John Greathouse http://johngreathouse.com Hands-on startup advice for emerging entrepreneurs Mon, 01 Feb 2016 18:43:04 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.2 Get Free Drinks, Upgrades And Smiles When You Travel http://johngreathouse.com/get-free-drinks-upgrades-and-smiles-when-you-travel/ http://johngreathouse.com/get-free-drinks-upgrades-and-smiles-when-you-travel/#comments Mon, 01 Feb 2016 13:00:53 +0000 http://johngreathouse.com/?p=5837 A version of this article previously appeared Forbes. A very good friend of mine has heard me tell many a tale of trips in which […]

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A version of this article previously appeared Forbes.

A very good friend of mine has heard me tell many a tale of trips in which I have scored free drinks, gratis hotel and car rental upgrades and various travel freebies. However, without experiencing my stories first hand, he always suspected there was a degree of embellishment involved to make my stories a bit more entertaining.

We recently had the opportunity to travel to Hawaii together and I was able to show demonstrate the power of a little respect and an authentic smile.

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It’s Kool To Be Kind

We began our trip sitting in the dreary, uncomfortable airport terminal, with ample time before our flight. Bored, I explored the terminal and located the airline’s club lounge. Despite not being a member, I entered and immediately knew where I was going to spend the next couple of hours. Sitting behind the receptionist desk, in a chair that was two sizes too small for him was, Don, a large Hawaiian with a hearty smile. He was clearly bored with the paperback book in his oversized hands and he seemed open to chatting.

After some brief pleasantries, I asked him what it cost to join the club and if they offered a one-day pass. He laughed and apologetically said, “It’s something like $500 a year. We don't have day rates, but I can let you slide this time if you just want to check it out." I thanked him and hurried back to grab my buddy.

After a leisurely time in the airline club, we boarded our flight and met Kelly, a young surfer dude in his early twenties who was our attendant for the next five hours. Once everyone was settled in their seats, I asked him where he lived in Hawaii, where he surfed, what sort of board he used, etc.

As soon as we were airborne, I asked Kelly if he could hook me up with a Mai Tai. He laughed and asked if I wanted one of his “special creations.” My reply, without hesitation, “Why of course.”

He returned and waited for me to sample the drink. I took a large swallow and sincerely told him, “You are an artist. You should call this ‘Kelly’s Creation.” I had several more of Kelly’s Creations before we landed, all at no charge.

We bid Kelly farewell, hoping we’d see him again on our return flight and headed toward the car rental agency. It was very hot and the woman at the counter did not look happy.

I approached her with a broad smile and asked how her day was going. She replied, “It’s about to get worse. All the flights from the mainland are landing.” She clearly wasn’t happy.

After a bit of joking around, she begrudgingly grinned and eventually was laughing at my corny humor. She waived the fee for my friend to be an authorized driver she gave us a gratis upgrade to a slightly nicer vehicle.

So What

Entrepreneurs are likewise well served to seek out and cultivate transitory relationships with service employees whom self-important professionals generally overlook, such as: waitresses, car rental agents, flight attendants and call-center agents.

Such folks encounter a horde of unhappy, disgruntled and downright surly travelers each and every day. Thus, it is easy to differentiate yourself by simply smiling and showing these hard-working people the courtesy they deserve. Greeting someone by genuinely asking, “Wow. How can you look so cool under pressure when you are so busy?” will often be rewarded with a Bro deal.

Landing A Bro Deal

Identifying and closing a Bro Deal involves three simple steps.

Open The Door – You must make an authentic connection with your potential Bro. Always start with a friendly, sincere smile. Then engage your would-be Bro as a peer, a courtesy they may seldom experience from most of their harried, self-absorbed customers.

The specifics of what you say will depend on the situation. Irrespective, it should be a genuine expression of interest. For instance, after a long day of travel, I approached the night clerk at a hotel at about 1:00 in the morning. He was clearly studying a textbook. I immediately respected the fact that he had a night job while attending college. Rather than ignoring his book or asking him a superficial question like, “What’s your major” or “Where do you go to school?” I asked him, “What are your dreams once you graduate?” He hesitated, clearly debating if he should give me a thoughtful, honest answer or if he should remain in transaction mode and give me a cursory, glib reply.

He opted for honesty and told me that he wanted to someday open a veterinary clinic because he loved animals. We had a pleasant conversation, I was given a free upgrade without even asking and we parted with me sincerely wishing him the best. I didn’t even realized he had upgraded me until I arrived in my multi-room suite.

Obviously, the more unique, appropriately personal and clever your remarks, the faster and wider the door will open.

Make A Connection – Once the door is open, make a connection by finding a point of commonality. By politely probing, you should be able to identify a city, college, country, occupation, sports team, author, musical artist, etc. that you and your Bro have in common. Such similarities lead to liking and liking ensures that your Bro will relate to you as a kindred soul, rather than another anonymous customer.

I recently rented some kayaks on a beach in Southern California. Within three minutes of chatting with my Kayak Bro, I learned that: (i) he previously lived within a few blocks of me on the same street in Philadelphia, (ii) his brother went to my Alma Matta, and (iii) he currently attends the University where I teach.

After I had opened the door and made a solid connection, I asked him if he could give me a “Local’s Only” discount. Without hesitating, he gladly knocked 20% off the price.

Ask For A Deal – Once you establish a personal connection with your Bro, ask them for a deal. If you handled steps one and two appropriately, giving you a deal will be a natural byproduct of your camaraderie.

Bro Deal Tips

Not every situation is conducive to cutting a Bro deal and not every person you meet is a potential Bro. Below are considerations that will significantly enhance your Bro deal success rate.

Time And Place – Avoid attempting to cut a Bro in hectic situations in which you cannot properly make a connection with your potential Bro. If there is no connection, there will be no deal.

Out Of Earshot – Even if you establish a solid connection, do not ask for a Bro deal if your Bro’s boss or other customers are within earshot. Not only is it simply bad form, it will also decrease your chances of getting a deal. If there are a line of customers behind you, be cool and lower your voice when you ask for a deal.

Bending vs. Breaking – Bending the rules to get a free upgrade is one thing. Breaking the rules is something else altogether. Only request things which are relatively inexpensive and will not put your Bro’s job in jeopardy.

Be Realistic – No matter how much you Bro-up with someone, there is a limit as to what they can do for you. Use a liberal dose of common sense as you assess each potential Bro situation.

For instance, it is easier for a flight attendant to provide coach passengers free drinks when the plane has a First Class cabin, as the tracking of beverages is more difficult on such flights. The absence of a First Class cabin on a commuter planes generally takes free drinks off the Bro menu.

Timing Is Everything – Do not rush the Bro relationship. Even though your entire interaction may only encompass a few minutes, if you become too familiar too quickly, you will greatly decrease your chances of success.

Let your potential Bro set the tempo. If your displays of respect and kindness are well received, great. If they are ignored or rejected, keep smiling, but stop pounding on the Bro door.

The Real Reward

If you are rolling your eyes and wondering why anyone would bother asking for such petty deals, I will let you in on a secret – the real reward is not saving a few shekels.

