling off of a skateboard does not say much about my consumption preferences. It certainly says a lot less about me than when I search for "cycling computers," or read a blog about the Tour de France, which both clearly demonstrate my interest in bicycles.

Overtime, advertisers will allocate their budgets more efficiently. This means that less dollars will be spent on audiences that can only targeted by demographics and the value of Youtube's inventory will decrease. In order for Youtube to be a billion dollar business in the medium to long term, I think that they will need find ways to place contextual ads or get more information from their users to target them as individuals. I don't think that cookies tracking, which video clips a user watches will be sufficient to provide enough data about individuals without understanding the video's content at a deeper level than basic tagging. Furthermore, I doubt that Youtube users' tolerance for marketing surveys is very high. In the future, video search or advanced forms of tagging may help Youtube place more targeted ads but right now I don't believe either are sufficient to create meaningful contextual ads. Thus, I find it pretty easy to agree with Jason Calcanis's description of Youtube selling ads at junk CPM rates and I think these rates could even fall over time.

Service Providers Posing as Angel Investors

There are certain common courtesies and etiquette guidelines that I wish were more respected in the Silicon Valley startup community. I’ve written previously about entrepreneur-to-entrepreneur etiquette but more recently service providers posing as angel investors has really been bugging me.

At the various startup events I attend the audience tends to be a mix of approximately 60% entrepreneurs, 10% investors and 30% service providers. The service providers are looking to sell something to the entrepreneurs (and sometimes the investors also) and they generally fall into these categories, PR, legal services, investment agents, recruitment or outsourced/consulting functional roles of marketing, sales strategy (but usually not sales), bizdev or software development (often offshore).

Some entrepreneurs and investors find the service providers to be annoying and at least one of the major startup events organizers takes steps to reduce their presence. I think this is a little bit unfair as many of the service providers do have valuable knowledge to share specifically because they’ve worked with many startups and/or investors. One great example is Chuck Boggs, who is a well respected investment agent that is based out of San Francisco. Mr. Boggs has a lot of experience with startups and whether or not an entrepreneur decides to work with him, I believe that most could benefit from meeting with him. Mr. Boggs also has mastered the art of letting entrepreneurs know that he’d like to work with them without being pushy. I guess it helps when you don’t have a shortage of startups that want to work with you. I agree that some service providers are annoying or too pushy, but then again there are also a number of crazy, obnoxious or self-deluding entrepreneurs who detract from the events by asking questions that are too company specific or attempting to monopolize discussions. However, I believe that weeding out certain people is a very slippery slope and that these events should be open to everyone.

Thad said, I do feel a little bit differently about service providers that pose as angel investors. Some service providers do occasionally make angel investments, which of course is great, but many have every intention of sucking cash the other direction and really are using prospective angel investment as a tool to set sales meetings. I think this practice is disgraceful and a serious waste of everyone’s time. If I’m looking to raise capital, I probably can’t pay $200 per hour consulting fees or $25K finders fee to a recruiter, nor is it worth giving away any significant equity for strategy or “strategic advisors” when what I need is execution to hit milestones. But obviously there are enough entrepreneurs who feel differently, which continues to makes it worth many service providers time prospecting at these events, which is fine, so long as the entrepreneurs understand that they are buying services and not investment. Practically speaking, it would be virtually impossible to accurately enforce, but I sure wouldn’t mind if these characters were excluded from participating in startup best practice events.

Soccer is not Cycling

Today was my first game in the Palo Alto Adult Soccer Leauge. I've been eagerly awaiting this game since a friend let me know about the league earlier this summer. I haven't player much soccer since I left the UK in 2002 but this summer I've been cycling a lot. I'm riding between 125-175 miles per week and doing hills like Old La Honda and Kings Mountain so I figured that I could at least run even if I couldn't kick the ball.

On my first hard sprint of the game I felt my right hamstring tighten. About a minute later on my second hard sprint of the game it completely locked up, I fell over and had to come out of the game. I rested for about 20 minutes and then came back into the game for a couple more minutes but I just couldn't accelerate.

This evening my hamstring is swollen and soar. I've been limping all day and its now pretty clear to me that soccer and cycling are not the same thing. I guess if I want to get back into soccer shape, I'm going to have to run some sprints this week.

Your opportunity to try a new, exciting experience from Microsoft

Well, any takers?

"What is Max? Microsoft® Codename Max is your opportunity to try a new, exciting experience from Microsoft."

It is a new and exciting experience from Microsoft.

Everybody loves and trusts Microsoft so I guess they don't even have to tell you what the experience is.

