Andry Haryanto

Who the Fuck Knows?

Startup companies that we review often give us product roadmap and targets that are so outlandish and almost too-good-to-be-true. It is no surprise that in investing, you are somewhat trying to predict the future. “Can this company do it?”

One Managing Director I work with summarizes it best, he usually thought about this for a second, and then shrugs, “Who the fuck knows?” Then he continued, “We will take what we know today, make sure there is enough value in the current business to cover our investment, and then write these AIDS-curing ideas as an upside.”

Who the fuck knows - there is no point in thinking too much. Take what you have today, make the best decision you can, and move on.

This is an approach that also rings true for the other side of the table: entrepreneurs. In creating a startup, you are experimenting with products and business models. Proving that the product is valuable, and somebody is willing to pay for it, is more important than refining it over and over and over again, which is one mistake many founders make. Andrew Mason, Lesson from Groupon:

Shit that you read all the time. The biggest mistake we made with the point was being completely encumbered by this vision of what I wanted it to be and taking 10 months to build the product, all the while making assumptions on what people want that we then spent the next 10 months backtracking on instead of focusing on the one piece of the product that people actually liked. You’re way too dumb to figure out if your idea is good. It’s up to the masses. So build that very small thing and get it out there and keep on trying different things and eventually you’ll get it right.

Fred Wilson Wrote Venture Debt 101. Here is 102.

Now all my deals are closed, I finally have time to catch up on my reading list. A piece that caught my attention was Fred Wilson’s MBA Mondays on Venture Debt. Very succinct overview on venture debt 101, I suggest you check it out. This very condensed article could be a little misleading without further explanation and examples. Enjoy the response from the other side of the table.

Fred’s argument against venture debt in early stage / before profitable

I’m not a fan of venture debt for early stage companies. If the startup is getting the money because of the credit worthiness of my firm and the other firms in the deal, then I’d rather be putting more equity in instead and getting paid for my capital at risk. I’ve told this to every venture debt lender who has come to see me so it’s not a secret how I feel about this kind of funding.

That is Fred’s investing philosophy and I respect that. However, not all companies are that lucky. We often see VCs dragging their feet on follow-on investments because:

• They are not confident that the company can achieve the next milestone (e.g. getting drug approved, scaling up manufacturing, user adoption), while the management team believes otherwise.  
• Sometimes existing investors simply tap out or lose confidence, while the company still needs fresh capital to get to these next milestones before they can attract new investors. 

This is a case venture debt can bridge the gap. Not all companies qualify, of course. There are several qualitative and quantitative aspects that a lender must be comfortable with in these scenarios.

Venture debt to prevent dilution

It should be noted that there is an obvious counter to Fred’s view from the other side of the table (i.e. the entrepreneur).  If a company needs cash and Fred believes in the company, he obviously wants to put more $ in to own more of it.  Yet an entrepreneur may want to look into venture debt to avoid that dilution at that time, especially if there are meaningful milestones that will be achieved over the period of time that the debt affords, which would thereby increase overall value and minimize dilution.

Comment from Zack Mansfield (Square 1 Bank). Spot on. Venture debt can be especially attractive to software companies that have gained significant traction and are only a few quarters away from achieving cash flow positive. The technology and market are validated, reaching CF+ is only a matter of sales execution.

Venture lenders are just “dumb” followers… Ouch!

So why do banks loan to startups when they have raised VC but not when they have not? The answer lies in the key understanding about Venture Debt. The banks are not loaning against the credit worthiness of the startups, they are loaning against the creditworthiness of the venture capital firm or syndicate. Basically the banks are betting the VCs will keep funding the company well past the term of the veture [sic] debt loan.

The argument above undermines the complexity of venture debt financing, which is a commonly misunderstood asset class anyways. Sure, there might be some lenders who just look at a bigwig equity firm and immediately give the stamp of approval. However, these guys might as well open an ATM that spits out money based on which VC firms are backing a potential borrower. Not that simple! Let’s further define the statement above for better clarity:

[…] lenders are betting that the company can achieve the next significant milestone so that the VCs will keep funding the company […]

Simply translated, any prudent lender would make an effort to understand the company’s business to make sure that the company can get to the next milestone, as well as determine the value of the company in downside scenario.

Enough criticisms and corrections; now on to his best advice:

It is smart to use debt vs equity when you can absolutely pay the debt back.

Update: John Greathouse wrote a great response to the the AVC article. Check it out.