The foundation upon which Bro Deals are built is the levity and personal connection infused into otherwise tedious situations. Traveling becomes less mundane and a lot more joyful when you create a genuine rapport with the folks you meet along the way. The small, tangible freebies that sometimes result from such interactions are a nice bonus, but the real payoff is making brief, yet meaningful connections with otherwise anonymous people who share this planet with you.

Follow John’s startup-oriented Twitter feed here: @johngreathouse.

Image: Photo by Eric Charbonneau/Invision for Twentieth Century Fox/AP Images

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Don’t Let Faux Unicorns Screw Up Your Financing http://johngreathouse.com/dont-let-faux-unicorns-screw-up-your-financing/ http://johngreathouse.com/dont-let-faux-unicorns-screw-up-your-financing/#comments Mon, 25 Jan 2016 13:00:55 +0000 http://johngreathouse.com/?p=5831 A version of this article previously appeared on Forbes. It is no secret that the number of private companies with valuations in excess of one […]

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image001A version of this article previously appeared on Forbes.

It is no secret that the number of private companies with valuations in excess of one billion dollars has skyrocketed since the start of 2014. As show in CBInsight’s chart, the number of such “unicorns” created during the first half of 2014 was roughly equivalent to the number created during the prior three years.

The duct tape securing the faux unicorns’ horns won’t hold up to the market’s scrutiny forever. The inevitable outcome will be the collapse of the weakest companies, while those with sound underlying business models will be recapitalized with reasonable valuations.

If such write-downs only impacted the faux unicorns and their avaricious investors, there would be little need for alarm. Unfortunately, the coming market correction will reverberate to all stages of venture investing.

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Find A Partner Not A Banker

The constant media coverage of the aberrant unicorn valuations has caused otherwise level-headed entrepreneurs to expect investors to participate at prices which are detached from their startups’ fundamentals. At Rincon Venture Partners, we continue to be disciplined, seed-stage investors. However, we have seen pre-money valuations more than double in the past year.

Ultimately, a startup’s value is based on what the market will pay. However, despite the hyped stampede of faux unicorns, savvy entrepreneurs balance the important issue of valuation with the following non-financial aspects of a healthy investor / entrepreneur relationship.

Company Friendly – Investors should demonstrate an entrepreneur-centric approach with their actions, not solely their words. For instance, a company-friendly investor typically only participates in a follow-on funding round beyond their pro rata participation with the Founders’ explicit approval. This is significant because pro rata investors are relatively indifferent as to a future funding round’s valuation. Thus, a pro rata investor’s advice is not self-serving, as their dilution will be the same as Founders and other stockholders, irrespective of the valuation.

Investors that insist on investing more than their pro rata allocation in follow-on rounds have an incentive to compress the company’s valuation to maximize the percentage ownership acquired by their investment. Such depression of funding valuations increases the entrepreneurs’ relative dilution. Investors which either do not participate or do so at a rate below their pro rata are inclined to want as high a valuation as possible.

Shared View Of Success – Experienced entrepreneurs who have previously participated in large funding rounds with high valuations appreciate the direct correlation between the post-money valuation of their latest funding round and the range of financial acceptable outcomes to their investors.

Although mega rounds with high valuations can be an effective way for large VC firms to efficiently deploy their capital, this approach can actually decrease a startup’s chances of success. For instance, assume your investors will not be satisfied with anything less than a 5x return. Thus, if they invest $10 million and own 35% of your company, your venture’s exit must be at least $140 million (($10 million x 5) / 35%). According to Pitchbook, during the first half of 2015, “M&A exits valued at less than $100 million made up the majority of exits or about 65% of the total number of deals, which was up from about 60% in 2014.”

I recently met a young CEO who had previously founded a company that raised a sizable round at a $30 million pre-money valuation from two large, Bay Area VC funds. Shortly thereafter, the company received an acquisition offer which would have put over $15 million into the Founder’s pocket.

When the CEO excitedly called his venture capitalists, he was shocked when they literally laughed in his ear. When their laughter subsided, they condescendingly explained that they did not invest in his company to get a “2 or 3x multiple on our money.”

Years later, the company was sold for substantially less than the total capital invested. Rather than walking away a decamillionaire, the Founding CEO lost most of his life’s savings, as well as a significant amount of his friends and family’s money.

Manage Dilution – Valuation is only one factor impacting dilution. The other is so obvious, it is often not given the scrutiny it deserves: the amount of money raised. Smaller funding rounds with reasonable valuations often results in less dilution for the Founders and their employees. The most effective way to minimize dilution is to raise a modest amount of money and deploy it to create a capital-efficient path to revenue.

You Team Is Not Fungible – Investors should invest your team, not the market sector you are pursuing. Sector investors are more apt to replace founding members of the management team with executives from their professional network.

Ironically, this approach actually increases the company’s execution risk, as significant uncertainty is inherent whenever an ad hoc team is formed. When a senior executive is “transplanted” into an existing team, the risk that the transplant will be “rejected” should not be underestimated.

Multiple Winners – Certain markets inherently lend themselves to one or two companies owning their space (think Uber, eBay, YouTube and Twitter). However, non-market place opportunities support multiple successful companies.

Prudent investors do not demand that entrepreneurs pursue bet-the-company strategies. However, VC’s with large funds require huge outcomes to earn a sufficient return. This dynamic drives these investors to overly-value grand slam outcomes.

An investor looking for a career-making deal might encourage you to take imprudent chances in the hopes you are the “winner” in a highly competitive market. If you fail, their downside is minimal. They will remove your company’s logo from their website and try to forget they ever made the investment. For you, the impact of a negative outcome is far more tangible and dramatic.

Social Contracts Are The Foundation Of Successful Partnerships

When entrepreneurs are viewed by their investors as partners and not their subordinates, a healthy, long-term and mutually beneficial relationship often develops. When entrepreneurs feel they serve at the whim of their overlord investors, trouble (especially for the entrepreneurs), usually ensues. If you choose to chase unicorn-inspired valuations, be sure the source of the funds will be collaborative, rather than combative.

Follow John’s startup-oriented Twitter feed here: @johngreathouse.

Image: CBInsights.com

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Startup Lessons From Stephen King: Results Vs. Activities http://johngreathouse.com/startup-lessons-from-stephen-king-results-vs-activities/ http://johngreathouse.com/startup-lessons-from-stephen-king-results-vs-activities/#comments Tue, 12 Jan 2016 13:00:26 +0000 http://johngreathouse.com/?p=5827 A version of this article previously appeared Forbes. Long before author Stephen King sold over 350 million books, he was a budding entrepreneur. In order […]

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A version of this article previously appeared Forbes.

Long before author Stephen King sold over 350 million books, he was a budding entrepreneur. In order to pay his college tuition, young Stephen created a sole proprietor startup with a very entrepreneurial pricing structure.

Leveraging his core competency, Stephen cranked out term papers for his fellow students. Papers that resulted in an “A” grade earned him $20, “B” papers cost his customers $10. There was no charge for “C” level papers. The most enterprising aspect of King’s business model was his promise to pay his customers $20 for any paper that didn’t earn at least a C grade. According to King, “I made sure I would never have to pay, because I couldn’t afford it.”

