Author Archives: Ted Wang

How a seed financing can put you at the head of the class

Posted Sep 8, 2017 by Ted Wang

In the early days of a startup company, founders may be fortunate enough to be faced with a dilemma: raise a seed round or try to go straight to Series A? To some, this question has an obvious answer: raise a Series A if you can. It’s much more money for only slightly more dilution.

That simple answer, however, neglects a critical dynamic in the startup market, and may shortchange your startup for the long term. Now if you are a repeat entrepreneur like Russ Fradin or Diane Greene and have a string of successful ventures under your belt, the logic of this post doesn’t really apply to you. For the mere mortal founders, however, there is more to consider than simple dilution math.

Power law distributions

At any given time there is a cadre of companies that are viewed by the tech community as being at the head of their class. These companies reap a tremendous reward from this perception in terms of the quality of people, investors, partners, service providers and media coverage they are able to attract. This in turn increases that company’s chances of success. So while startups usually view their competition as companies that offer a similar product or service, in reality, all startups are in competition with each other. Your financing strategy should take into account how to become one of these top companies.

Being a top company is not simply a nice to have; in this environment it is a matter of survival. While the number of startup companies has exploded over the last decade, the number of Series B financings has remained relatively constant per Crunchbase data. In short, more companies than ever are competing for the same number of Series B rounds. By raising a seed round, a company buys itself more time and money to get to the Series B financing and therefore increases its chances of making it through this critical milestone.

chart

Nine women x one month ≠ baby

Another benefit of a seed financing is it gives a company more time to find its footing. A seed round gives the founders 18–24 months to build a team, bring an initial product to market and iterate on that product. During this time, the team can deeply understand customers, find the segment of the market where the product solves a real need and start to figure out the right go to market strategy.

Product development can’t be accelerated by throwing more resources at the problem. After having worked with hundreds of companies over the past 20 years — I’ve observed that successful startups are born from a series of tiny “aha” moments, each of which aggregate to create a truly unique and differentiated product and go to market. This simply takes time and much trial and error. Knowing the bar for a Series B financing is higher than ever, why not give your startup more time for this critical exploration?

Money burns a hole in your startup

Some will argue that a startup could just raise a larger round and not spend it. It’s just really hard to do this in practice. While many early stage companies show excellent discipline around spending, as Fred Wilson says, there are simply too many temptations. A startup with cash on the balance sheet is just more likely to spend more on a nice office, stretch to pay an executive who is making big money in her current job, or even start spending a bit more on customer acquisition to reach growth goals. Like the astronauts on Apollo 13, startups with limited resources seem to miraculously solve intractable problems without additional spending. I try not to keep cookies in my house because, when they’re on the shelves, I eat them. Why tempt yourself?

The main thing is to keep the main thing the main thing

Raising a Series A round requires fewer proof points than a Series B. Accordingly, a seed round gives founders the opportunity to focus on a smaller number of milestones for the next fundraising. This in turn makes it more likely these milestones will be reached. For example, a seed stage company CEO in a software company can be focused on obtaining and delighting a few key customers in order to show sufficient traction for a Series A. To raise a Series B, that same CEO must scale the sales team so that it can hit a series of subsequent quarters, ensure that churn is low, build out customer a success function and round out the executive team. Why not lessen the degree of difficulty of the dive and allow yourself to manage fewer key milestones?

Whether madness is or is not the loftiest intelligence

I hear what you are thinking. “So let me get this straight, are you saying to take less money instead of more and intentionally give myself a shorter runway? Are you insane?” Maybe (and there are many who will tell you so) but consider this scenario I’ve seen play out a number of times: A talented person from industry decides to start a company. Because of her tremendous track record, she is able to raise a respectable $4 million Series A. She quickly builds a solid team of other talented folks and they go to work building the product, creating a marketing plan for the big product launch and, hiring a sales people and an engineering team to rapidly build and sell the many features that are envisioned. The product launches to much fanfare, but initial sales traction is slow. The company now finds itself in the unfortunate position of having burnt a good chunk of the cash and needing to both cut the burn to buy some time AND ramp up sluggish sales. Not a pretty picture.

And so

Almost every one of the best companies I worked with over the last 20 years had a period of time during which the team was solely focused on building a delightful product and designing a thoughtful go to market. So while a seed financing might seem like you are putting your company at risk by giving your company less runway,a seed round may actually give you more runway for the truly difficult Series B round with fewer distractions and temptations and, that’s a good thing.