Notes from Dreamforce

This is my first time attending Dreamforce. Glad my team encouraged me to go and agreed to take over my deals. Yes, I had to wake up at 5am. Yes, the commute was 2 hours one-way. But I was like a kid in a candy shop all over again. 

Interesting, noted:

• The keynote is as interesting as, but the tone is totally opposite of, Apple. Jobs would say, “This is something amazing that we invented. It will change your life.” Whereas Benioff said, “We listened to our customer’s request, align it with our vision, and here is we enable them to change their life.” Still amazing products, slightly different tone.
• The theme year is all about “social”. Marc did a very good job sending subliminal messages - inserting the word “social” every 2-3 sentences, while roaming around the room saying hi and shaking hands.
• Demo of HTML5 iPad app. These guys made HTML5 app implementation look too easy. Watching this demo made me realize that to have a good mobile webapp experience is only a matter of satisfying two conditions: formatting and internet connection speed.
  
• “Corporate springs” is an interesting concept inspired by Arab Springs: a revolt because leaders did not listen to its employees/customers. It does sound like a marketing gimmick, but I did experience it firsthand when Sprint’s customers left in droves when the it refused to listen and fix customer experience.
• I wonder how Salesforce can release new features without pissing of its partners (this is the hazard when you own an ecosystem). Chatter is basically Yammer.
• A lot of companies are increasingly leveraging Salesforce for customer service. The demo demonstrates how integration with different communications channel (twitter, FaceTime) can be really powerful. Click play below. This is good stuff.
  
• There have been so many ways companies try to leverage social media to create viral marketing by surprising customer. This one is the best one I’ve seen so far, both in execution and documentation. The problem: this is good as a marketing tool, not exactly a scalable tool that can increase the overall service experience for the entire population.
  

Overall, Salesforce is an interesting company. What they do is not groundbreaking in a “rocket-science” sense, but they integrate all these disparate features in enterprise software so well. Purely awesome execution.

E-commerce: chicken and egg problem is overrated, get on it!

I was advising a couple founders who are building an e-commerce business. One of their worries is the classic “chicken and egg” problem of building a critical mass of sellers before the service becomes valuable for the buyers, and vice versa. Typical. They are building a full-blown business plan. Typical.

My advice was, “Chuck it, get on it. You already have the chickens.”

The “chicken and egg” metaphor sounds so metaphysical that, hyperbolizing the problem, and forcing you to think about a solution, not take action. Let’s face it, you are building Web 2.0, not creating Chicken 2.0. In fact, you already have the chickens (buyers and sellers), you just have to make them party at your place.

The metaphor also introduces a false notion that once you have one part of the equation, the rest would be “automatic” - once you have the egg, then you will have chickens, then you will have more eggs, then… And it undermines the incentive and momentum aspect of the whole process.

Starting a “snowball fight” is a better analogy, because it forces you to take action. Starting a snowball fight is easy. You throw a snowball at one of your buddies, he fights back. You get another person to tag team on him, taunt and laugh at him - it provides him incentive to get more people on his side. And it provides you more incentive to grow the size of your team… and so on…

The takeaway is that there is some value in planning, but not much value in too much planning. It’s better to get started and test whether your plan works. Once your user base grows, most of the time your acquisition strategy will change anyways.

So get on it.

On IPO, Make Sure that Monkeys Can Run the Train

Max Levchin:

We went public (PayPal) just before Sarbanes-Oxely and it was very onerous. Once you go public it is a big distraction to staff, they are checking their stock price all the time. If it is down, they are depressed and when it is up, nothing can touch you.

On the day of Tesla’s IPO, I thought that its strongly prohibiting employee from checking the stock price was just Elon’s antique. Turns out not everyone can resist. Moreover:

When you go public your organization is probably working at half productivity. Going public slows you down, you should make sure you get most of your innovation done first. You should make sure, as Meg Whitman once said, that monkeys can run the train, then it doesn’t matter that your productivity is down.

Evergreen Solar on China: Cheap Labor & Libor

NYTimes:

China’s real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.

Evergreen borrowed two-thirds of the cost of its Wuhan factory from two Chinese banks, at an interest rate that under certain conditions could go as low as 4.8 percent. Best of all, no principal payments or interest payments will be due until the end of the loan in 2015.

By contrast, a $21 million grant from Massachusetts covered 5 percent of the cost of the Devens factory, and the company had to borrow the rest from banks. Banks in the United States were reluctant to provide the rest of the money even at double-digit interest rates.