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Activities Vs. Results

Unlike entrepreneurs, whose survival is similarly based on their ability deliver value to their customers, politicians and big company executives routinely confuse activities with results.

Government officials proclaim the number of missions flown, bombs dropped and dollars spent to defeat ISIS, but there is scant mention of the actual impact of these efforts. In a politician’s world, “trying” is the measure of success. In contrast, startups which confuse inputs with outputs are assured an unceremonious death.

Performance Propels Velocity

Startup selling is largely predicated on velocity. Indecisive prospects diffuse a startup's focus and slow its sales velocity. The more rapidly a startup can determine which prospects are likely to purchase in the near term, the more effectively it can deploy its limited resources.

One way to quickly qualify a prospect is to offer them a proposal with little risk. If they balk, you can be assured they are not worthy of additional near-term attention.

At RevUpNet, an online marketing agency which I co-founded and subsequently sold to Coull, we partnered with our clients and shared the revenue we helped them generate. If we were unable drive incremental sales, we didn’t get paid. As such, we were highly selective of our prospects, only approaching companies which we were highly confident we could make a meaningful impact.

Our sales velocity was extremely high because, like young Mr. King, our pitch was clear and compelling. “We are willing to invest our scarce time and resources into a partnership with you because we believe we can tap into revenue sources you haven’t yet explored. If we fail, it will cost you next to nothing. If we succeed, we’ll pay our own way. When can we start?”

In order to further qualify them and ensure that the prospect would apply adequate attention to our partnership, we charge them a nominal flat fee during the first few months of our engagement. The size of the fee varied, but it was typically a couple thousand dollars and it went away once we began generating revenue. Even in the rare cases in which we could not make a material contribution to our customers’ sales, we always generated enough revenue to more than offset our de minimis fees.

We took a similar shared-success approach with our employees, many of whom were my former students at UC Santa Barbara. We paid them a base salary that was significantly less than what they could earned elsewhere. However, we rewarded their performance by sharing the revenue we collected from our customers. This allowed our top performers to earn in excess of $100,000 annually, while still in their early 20’s.

This performance-based compensation plan and business model allowed us to produce in excess of $100 million in sales for companies such as Angie’s List, Sonos, eFax, Stamps.com, Picassa and Green Border (both purchased by Google).

Service businesses are typically difficult to sell at a premium, yet we were fortunate to be acquired at an aggressive multiple of our sales, largely because our “put up or shut up” business model resulted in a robust recurring revenue stream.

Outputs, Not Inputs

“Believe in yourself! Have faith in your abilities! Without a humble but reasonable confidence in your own powers you cannot be successful or happy. American author, Norman Vincent Peale

By definition, startups are unproven. Rather than attempt to convince stakeholders to believe your words, a performance-based business model shows them through your actions that you believe in yourself.

A pure performance-based business model is clearly not relevant to all industries. However, wily and creative entrepreneurs incorporate an aspect of rewarding results into most of their business relationships.

If you don’t believe in your ability to deliver, why should your customers?

Follow John’s startup-oriented Twitter feed here: @johngreathouse.

Images: AP Photo/Francois Mori

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Why GoToMeeting’s SaaS Playbook Wouldn’t Work Today http://johngreathouse.com/why-gotomeetings-saas-playbook-wouldnt-work-today/ http://johngreathouse.com/why-gotomeetings-saas-playbook-wouldnt-work-today/#comments Mon, 04 Jan 2016 13:00:09 +0000 http://johngreathouse.com/?p=5812 A version of this article previously appeared in Forbes. It was a decade ago that I led the sale of Expertcity (creator of GoToMeeting) to […]

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image001A version of this article previously appeared in Forbes.

It was a decade ago that I led the sale of Expertcity (creator of GoToMeeting) to Citrix. During the early 2000’s, my team grew the company to one of the largest SaaS businesses of its day, with sales of $70 million.

In November of 2015, Citrix announced that it will spin out the “GoTo” Division, of which GoToMeeting remains the flagship product, as a standalone public company. At approximately $600 million in recurring, annual revenue, the new GoTo Company will rank as one of the largest pure SaaS companies on the planet.

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The More Things Change, The More Things Change

Many of the tactics we deployed simply do not work in today’s market. We are all victims of our past successes and thus, as an early-stage venture capitalist at Rincon Venture Partners, I constantly must remind myself that just because something was effective in a bygone era, doesn’t mean it will be so today, such as:

  1. CPA – After the dot bomb crash, online advertisers were hurting. According to Nielson, Expertcity was a top-five online advertiser for an 18-month period, based on our total marketing spend. We spent so voraciously because we had a pour and stir business model. I knew that every dollar I spent to acquire a customer resulted in a 4x return. I couldn’t spend money fast enough.

Circa 2001, Yahoo publicly declared that they didn’t do cost per acquisition (CPA) deals. In reality, they loved doing CPA deals. I paid them a flat fee for every trial customer they drove my way. This was a no-lose relationship for me, as the average lifetime value of customers derived from the Yahoo was significantly more than the bounty I paid them. I was writing them multi-seven figure checks each month, because they were generating tens of thousands of customers.

  1. Download Sites – We generated tens of thousands of customers from sites such as Download.com. We paid a very small amount per download, which proved fruitful because our in-house drip email system effectively encouraged trailers to convert to paying customers.
  2. Co-registrations – We cut dozens of co-reg partnerships with other online solutions (such as anonymizers, firewalls, anti-virus tools, and toolbars). Customers who downloaded such products could opt-into a trial for our products, without filling any additional forms.
  3. Ad Network Popups – Remember the sleazy x10 camera popup ads? If so, you probably also recall the ever-present GoToMyPC ads that polluted your desktop ten years ago. Sorry, that was me.

Because of our aggressive CPA model, hundreds of partners gladly spent their own money to buy online ads (mostly through ad networks) on our behalf, in exchange for the hefty customer bounties we were willing to pay. This was years before ad exchanges democratized display advertising and thus the inefficiencies of the market lent itself to arbitrage opportunities.

Our biggest concern wasn’t trying to get more folks to market on our behalf, but to police the nefarious members of the community, who resorted to black and grey hat tactics which, if unchecked, would have impaired our brand.

  1. Spam – Email spam was an essential marketing tool during the early days of Internet marketing. Dozens of companies in Boca Raton would send hundreds of millions of unsolicited emails each week (I wish I was exaggerating). Because we were one of the few companies which was willing to pay a customer bounty, many of these outfits spammed consumers with GoToMyPC ads, without our consent.
  2. Run Of Site Banners – Because the online advertising market was so depressed, we were able to buy tens of millions of remnant banner ads each month for next to nothing. Publishers valued the fact that we were a solid credit risk and thus allowed us to buy extraordinary amounts of their inventory. Even though the banners converted at an abysmal rate, the economics still worked for us.
  3. Incentivized Traffic – We cut deals with a number of sites that incentivized users to sign up to trials, in exchange for coupons, prizes, etc. My personal favorite was FreeCondoms.com, that drove a ton of mostly worthless traffic, but still generated a meaningful number of trials that converted to paying customers.