I’m Joining the Cowboy Posse

Posted Jan 24, 2017 by Ted Wang

stocksy_txp412bc114vnk100_medium_290067After nearly 20 years working with startups in Silicon Valley as counsel, I’m excited to announce I’m joining Cowboy Ventures as an investing partner.

For the past decade at Fenwick & West, I have loved working with a broad group of clients from incorporation to being a public company, and everything in between. I’ve realized that it’s time for a new challenge and so I’ve decided to use my skills and experience to work with startups more directly as an investor and business advisor. At Cowboy, I will have a chance to do that with a friend I’ve known for over a decade, and become part of a firm about which I am super excited.

How did I get here?

I  began my legal career at the wonderful firm Gunderson Dettmer almost 20 years ago.  After a few great years there, I left to start a solo law practice so I could be closer to the action of my startup clients. My first “office” was a single room in a dingy second story office building next to Gordon Biersch. I started with two clients. These humble beginnings gave me a great appreciation for the excitement and optimism of starting something new.  I also felt firsthand the intermittent terror entrepreneurs can feel during this stage and the resulting sense of urgency.

It sounds absurd now, but the fundamental bet that I made at this point in my career was that the Internet would be big.  As the Internet sector rebounded from the dot.com crash, my law practice grew like a weed.  In a few short years, my clients’ needs had outgrown the capabilities of my small firm and so I joined Fenwick & West.  Fenwick was the ideal place for me.  It was an excellent firm with a great group of experienced, highly skilled lawyers and I was a young, scrappy and hungry lawyer with something to prove.  I went to every conference, had 200 business lunches in one year alone and stayed up all hours of the night working on my clients’ deals.  With a little bit of pluck and a little bit of luck my practice flourished.

During my decade at Fenwick, I had the good fortune to work with many of the best entrepreneurs, investors and advisors of the era.  I helped Evan Williams to shut down a struggling podcasting company called Odeo and spin out this funny little idea called Twitter into a separate company.  I negotiated the seed financing term sheet for Dropbox with Drew and Arash in the Palace Hotel during the Web 2.0 conference. I was at a Facebook board meeting when I first heard Mark Zuckerberg articulate his law of information sharing.  I watched Jack Dorsey grow as a leader at Square and saw Marc Lore make huge bets that ultimately paid off at Jet.com.  Watching these fantastic entrepreneurs work was a terrific education for me.

Of course, the startup lifecycle is not all lollipops and rainbows.  I’ve also had countless conversations with founders who have had to turn out the lights on their dream and I know how heartbreaking it can be.  I’ve seen pivots, double pivots and in one case, a complete 360 degree turn. I’ve been part of victory being snatched from the jaws of defeat and of promising deals that fell apart at the last second.  Some of the people whom I respect the most are those who handled a shutdown or layoff the right way, treating people with dignity and respect and putting the interests of others before their own.  

With all of the situations I encountered, good and bad, I learned a lot about the startup world.  There was the time when we sold a company at just the right moment and the one when we failed to sell when we should have.  I’ve seen new team members who raised a company’s game and others who drove a company into the ground like a dart.  I’ve watched entrepreneurs who have ignored all distractions while staying laser focused on critical matters and those who drowned trying to chase down every seemingly golden opportunity. No matter what is happening at a startup, I’ve seen that “movie” before and for years I’ve shared these learnings with my clients.

Being outside counsel, however, comes with some limitations, not the least of which is the billable clock looming over every conversation.  As counsel even though I was on the journey with founders from the beginning, and I felt respected and trusted (and, in the best cases, loved) I also often felt I had to hold back given my role.  For years I’ve been giving people advice as to how to navigate the perilous waters of the startup world.  It’s time to jump into the boat.   I am still young, scrappy and hungry and am excited to use my experience to help entrepreneurs thrive and to prove myself as one of the most valuable early stage investors.

Why Cowboy Ventures / Cowboy Ventures is Special

I’m fortunate to have known Cowboy’s founder, Aileen Lee  for many years and she and her husband Jason are among my closest friends and favorite people in the world. She has been a trusted confidant on both business and personal matters for me and my wife. She and her family even traveled all the way to Argentina to visit us when we were there for a year abroad.