Board Control: VCs vs. Entrepreneurs

On Wednesday, I wrote about the Rapt co-founders suing their CEO and investors and brought up the topic of entrepreneur/VC tension over startup ownership, control and rewards. Matt McCall of DFJ Portage Venture Partners initially wrote a good post titled "A Dark Side Tale" on this tension and lessons learned from Rapt. Mr. McCall then followed this up yesterday with another good post on "Where does Power Lie," about startup board control. David Cowan of Bessemer Venture Partners also wrote a great post on the subject earlier this year titled "Control Roulette: A Bet on Red or Black." Both posts explain how control really depends on what the company needs more, the founders' knowledge and momentum or the investors' capital. Mr. McCall's article also explains that having to use financial/legal levers of control is really a last resort because "it poisons the relationship going forward." Its often said that the entrepreneur/investor relationship is like a marriage and as such its tough to work closely with board members when irresolvable differences must be decided through use of force.

However, I do believe there are two circumstances where board control is very important, the capital vs. management equation is less relevant and the need to work together in the future has less impact on outcomes :

1. When evaluating prospective liquidity events
2. When evaluating options if no investors (or at least no current investors) will invest additional capital under any circumstances

In both of these cases VCs and entrepreneurs can sit on very opposite sides of the fence. When evaluating prospective liquidity events entrepreneurs and VCs can have different risk tolerances because entrepreneurs (especially first-timers) have all of their eggs in one basket, while VCs can spread risk across their entire portfolios. In this case, management does have more influence that investors because their ability to quit can easily derail a successful company. Nonetheless, VCs tend to shoot for the moon because a singular 100X return investment is often what makes or breaks a fund. Thus, VCs may want to turn down a guaranteed $40M liquidity event in favor a 10% chance at a $400M outcome because they have multiple investments and can handle many failures as long as a couple are successful. On the other hand any outcome that nets a couple million bucks to an entrepreneur is often a successful personal outcome but it may have little or no impact on a VC's fund. The right decision is an objective assessment of what is best for the company. However, neither the entrepreneur faced with the potentially life-changing opportunity to secure a couple million bucks nor the VC faced with the need to make the top quartile of funds can truly be objective.

Entrepreneurs' and VCs' interests may also differ when a company has run out of cash and the investors do not want invest any additional capital. (I have a friend going through this right now. It is a gut wrenching experience that I hope he will write about when it is over.) The entrepreneurs may have a plan to pursue the company as a life style business and/or find new investors. However, VCs typically want to sweep the failed company under the rug as quickly and quietly as possible. In fact, some investors want to kill off companies when there is still some remote prospect of success because they don't want to be seen as having walked away from a good thing even when offered a percentage of common stock to resign from the board.

The goal in both of these situation is to protect the best interest of the company rather than favoring either the entrepreneurs or VCs. Thus, I believe that David Cowan nails it when he describes the ideal company board as having 5 directors with no more than 2 VCs, the CEO and 2 outside experts. The only thing I would add to Mr. Cowan's description below (which I believe he is implying anyway) is that the 2 VC board members represent different firms.

"I find that the ideal board of directors has 5 members--a nice, small odd number that allows for multiple skill sets without losing anyone's attention or complicating communications. The CEO is the only employee on the board, so that open, apolitical conversation can ensue regarding the team. VC's occupy no more than two of the seats--more than that yields rapidly diminshing returns (and fuels the conspiracy nuts who blame all setbacks on evil VC control). The remaining seats are held by outside experts recruited opportunistically--the board should regularly consider skill sets and credentials that would add value to the board (contacts, reputation, domain knowledge, customer perspective, CEO coaching experience...) and keep all eyes open for the right individuals who inevitably pop up."

With the intensity of a startup its easy to forget that the goal is to build a great company not to protect the interests of any one party over another.

Here are a couple of other interesting perspectives:

• Brad Feld - Board of Directors (An entire series of posts dedicated to the topic)
  
• Brad Feld - Term Sheet: Board of Directors
  
• Brad Feld - Term Sheet: Protective Provisions
  
• Pascal Levensohn - Venture Board Governance White Papers (Another series)
  
• Rick Segal - The VC Dance
• Matt Blumberg - The Good, The Board & The Ugly
• Fred Wilson - The Board of Directors
• Fred Wilson - VC Cliche of the Week

Please comment with links if you know of any other good posts to add to the list.

Cyclist Killed on Page Mill

Earlier today a cyclist was hit by a car and killed on Page Mill Road in Palo Alto. See early coverage here. On Wednesday I rode my bike down Page Mill and that could have easily been me who got hit. Early reports suggest the driver may have been drunk. However, there is a lot of tension between cyclists and drivers. Some cyclists don't obey traffic laws and some drivers lack of attention or anxiousness to pass endanger cyclists. Really both parties need to be a little bit more a cautious and respectful of each other. That said, steep winding roads like Page Mill, Old La Honda, Kings Mountain or Highway 84, really seem to exacerbate the tension. Cyclists climbing the roads are exhausting themselves to spin at 7 mph when drivers obviously want to go much faster. Whenever a car is behind me I try to stay as far right as possible but there are some parts of these roads that are impassable. I can understand how this frustrates drivers but really waiting until there is a clear line of sight and enough width to pass is in everyone's best interest. I've just had too many close calls where drivers try to pass on nearly blind corners only to find another car coming down hill. Anyway, if you happen to drive any of these roads please remember that being patient and using caution will only take an extra 1-2 minutes out of your day... Endangering someone else's life isn't worth saving two minutes.

