The Valley is back! Silicon Valley Bank reports it had 120 new startups sign up in the first quarter — the most since the first quarter of 2008. Finding companies worth investing in, though, is as hard as ever.
At the recent SVB-sponsored CEO Accelerator summit, Matt Marshall, editor and CEO of VentureBeat, spoke with Jeff Clavier, founder and managing partner of SoftTech VC, about how to build a winning team for your Web business and got a behind-the-curtain look at the world of angel investing. Clavier is one of the most active seed-stage investors in Web 2.0 startups, having invested in roughly 76 companies since 2004.
A portion of the discussion is embedded below, but Noombl CEO Oladayo Olagunju was among those in attendance and compiled the following notes (which shouldn’t be taken as a verbatim transcript) from the fireside chat.
Noting Mike Moritz, a famous Google backer who is a self-confessed admirer of young founders and their enthusiasm, Marshall asks if age matters to Clavier when investing.
Clavier: One needs to beware of the first impressions. His youngest founder was 17, while the oldest was 55 or so. Generally there should be more to it than the figure.
How long is the lead-time between first point of contact/pitch and actual term sheet talks?
Clavier: Angels are a lot faster than VCs. Two to four weeks is normal. Due diligence consumes most of this month-long span.
What do you look for: single founders or a team?
Clavier: Like most other investors, he prefers a two or three cofounder team — and likes to observe how well they gel and the dynamics between them. He looks for a good mix in the team. He’s actually not adverse to one-person startups, though. He cites (as an example of an ideal one-person founder) Aaron Pratzer’s Mint.com and how that has been his best exit to date. Yet, he points out that three- or two business partners pitching him is typical and that there are few single founder teams whose pitch actually “cuts it”. On the issue of dynamics in the team: Many times, when one digs deep, one sees that the better members of the team often have silenced doubts or reservations about the less/least capable one.
What exactly does an investor do when, pre-funding, he likes one of the founders but feels the other founder is not a good fit?
Clavier: He does not touch a team when he realizes there is such dysfunction or mismatch, but if it’s a team an investor is already invested in, he or she can do some “firing” as humanely and respectfully as possible.
What about “poisonous team members” — early joiners who start out well, but later cause things to go sour within the startup?
Clavier: In such a scenario, the investor has to effect change somehow — whether that’s changing the person or make them change. The first step is to have a “gentle discussion — which is actually a warning.”
What are the rules of compensation in a founding team, specifically to division of equity? Is it clear who is driving or do they have to decide it before approaching the investors? And how does this affect ownership?
Clavier: The first two mistakes are teaming up with the wrong cofounder and getting a bad lawyer. A good lawyer will help with vesting schedules. In terms of equity division. Are all founders equal? Sometimes. Typically, there is a founder who is the most important and is typically the founding CEO. As such, s/he usually has more stock to reflect the difference in responsibilities within the team. Stock should clearly tell or reflect who is responsible for what – and Clavier does not want to be in the middle of that discussion. Founders should have figured all that stuff beforehand.
Matt reinforces what Clavier says, adding “always negotiate with your lawyers. Get a good lawyer. Typically, you should pay only at the closing of your A round.”
On the issue of compensation:
Clavier: People always want to make similar sums to what they made at their previous jobs. Founders need to know that you won’t get rich on salary. That’s why they’re in a startup. It’s a choice they made, and Clavier and other investors generally have a problem with founders who demand non-startup salaries.
Some people are not driven by stock, but by money. Given that, how can founders scale, hire more people, hire correctly and implement the fitting stock allocation split?
Clavier: There are standards that serve as guidelines. For first key non-founding employees, the equity received generally is in the tens of basis points (NOTE: One basis point is 1 percent of 1 percent = 0.0001). Hence the first few non-founders get stock in the order of 20 basis points or 20 percent of 1 percent = 0.2 percent.
Q/A session – Can you ‘fire’ investors?
Clavier: Investors can be fired by buying them out. It happens typically when the company is doing well, but the VC-founder interaction is not. It can occur if you have leverage and walk and/or if you can afford to buy them out.
Q/A session – How should an entrepreneur check out a VC or angel?
Clavier: To do due diligence on a VC or angel, founders should research/call one of its portfolio companies that flopped in the past.
Q/A session – On hiring…
Clavier: The most challenging task for CEO is hiring talent. Headhunters are used for an exact or precise talent search (e.g. CEO search) Headhunters are different from recruiters, though. The former work on contingency basis and can ask for 20 percent of the target’s salary as compensation.
Q/A session – On boards of advisors…
Clavier: A board of advisers is great. Advisers should not get paid, but receive equity stakes of 0.1 percent to 0.25 percent equity. That may or may not have a cliff and should vest quarterly. It should typically reduce as you scale. Advisers who invest are stronger reason for a VC to invest.