My wife and I were at the the initial kick off “thank you” dinner for the firm and we’ve been enthusiastically watching Aileen build Cowboy ever since.  What she and the team have created is an outstanding firm known for bringing valuable, hands-on advice and connections to its portfolio companies.  The Cowboy team stands out for the durable, personal relationships it creates with its founders.  Being a founder can be a hard and lonely road, and Cowboy has thrived by fostering authentic communications with its founders, and not just when they are  “killing it.”  Cowboy is also a more diverse and inclusive group than others.  As the token man at the firm, I’m proud to be joining a group that has advocated for and understands the benefits of diversity and inclusion. In short, Aileen and her team have built one of the most respected new ‘brands’ in venture and I feel very lucky to be a part of it.

But there’s more.

At Cowboy Ventures, Aileen and her team work incredibly hard, and they have also managed to succeed while creating a tribe of people who excel at and love the work they do. Hard work and fun need not be mutually exclusive.  Watch the Golden State Warriors play basketball or listen to Pearl Jam make music and it’s evident that people can perform at the highest level and truly enjoy doing so.  Cowboy exemplifies this spirit and it’s one of the things that drew me to the firm.   Aileen refers to this attitude as “always happy, never satisfied” and this is spirit that has animated my entire career.   I look forward to working with founders who share these values and want to work hard and have fun with us.

What I’ll be looking for in the coming year

Since I’ve yet to spend one day on the job, I’m not ready to declare a thesis, unless you count “working  with outstanding people” a thesis.  My current thought is to follow the same type of “no duh” thinking that led me to focus on the technology sector 20 years ago and the Internet 10 years after that.  It’s pretty clear that natural language processing and machine learning are radically changing computing and that services based on AI are going to find new and amazing ways to help both consumers and businesses.  In particular I’ve got a feeling that this will really impact accounting and so would like to meet anyone who is working in that area.  I’m also pretty confident that our current TVs and other video consumption devices are going to look like Space Invaders looks today when compared to whatever it is we will be watching a decade from now and so both virtual and augmented reality are of interest.  Finally,  when I started working in the industry, my clients’ products were software programs or consumer facing services.  Now I represent folks who are creating tech enabled primary schools, universities, home healthcare services and concierge medical care facilities.  I am intrigued by these “third wave” companies which use technology as the backbone of delivering superior services to consumers in established industries.

What type of people do I want to back?  As I reflect over my career there are a few commonalities in successful founders I’ve noted:

    • Forceful, but not loud: There’s a notion that great entrepreneurs are rah, rah leaders or slick sales people, but that doesn’t foot with my experience.  Most of the great founders I’ve worked with have been rather subdued sorts.  The amount of volume a person generates has no relation to the amount of determination that person has and this quiet demeanor can often mask a steely determination that is critical for success.
    • Ability to focus: There’s an old trope that startups die of indigestion and not starvation.  The best founders I’ve worked with know how to focus the effort and energies of the team on the key objectives that really matter.  Steven Covey famously said  “the main thing is to keep the main thing the main thing.” The best entrepreneurs are able to ignore the myriad of distractions that arise and focus on the critical projects that make their company successful.
  • Data driven: The best founders are willing to let new information take them in different directions.  I was once discussing a course of action with a well known technology CEO, who was quietly but forcefully disagreeing with my point of view.  I added one fact to the discussion and he did an about face and proceeded as I was suggesting, as if the previous conversation had not happened. To me this is emblematic of the data driven approach.  
  • Learn it alls:  The best founders I’ve worked with are intellectually curious.  They are constantly learning new things, both in work and in their free time and they come to conversations genuinely curious to learn and understand what the other people have to say.  They are probably not going to be extraordinarily patient if that information isn’t delivered promptly and succinctly but if someone is presenting new and useful information, she is going to get that founder’s attention.

Listing these traits in retrospect is obviously a hell of a lot easier than finding people who exhibit them ex ante, but the above list should give folks a good notion of the types of people I’d like to meet.

Thank you!

I would like to thank my many wonderful clients, partners and other team members from Fenwick & West for more than ten amazing years.  It was a heck of a decade and I am privileged to have worked with such an outstanding group of people.  Although I will be focusing my efforts on Cowboy, I will remain a special counsel to the firm and will still be available to help with problems as needed.  I look forward to working with you all in new ways as I ride off into the next chapter.  Giddy Up!

PS: my new contact info will be Ted@cowboy.vc and i can be found at @twang on Twitter.