Today, driving such traffic typically is not economical, unless the cost of your product is close to zero, such as virtual goods in the gaming world.

  1. Affiliate Marketing – In the early days of Commission Junction, there were enough credible publishers that it was possible to generate substantial sales of b-2-b software solutions. Although there are a handful of successful SaaS vendors within the leading affiliate marketplaces, most of the traffic is now comprised of low-quality, coupon seekers of consumer products.

The Wild West days of online marketing may be over, but today’s marketers have a number of tools that weren’t available to us when we were hawking our SaaS solutions. Off-the-shelf attribution and analytics, hyper-efficient ad exchanges, retargeting solutions, lead scoring funnel optimization algorithms, etc., more than offset the “everyone is still learning” advantage we had when the Internet was young.

Don’t despair. Just think how different things will be a decade from now, when you look back on “the good old days” of the present.

Special thanks to Dan Engel, CEO of Mobile1st.com. Dan is a serial entrepreneur and uber-marketer who contributed to this article and was instrumental in Expertcity’s online marketing success.

Follow John’s startup-oriented Twitter feed here: @johngreathouse. I promise I will never Tweet about trendy bars or that killer burrito I just ate - just startup stuff.

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Online Entrepreneurs: Get Sales Tax Compliant For 2016 http://johngreathouse.com/online-entrepreneurs-get-sales-tax-compliant-for-2016/ http://johngreathouse.com/online-entrepreneurs-get-sales-tax-compliant-for-2016/#comments Mon, 28 Dec 2015 13:00:47 +0000 http://johngreathouse.com/?p=5822 A version of this article previously appeared Forbes. One of the reasons I know way more about online sales taxes than I ever thought I […]

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A version of this article previously appeared Forbes.

One of the reasons I know way more about online sales taxes than I ever thought I would is due to Rincon Venture Partners’ investment in TaxJar, one of the leaders in this emerging space. Taxes may not be fun, but I am proud to be affiliated with a company that takes much of the pain out of the process.

January is coming up and you know what that means. Did you immediately think “a relaxing post-Q4 break?” Hopefully you’ll get plenty of rest during the Holidays because soon after the New Year starts, online retailers must begin contemplating sales tax deadlines.

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Almost every online seller will have a sales tax deadline this upcoming January.

If you’re worried that you may not be getting sales tax quite right, fear not. The following sales tax compliance checkup will help you make sure you’ll start 2016 on the right track.

Your Sales Tax Compliance Checkup

Whether you’re never paid sales taxes before or you’re a seasoned expert, this checklist will help you stay on the right side of the law when it comes to sales tax compliance.

Get in the Right “State” of Mind – When most people think tax, they think “IRS.” But there is no federal sales tax, and the IRS actually has nothing to do with it (YET!). For now, online sales taxes are administered by individual states.

In specific terms, forty-five states and the District of Columbia have a state sales tax, and each has differing laws and regulations regarding rates, deadlines, filing requirements, etc.

Determine Where You Have sales Tax Nexus – Online sellers are required to collect sales tax in states where they have sales tax nexus. “Nexus” is just a fancy way of saying “significant presence.” Business activities that cause nexus in a state can include:

  • Your Home – If you live and work there, even if you only run your business from your kitchen table, then you have sales tax nexus
  • A Location – An office, storefront, factory, distribution center or even products stored in a warehouse can create nexus
  • Personnel – An employee, contractor, salesperson, or installer can create nexus
  • A Drop Shipping Relationship – Sometimes drop shipping can create nexus for your business
  • A 3rd Party Affiliate – Some states consider that 3rd party affiliates who send you business in exchange for a small cut of the profit create sales tax nexus
  • Temporary Business Activities – Sell at a trade show or craft fair? You may have created sales tax nexus.

Oh Crap, I Have Nexus. Now What?

If you are not sure you have nexus, check out this state-by-state list of activities that could have negative tax implications on your business.

Register for a Sales Tax Permit – Once you’ve determined you have sales tax nexus in a particular state, register for a sales tax permit in that state.  Be sure to obtain the permit before you start collecting sales tax from buyers who reside in the state because most states consider it unlawful to collect sales tax in their name without a permit. Here’s a guide on “How to Register for a Sales Tax Permit in Every State.”

Set Up Sales Tax Collection – Next, make sure you are collecting sales tax from all the buyers in states where you have sales tax nexus. Most shopping carts allow you to set up sales tax collection, but it is a manual process. Just remember to set up sales tax collection from buyers in all of your sales tax nexus states and on all the different shopping carts / online marketplaces from which you sell.

Simplify Sales Tax Reporting – Almost all sales tax filers will have a January sales tax deadline.  Before you can file, you’ll need to report how much sales tax you’ve collected from buyers in each state.

If you do this the old fashioned way, it may mean pulling a sales tax report from each of your shopping carts and trying to manually combine them. To make matters worse, almost all states want you to break down how much you’ve sold by county, city and other special taxing districts. In the past, this has meant juggling multiple reports, creating massive spreadsheets and then spending hours poring over tax tables. Fortunately, sales tax automation tools have greatly simplified this process.

File Sales Tax the Easy Way – The January sales tax filing due date will be here before you know it.  Make sure you get ready and pay on time or you could face fines and penalties. Some states even require you to file when you don’t owe a payment. Hey, no one ever said taxing authorities were rational! Don’t be a vendor that is forced to pay a $50 penalty on a $0 sales tax due bill. Tools that help you calculate what you owe can also automate your sales tax filing, so you’ll never have to worry about penalties or late fees again.

Make this Headache Go Away with Sales Tax Automation – Sales tax is complicated but new technology can help you simplify your sales tax compliance. Sales tax automation will do everything from helping you determine where you have nexus, to reporting how much sales tax you’ve collected, to filing your sales tax for you. Automate your sales tax hassles so you have more time for the profitable (and fun) aspects of your business.

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What’s Real About Shark Tank? I Asked This Entrepreneur Who Took Down $1M http://johngreathouse.com/whats-real-about-shark-tank-i-asked-this-entrepreneur-who-took-down-1m/ http://johngreathouse.com/whats-real-about-shark-tank-i-asked-this-entrepreneur-who-took-down-1m/#comments Mon, 21 Dec 2015 13:00:13 +0000 http://johngreathouse.com/?p=5815 A version of this article previously appeared Forbes. When I learned that one of my former UC Santa Barbara students scored a $1 million investment […]

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A version of this article previously appeared Forbes.

When I learned that one of my former UC Santa Barbara students scored a $1 million investment from the Shark Tank judges, I reached out to see what insights he might be able to share with his fellow entrepreneurs. Whether you love or loath the show, his responses might surprise you.

Jeff Overall, Founder and CEO of PolarPro, was successful because he properly balanced the show’s need to entertain its audience, while delivering a professional pitch of his solid business. The entertainment factor was his exaggerated, surfer bro delivery which charmed the judges, but didn’t distract them from the underlying fundamentals of the business.