Suing Your VCs: Rapt vs. Accel & Levensohn

Matt Marshal of VentureBeat and Dan Primack of PE Week have written interesting posts on two co-founders of Rapt, a once promising Silicon Valley startup, who are suing the company's CEO and its investors, Accel & Levensohn. (UPDATE: Matt Mcall Also wrote a very good post on these issues) I believe that Rapt's law suit is an important case-study because it is so hard for entrepreneurs to get an accurate picture of how VCs react when it all goes wrong. How does an entrepreneur perform due-diligence on their prospective investors when VCs wipe all evidence of any of their failures from their websites? I want to write a little bit more on why I believe the conspiracy theories of evil VCs colluding against entrepreneurs are overblown below, but first here are a couple of quick thoughts on the Rapt law suit.

First let me be clear that I have no insight into the details of the the situation at Rapt other than what I've recently read in the blogsphere. Furthermore, I've never met any of the parties involved, other than occasionally reading Pascal Levensohn's blog and hearing him speak a couple of times. However, I am certain that that there are three sure-fire ways that entrepreneurs will windup taking heavy dilution:

1. Leaving the company
2. Lack of success leading to down rounds
3. Exacerbating 1 & 2 by not getting along with other team members and/or investors
   

Rapt went through two down rounds, the co-founding plaintiffs both left the company and (according to Mr. Primack's article) one of them had numerous runins with the CEO... Given these factors, its hard for me to imagine the co-founders holding much stock even in the best of circumstances.

The co-founders claim that the second down round was not necessary and done specifically to wipe them out because they left. This would certainly be nasty and unethical behavior if their is any truth to the accusation. However, the good news is that it should be relatively easy to investigate because reviewing Rapt's financial records and the minutes of their board meetings will demonstrate whether they were running out of cash and/or needed an influx to pursue a new opportunity.

A serious concern definitely exists amongst entrepreneurs that venture capitalists will ultimately try to take over, fire and/or wash them out, but I've always felt this was overblown. VCs only goal when they invest in a company is to make money and there are some nasty characters in the VC industry but Silicon Valley startup community is a very small place and I don't think many people can sustain success by screwing entrepreneurs.

I heard Pascal Levensohn say that the empirical evidence demonstrates that startups where founders are not replaced are significantly more likely to succeed than situations where they are replaced, at a talk he moderated earlier this year. Founders are rarely replaced when startups are successful, so I think this somewhat misleading data. However, rock star CEOs with liquidity events under their belts are the most sought after component of any startup and VCs clamor to fund them. It is also worth noting that while venture capitalists want maximize their returns, those returns are dependent on the performance of the startup. Thus, gouging management doesn't make sense because it has a direct impact on incentives and motivation to succeed. Furthermore, Venture capital is a relationships business and screwing entrepreneurs is short sighted.

That said, being screwed and feeling screwed are two different things. My subjective pool of personal relationships, acquaintances and experiences tells me that many entrepreneurs have unrealistic expectations that aren't grounded by market realities and some do not even fully understand the terms and preferences they are agreeing to when they raise capital. Moreover, unsuccessful companies have turnover and founders should be no more immune than any other non-performing team member. Its a heartbreaking and gut wrentching experience for founder to fired and this emotion often obscures objectivity... Does getting rid of a productive team member ever really make sense for anyone involved?

Entrepreneurs that want to control their companies need be successful and David Cowan's post on startup boards really says it best:

"I have learned from experience on 40+ boards that they don't matter. Real control has nothing to do with the documents, and everything to do with the color of the ink at the bottom of the cash flow statement. Simply put, when a private company is losing money, the investors control it, and when it's profitable, control rests in the CEO's hands--unresolvable differences between the CEO and investor group inevitably pan out this way. It's simply a matter of which is more dispensible at the time--the financial support of the venture firms, or the knowledge and momentum that the executive team brings to operations."

If a company isn't successful and needs cash, it is going to have to give up control and ownership to get cash. Furthermore, the market currently supports liquidity preferences, which ensure that VCs will always going to get their cash out first. Thus, a moderate hurdle exists before entrepreneurs can make money under any circumstances. The best way for entrepreneurs to avoid getting screwed is do their due-diligence on prospective investors in order to ensure they aren't working with one of the few bad apples and to understand the current market liquidity preferences. Ultimately, success is only way to maintain control of a startup and losing control, getting crammed or being fired really aren't unreasonable outcomes if it all goes wrong.