I recently caught up with Jeff and he candidly shared his thoughts regarding his Shark Tank experience and whether or not he felt the return on his efforts were worthwhile. You can check out his Shark Tank pitch HERE (go to the last segment of the video and be ready to watch an annoying onslaught of commercials).

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John Greathouse: Tell us a bit about PolarPro and what motivated you to launch your company right out of college.

Jeff Overall: I launched PolarPro my senior year at UC Santa Barbara. I was skiing a lot on the UCSB ski team and found a solution to improve GoPro’s video quality. I sat on the product for a couple of weeks until I realized I had a minimal viable product on my hands. I think the biggest inspiration to get this product launched right away and not wait until graduating was from your Entrepreneurship class I was in at the time.

Greathouse: You attended UC Santa Barbara's Technology Management Program (TMP). What skills did you find were the most helpful when you launched your business? If you could go through the Program again, are there skills you would further hone?

Overall: I think the most valuable skill I learned throughout the TMP program was how to sell. Learning the basic principles of selling, and how to close deals have been the most valuable in starting PolarPro. The second most valuable skill I learned in the TMP program was how to build a ten-slide deck. Granted the deck was geared towards investment in your class, but I use a variation of this method in almost every sales meeting. I would say the third most important concept I picked up was from the book you forced us to read Guy Kawasaki’s “The Art of the Start”. I still use a lot of Guy’s insight as I try to build PolarPro. Also in your class you made us read your blog posts. At the time I thought of these as busy work but am glad I was exposed to all of the insight, as I still reflect on them to this day.

The only thing I wished we spent a little more time on was tradeshows, like how to prepare, exhibit, and follow up at shows.

Greathouse: Yes, getting a return on trade show dollars can be tricky. Another challenging aspect of your business is hardware management. I assume you have become quit the expert in manufacturing, inventory control and distribution. Did you hire someone with expertise in these areas or was it something you and your team learned along the way?

Overall: I have had to learn a ton about manufacturing. Since the beginning I constantly wanted to make our products better and more refined. There was no way I could have hired anyone with our ultra-bootstrapped budget, so I had to take it upon myself to learn the ins and outs of manufacturing.

Distribution was another area I learned along the way. I only knew one thing about distribution in the beginning and that was not to give out exclusivity, everything else such as margins, logistics, international marketing, and tradeshows have all been learned along the way. Inventory control has always been a challenge; it is extremely difficult to manage cash flow between new product development and building existing inventory, but these are all things I had to pick up as we grew.

Greathouse: Ha. I am glad my anti-exclusivity message sank in! Besides inventory and distribution, what has been your greatest unforeseen challenge and how did you overcome it?

Overall: The biggest challenge / obstacle we overcame happened at our second tradeshow. At the time we only had two filters for the GoPro camera. We rolled up to the show and walked by the GoPro booth. We saw two identical filters on display in their booth and my stomach dropped. I remember thinking, “Should we just pack up and go home now?”

After the initial shock went away, I knew we probably could not compete with GoPro, as the product they showed was identical to ours. So at that moment, I realized we would need more products in case one gets knocked off or looses steam. So I guess I should partially thank GoPro for copying our product and pushing us to innovate new product lines.

Greathouse: What prompted you to invest time in securing a spot on Shark Tank? I've read that less than one percentage of the applicants get in front of the sharks and only half of those pitches make it onto the show. Despite those steep odds, you must have felt pretty bullish to put in the necessary time.

Overall: I knew I had a pretty good shot. I mean come on, Southern California surfer, in an industry that is on fire right now, how could they say no? <laughs> Every season I would watch and say to myself, “How the hell did this company get on the show?” I knew I could be more entertaining than a lot of the entrepreneurs on the Tank, and I also had a legitimate company. I Finally I decided it was time and showed up to a casting call in Los Angeles.

Greathouse: I’ve cautioned entrepreneurs to not take pitch lessons from Shark Tank in the past and I’ve received a lot of pointed criticism, including getting Tweeter flamed from Mark Cuban.

My point is that the show is Reality TV and not a seminar on fundraising. That said, what lessons do you think entrepreneurs can take away from the show, both the backstage experiences you had, as well as those on camera.

Overall: I think most of the pitches on Shark Tank provide mainstream America with a broad generalization of the investment pitch. But would I walk into Rincon Venture Partners with the same 45-second intro? Hell no. The two venues are completely different.

On Shark Tank, the entrepreneur needs to be entertaining enough to get the episode to air. If I were to walk into a pitch at RVP, I would pitch my company in a more professional manner and tone down the surfer bro accent. The QA portion is actually very thorough and I imagine these would be the same questions asked in a traditional fundraising setting. They usually only air the entertaining questions, a lot of the dry questions the sharks (use to) make their decisions on are not aired.

Greathouse: What do you think "hooked" the judges when it came to your pitch? Anything you would change now that you've had time to reflect?

Overall: Probably any/all of the following: 1. I built the company with zero debt 2. Grew to $5 mil in sales in 4 years 3. Diversified the product line away from one brand/category 4. Reinvested all of the money back into the company.

Greathouse: The pitches obviously have to be edited for TV. How long was your actual pitch and were there parts that were edited out that you had hoped would make it into the final cut?

Overall: The actual pitch was an hour and a half. It was way longer than I expected, and they cut it down to about ten minutes of airtime. I had a pretty good idea of what they were going to air - the entertaining lines. There wasn’t anything in particular I wished they would have aired. I was happy with the final cut.

Greathouse: In addition to the incremental capital from two high-profile investors, what other concrete benefits did you derive from your appearance on the show?

Overall: Visits to our site were through the roof that night, and held steady through the week. Before Shark Tank, we had an average of 6 to 10 people on the website at any given time. The night of the airing we peaked at 9,000 concurrent visitors on the site. We had 45,000 unique visitors Friday and Saturday. Surprisingly, the traffic did not drop off either, we are still averaging 100-150 people on the site at any given time, which is pretty sweet. I think the biggest boost is going to come from closing deals with Best Buy, Target, and a few other retailers who were on the fence before the show.

Greathouse: That’s awesome. How do you plan to deploy the Shark Tank capital?

Overall: We are planning on using the capital to scale our current GoPro and Drone Inventory. Right now we have to airship everything in. If we can order 60 days in advance, we can ship it via ocean and save a ton of costs. Most importantly, we have plans to increase our drone accessory line, and also add a new accessory line for mobile phone imaging. We will also have some capital to act quickly on emerging trends in the constantly changing digital imaging space.

Greathouse: Other than getting recognized when you buy groceries, have you experienced any other ancillary benefits of being on the show?

Overall: Haha, I actually have only been recognized twice in public. I’m no celebrity yet, but maybe one day I will get there. To me the biggest ancillary benefit of being on the show was giving the company credibility, I mean up until last year my Grandma would get on my case about getting a “real job,” now we have a lot of the big box stores calling us back.

Greathouse: What is the extent of the involvement you have had with the show's investors, to the extent you have called upon them for assistance.

Overall: It’s pretty funny, the show really makes it seem like the investors are apart of everyday business and decisions. I personally have not talked to either of the investors since taping, the only contact I have had with them is through their team, as we work through due diligence.

Greathouse: What advice do you have for other entrepreneurs who aspire to make it onto the show?

Overall: I would say if you can be entertaining, and have a product that has some traction go for it! At the end of the day it is a TV show and needs to be entertaining. If you can be entertaining, you should have a pretty good shot. I think it is worth investing the 40 to 60 hours of time for the most engaging brand awareness platform on TV.

Greathouse: In the past, the show asked entrepreneurs to share future profits and/or give up equity in their companies as compensation for including them in the show. My understanding is that this is no longer the case. What was your experience in this regard?

Overall: I did not have to give up any equity to the show, or give profit sharing to be on the show, that would have been a deal breaker for me. The only cost to be on the show was the time it took to apply, rehearse, and film.

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Talk Like An 8th Grader When Pitching Investors http://johngreathouse.com/talk-like-an-8th-grader-when-pitching-investors/ http://johngreathouse.com/talk-like-an-8th-grader-when-pitching-investors/#comments Tue, 15 Dec 2015 13:00:06 +0000 http://johngreathouse.com/?p=5805 Photo courtesy of Santa Barbara Independent’s recent Techtopia Issue A version of this article previously appeared in Forbes. Serial entrepreneurs agree that it is best to communicate […]

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Photo courtesy of Santa Barbara Independent’s recent Techtopia Issue

A version of this article previously appeared in Forbes.

Serial entrepreneurs agree that it is best to communicate with investors on an eighth grade level. To illustrate this point, former DoubleClick Founder and current CEO of Graphiq Kevin O’Connor often begins his talks to entrepreneurial students by asking the following question.

Select the real software product from this list.

A. Assimilated, zero-administration, standard database-queuing schema

B. Open-architected, workforce-neutral, productivity assimilator

C. Modularly reduced Graphical User Interface heuristic

D. Profit-focused, fault-tolerant encoding interface

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Buzz Off

“The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.” - George Orwell, British Author

The correct answer is… none of the above. All of these “products” were created with a few clicks of a buzzword generator.

As Kevin points out, “Your prospects are busy people and they don’t care about the innards of your product. They care about finding solutions to their problems.” In the same vein, most investors are too busy to decipher obtuse buzzwords. If your pitch deck cannot be comprehended by an eighth grader, it’s probably won’t be read by the typical investor.

Effective corporate communications are not just applicable to investors. You must also place yourself in the shoes of other uniformed and indifferent stakeholders, including: customers, partners and suppliers. Do this by crisply explaining how you will resolve each of these constituents differing problems, and not bore them with the inner workings of your technology. People care about salving their pain, not the origin, design and composition of the painkiller.

Stephen King Startup Tip

In describing effective writing, the best-selling author Stephen King notes that, “Any word you have to hunt for in a thesaurus is the wrong word.” In business, if your audience focuses on your words, instead of your message, you are using the wrong words.

Worried that short, simple words will sound condescending? Don’t be.

According to the National Adult Literacy Survey, “The average adult reads at the 9th-grade level. This accounts for the fact that the popular blockbuster novels are written at the 7th grade level. People like to read recreationally two grades below their actual reading skill.” Not surprisingly, newspapers’ reading levels range from ninth to twelve grade, with the New York Times comprehensible by the typical High School sophomore.

There’s no question that they average stakeholder can comprehend language above a seventh grade level, but since most of our daily communications are in the Junior High reading range, text significantly more complex quickly becomes burdensome.

Still not convinced? In his book Fiction Writer’s Brainstormer, James V. Smith applied the Flesch-Kincaid Readability Test to the writing of ten best-selling novelists. Smith determined that the average grade level of their collective prose was 4.4 (i.e., the fourth month of the fourth grade) and that the average number of characters per word was 4.15.

If you are unsure how your corporate communications stack up against these mass-market benchmarks, run your text through the following Flesch-Kincaid Readability formulas.

Readability Test

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Grade Level Test

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Your college English Composition Professors be damned, literary flourishes written at an elevated reading level may alienate potential investors and customers.

By the way - I assessed a few random paragraphs from this entry via the Flesch-Kincaid test and it clocks in at a grade 12 reading level! I clearly have some work to do if I am to obtain parity with the New York Times.

Follow John’s startup-oriented Twitter feed here: @johngreathouse.

Image: Santa Barbara Independent, all rights reserved

 

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Is Venture Capital A Path To Riches? http://johngreathouse.com/is-venture-capital-a-path-to-riches/ http://johngreathouse.com/is-venture-capital-a-path-to-riches/#comments Mon, 07 Dec 2015 13:00:19 +0000 http://johngreathouse.com/?p=5801 A version of this article previously appeared in Forbes. Who makes more money, entrepreneurs or venture capitalists? I recently came across an interesting Quora response […]

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image001A version of this article previously appeared in Forbes.

Who makes more money, entrepreneurs or venture capitalists? I recently came across an interesting Quora response from a friend and one of my favorite co-investors, Jason Lemkin.

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The Answer: “Yes and No”

Jason concludes that:

  • A top founder takes much more risk, at least on paper, but can make a lot more than even the best VC of all time
  • A pretty good VC probably makes more than a pretty good and successful founder
  • A mediocre VC makes a lot, lot, lot, lot more than a mediocre founder and if lucky and has good partners, can make more than a pretty good and successful founder

Jason’s comments caused me to compare my career as an entrepreneur and a VC with Rincon Venture Partners. I began by calculating the size an exit must be for a VC partner to generate the same amount of money they might have earned as a member of the founding team. This analysis is particularly timely, given the recent tidal wave of successful entrepreneurs who have become Angel and venture investors.

To be very clear – I am not shedding any tears for myself or other venture capitalists. I am humbled to have a career which is practiced by fewer individuals than play professional baseball. There’s no question that many VCs (especially those who manage large funds), are underworked and overpaid.

My Experiences

To explore the operator vs. investor returns question, I thought back to my own experiences as an entrepreneur. In 2012 I sold a modest business that I co-founded for $2 million and split the proceeds evenly with my business partner. I was very appreciative of this windfall, as the company was essentially a lifestyle business that my co-founder and I never expected to sell.

As shown in the following chart, for me to gross the same amount as a venture capitalist, one of our portfolio companies would have to exit for a massively larger amount.

Note: 20% carry is fairly standard, although a handful of firms demand a slightly higher percentage. Also, the above figures do not consider the substantial transaction fees or escrow holdbacks associated with company exits.

For instance, if a firm has three partners who equally share in the firm’s carry and the firm owns 10% of the acquired venture, the exit must exceed $150 million for each partner to gross $1 million. If there are only two partners and the firm owns 15%, an exit of $67 million will result in a $1 million payday per partner.

As Jason noted in his Quora response, the degree of risk taken by entrepreneurs is immensely greater. In a downside scenario, VC’s are clearly better off. Even if their fund fails, they will receive a hefty salary during its ten year life, although they will likely be unsuccessful if they attempt to raise a subsequent fund.

Thus, it’s entirely appropriate that founders net substantially more than the VC partners associated with their company. For instance, in the above scenarios, a founder who owns 15% would gross between $22.7 million and $10 million – far more than the $1 million distributed to each VC Partner.

Will A Change In The Tax Law Make A Difference?

A few of the 2016 presidential candidates have indicated their intent to change the rate at which venture returns are taxed. Currently, carry proceeds are taxed at the long-term capital gains rate of 20%. If these rates are changed as currently proposed, venture capitalists would pay an additional 20% to the Federal government. This would effectively increase the delta between what an entrepreneur nets from a company’s sale, versus that of an investor.

Will such a change cause some venture capitalists, especially the former operators who are new to investing, to exit the industry? Possibly. It may drive some back to an operational role (a good thing) and it might encourage others to check out and hit the beach (a bad thing).

However, most investors are unlikely to make a drastic career change based on losing 20% of their future capital returns. Although a tax hike would be unwelcomed, it would not change the fundamental reasons that the investors are no longer operators - the exhaustive hours, overwhelming stress and catastrophic downside risks.

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Image: Michael Dodge/Getty Images

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VC Confessions: We Passed On Twilio’s Seed Round http://johngreathouse.com/vc-confessions-we-passed-on-twilios-seed-round/ http://johngreathouse.com/vc-confessions-we-passed-on-twilios-seed-round/#comments Mon, 23 Nov 2015 13:00:03 +0000 http://johngreathouse.com/?p=5793 A version of this article previously appeared on Forbes. There are a number of reasons why Rincon Venture Partners passed on Twilio’s Seed Round. In […]

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A version of this article previously appeared on Forbes.

There are a number of reasons why Rincon Venture Partners passed on Twilio’s Seed Round. In retrospect, our decision was both perfectly rational and completely lame.

VC's love to talk about their successes. However, they seldom acknowledge their mistakes. Exceptions exist, such as the highly self-aware Paige Craig, who recently described how he missed out becoming Airbnb's first investor. Yet most VC's bury their failures under six feet of denial.

Twilio has now raised around $235 million, including a July 2015 round totaling $130 million. This latest round valued the company in excess of a billion dollars, entering them into the overly-hyped Unicorn Club.

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What’s The Worst Mistake?

Mistakes can be categorized as “false positives” or “false negatives.” In the startup world, the former happens when a VC makes a bad investment, and the latter occurs when they miss a great opportunity. For a high-volume seed fund that adds many portfolio companies every year (such as our friends at 500 Startups who invest in over 100 distinct companies annually), the cost of a bad affirmative decision (a false positive) is quite low, since it accounts for a relatively small portion of their total fund.

In contrast, low-volume, high-conviction investors like Rincon only invests in a handful new companies each year, making it much more costly (in dollars and effort expended) to invest in a loser. For us, it’s OK if we miss a great deal once in a while, so long as the companies we DO invest in generate outstanding returns. Like fishing, it sucks when a big one gets away, but if you still catch a hefty basket of fish, it’s a good day.

Thus, while we maintain a healthy degree of optimism, we begin each funding discussion knowing that most nascent startups are not worthy of an investment, until we prove them otherwise.

Unicornless

There were no unicorns in sight on April 14th, 2008 when Kevin O'Connor, my Partner Jim Andelman and I met Twilio's Founder and CEO, Jeff Lawson.

We typically do not ask entrepreneurs to visit our offices in Santa Barbara, but Jeff wanted to meet with Kevin, an investor in our Fund who helped us vet opportunities and occasionally invested alongside of us. A true Internet Pioneer, by 2008, Kevin had already founded or co-founded two Unicorns in his own right, DoubleClick (sold to Google $3.1 billion) and ISS (sold to IBM $1.3 billion). He is now well on his way to scoring a billion dollar hat trick, with his latest company Graphiq (formerly FindTheBest).

I recall being impressed with Jeff, but I was concerned that he was creating a platform, which often requires a significant amount of capital, takes an extended amount of time to establish and can be subject to margin pressure as the enabling technologies become commoditized. It also wasn’t clear at the time what types of apps would be built on top of the platform, other than cheaper IVR systems.

Little did I know that it was Jeff's first pitch of Twilio to a VC, as he recently noted when I asked him for his recollections of our meeting.


 

Jeff Lawson <****@twilio.com>
10/5/15
to John

Hi John - if I recall correctly, this was the very first investor meeting we had for Twilio so I bet it was interesting :) I considered Kevin to be a friendly to get feedback on the pitch. <Note: I edited a few comments from Jeff's email, none of which related to our meeting in 2008.>

-jeff


Despite our business model reservations, we were sufficiently intrigued by Jeff and the opportunity to seek technical and market feedback from a VoIP expert.

Tech Diligence - Consider The Source

Our approach to diligence isn't the classic Sand Hill Road methodology of forcing entrepreneurs to deal with an expensive charge-by-the-hour "expert" who spends weeks performing a largely academic exercise of assessing the company's tech stack and code, all the while asking irrelevant questions intended to assure the investors that she is truly an expert that is giving the investors their money's worth.

Rather, we value entrepreneurs' time and thus our diligence generally includes introducing them to potential customers and partners. Our approach is often additive to all parties, resulting in ongoing, productive relationships. In turn, we receive unfiltered, frank feedback regarding the team, their value prop and the veracity of their assertions.

This was the approach we took in vetting Twilio, by introducing the Company to an industry expert with whom we had a long history.

Our friend and expert was gracious with his time and spoke with Jeff. Below is my email to Jim and Kevin, following my debriefing with the VoIP expert, who requested to remain anonymous.

The expert’s feedback was fair, but what I failed to adequately consider was that he and his team had previously built one of the world's most sophisticated softswitches. Thus, he naturally viewed Twilio's toolsets as rudimentary and easy to copy - easy for him and his world-class team of VoIP engineers, but not so easy for the average developer.


John Greathouse <john****@****.com>
4/25/08
to Jim, Kevin

I spoke (with) *** (name redacted) re Twilio. *** spoke with Jeff for about 40-minutes. The net was that ***'s app is too sophisticated for the five verbs. <Note: at the time, Twilio offered users five basic actions>

*** was surprised that there were some VoIP tools that Jeff wasn't aware of, such as SIP-T (which allows you to dip into the Caller ID, even if their ID is blocked).

Similar to VoiceXML, the standard for the past 5-yrs. Seems to be the biggest competitor. The difference is that VoiceXML does not leverage customers' knowledge of web development. *** is concerned that anyone familiar with VoIP will be confused with Twilio and VoiceXML.

*** agrees that Ribbet's strategy is bizarre since they are client-centric. They have no solution for a call that comes in while your browser is not open (it goes to Voicemail).

*** thinks his product is probably much easier to (use than) VoiceXML, but he is not sure that the ease of use will offset the market confusion.

*** reinforced our reservation regarding trying to sell tools rather than apps.
Clearly not a ringing endorsement. *** asked that his feedback be kept in confidence and NOT be passed along to Twilio.


 

Mensching

Although the expert’s startup and Twilio never formed a partnership, our collaborative approach to diligence did benefit Jeff and his team. Per the email below, Jeff leveraged his discussion with the industry expert to enlist his help with future investors. Notice how Jeff first offered value to the expert, before asking for a favor – perfect execution by a true Mensch.

Notice how Jeff first offered value to the expert, before asking for a favor -- perfect execution.


---------- Forwarded message ----------
From: Jeff Lawson <****@twilio.com>
Date: Fri, May 16, 2008 at 2:05 AM
Subject: Reference for Twilio
To: *** <****@gmail.com>

Hi ***,

Greetings from Twilio!  I wanted to check in and see how your app progress is going.  Also, you mentioned an interesting rails session that you attended last month about security, and we've been studying Google's web app security guidelines... thought you might be interested as well:

http://code.google.com/docreader/#p(doctype)s(doctype)t(ArticlesXSS)

Also, I'm curious if you could help us out a little.  A potential investor would like to speak with somebody familiar with the telecom industry to help him gauge where Twilio fits in.  I thought of you, since you've been in telecom aa (sic) long time and really impressed me with your knowledge of the space.  I think that making contact with this particular investor would benefit you as well, as they're probably good people to have in your rolodex.  Let me know if this sounds like something that interests you.

Cheers!

-jeff


It's Me, Not You

Entrepreneurs should realize that VCs’ decisions often involve factors that have nothing to do with their startup. In the case of Twilio, there were a number of such issues that influenced our decision to pass on the deal, including:

Potential Portfolio Conflict – At the time we met with Jeff, we were also prosecuting a potential investment in RingRevenue, another VoIP opportunity. We had known and worked with the RingRevenue team for years, they were located in our hometown and the pain they were alleviating was validated by several large, early-adopters.

We certainly could have invested in two VoIP deals simultaneously, but we were concerned that the two companies might ultimately compete. Although larger VC firms routinely invest in competitive offerings, it is less prudent for a small firm to do so, as it can be difficult to avoid inadvertent information transfers within an intimate partnership. Most importantly, it just doesn't feel right to us to hold positions in competitive companies.

Too Early – Twilio secured a $1M seed round during the first half of 2009, nearly one year after we met with Jeff. At the time he pitched us, he had no paying customers and was only offering five basic "verbs" of functionality to his users.

Also in 2008, SMS was not pervasively used by businesses. The iPhone had been launched about 10-months earlier (tying users to an exclusive carrier with a crappy network) and most of the smartphone apps that had reached scale were games. As such, it was difficult to envision the ultimate size of Twilio’s market.

This is a common situation in early-stage stage investing. It is often challenging to extrapolate the future from a sparse dataset. As noted in What Does VC Traction Really Mean?, if an entrepreneur doesn’t have prior history with a professional investor, it is highly unlikely they will be successful in their fundraising efforts unless they have third-party validation of their venture’s value prop. Without knowing Jeff first-hand and absent market validation, we weren’t comfortable placing a bet on his opportunity.

Geography - Rincon is now very active in the Bay Area. However, in 2008 we were focused almost exclusively within Southern California. Without insights into the Northern California startup ecosystem, our thesis was, "Why are these guys seeking capital in SoCal? What do Silicon Valley investors know that we are missing?"

Painful Past - We are all also victims of our past. By 2008, I was only a couple years away from the brain damage I suffered at CallWave, after the executive team turned down acquisition overtures from Google and Yahoo (I'll write about this colossal mistake in a future confessional article).

Other than the fact that both Twilio and CallWave utilized similar telephony technology, they were otherwise unrelated. The former is a developer platform, while the latter was a consumer subscription service. Thus, it was not rational to allow my negative experiences at CallWave to influence my thoughts about Twilio, but it happened, nonetheless.

Billion Dollar Consolation Prize?

Fortunately, after turning down Jeff, we co-led the first priced round in RingRevenue (now known as Invoca), along with Mark Suster of Upfront Ventures. The company has been a resounding success and we believe is well on its way to a billion dollar exit. We "missed" one Unicorn opportunity, but at least we didn't miss two. Well, we actually did pass on a seed investment in Uber... but that's another confession, altogether. Doh!

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Image: Courtesy of Twilio, all rights reserved

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Startup Lessons From The Beatles’ Relationship With Their Manager http://johngreathouse.com/startup-lessons-from-the-beatles-relationship-with-their-manager/ http://johngreathouse.com/startup-lessons-from-the-beatles-relationship-with-their-manager/#comments Mon, 16 Nov 2015 13:00:31 +0000 http://johngreathouse.com/?p=5789 Brian Epstein, the Beatles’ Manager, was tenacious and ambitious, but he was musically inept. Brian was instrumental in establishing the Beatles’ career, but he had […]

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image002Brian Epstein, the Beatles’ Manager, was tenacious and ambitious, but he was musically inept. Brian was instrumental in establishing the Beatles’ career, but he had no input on the band’s production of music. In the same way, investors can be immensely additive to an entrepreneur’s journey, as long as they know the limits of their ability to help.

Effective startup investors guide management’s decision process, but ultimately they support the team’s decisions. If the investors repeatedly disagree with management, they should either disavow themselves from the startup (which is typically difficult for a venture capital firm to do) or make appropriate replacements to the management team. However, they should never attempt to run a company from the sidelines.

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The Beatles’ Biggest Day… So Far

January 1st, 1962 was the biggest day yet in the Beatles’ fledgling career - an audition with Decca Records. However, rather than showcase such high-energy Beatle originals such as, “I Saw Her Standing There” or “The One After 909,” Brian Epstein, the Beatles’ Manager, focused the group’s efforts on sappy show tunes and languid pop standards. The result was a listless audition and the ultimate rejection of the world’s most successful recording act by the otherwise astute Decca.

That was the last time Brian played a major role in the Beatles’ musical direction. As their career progressed, Mr. Epstein focused on what he did well - dealing with the financial aspects of the Beatles’ money machine.

Several years later, Brian made an uncharacteristic visit to the recording studio while the Beatles were creating their landmark album, Sgt. Pepper. During a lull, he made the mistake of offering his unsolicited musical advice, telling John Lennon, "I don't think that sounded quite right”. John didn’t miss a beat, replying, “Slag off Brian. You stick to your percentages and we’ll look after the music.” Brian quietly sulked out of the studio and never returned.

In this instance, John Lennon did what many entrepreneurs fail to do with respect to managing their investors. John made it clear to Brian that the Beatles’ role was to make the product and tend to operations while Brian’s responsibility was to manage the group’s financial solvency.

Seeing Is Not Doing

At the height of their fame, the Beatles were asked, "What excites people so much about your music?" John Lennon replied, "If we knew that, we'd start another group and become managers."

Observing successful execution as an investor is not the same as performing successful execution as an entrepreneur. Just as sports writers are not athletes and theatre critics are not actors, investors are not operators. Thus, act upon your investors’ advice that is drawn from their experience and expertise, but never allow statements like, "I don't think that sounded quite right” to go unchallenged.

You can follow John on Twitter: @johngreathouse.

Photo Credit: Chris Ratcliffe/Bloomberg

 

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