Tuesday, July 26, 2011

Venture Deals

I was very pleased to receive an advance copy of Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist the other day. After reading it, I've concluded that it's like having a super-mentor on your shelf.

I have been extraordinarily fortunate throughout my career to have been blessed with amazing mentors. Men like Will Harvey and Steve Blank have been there to help me, encourage me, and push me to do better. For any entrepreneur, these super-mentors are one of the secret weapons that can make a difference: answering difficult questions, making key introductions, or offering sage advice.

However, there is one thing that the best mentors do which is most important: they can help you figure out what the $@%@$ is going on. When things get really tricky, often we find ourselves asking the wrong questions, or not even knowing enough to ask.

When raising money, for example, you might think that most negotiations happen in a rational way, over just a few deal points that have a clear meaning. You might think that "company valuation" refers, naturally, to how much your company is - you know - valued. But this kind of thinking will get you in trouble fast. Because in reality, these negotiations hinge on hundreds of hidden factors, incentives, and sources of agency bias. Nothing is straightforward, especially if you haven't done it before. These are the moments when the truly great mentors stand out in their ability to cut through the BS and help you understand the motivations and systems that are driving seemingly incomprehensible behavior.

All of this is by way of saying that if you already have a mentor of the caliber of a Steve Blank or Brad Feld on speed-dial, you probably don't need to read Brad's new book Venture Deals.

What's that you say? You don't - or you're not sure? Well then, you absolutely, positively, without-any-doubt have to read Brad's new book Venture Deals. Here's why.

Book endorsements are a funny thing. I get asked all the time to endorse books, in the hopes that you all will buy them and read them. And I often want to help other authors, because I know just how hard it is to get people to give a new book a chance (you may have noticed that I've been pushing a certain book pretty hard lately).

But if you look at my past book reviews and the "recommended reading" widget in the sidebar on the right, you'll notice that I recommend very few books. That's because I have an iron-clad rule: I will not use this space to recommend any book that I do not personally believe will directly impact entrepreneurs in a positive way. This creates a lot of awkwardness, because so many people have sent me books that I genuinely like, but which I don't feel are appropriate to endorse.

I say all this because I want you to understand why I am writing this post. Brad Feld and I have a bit of a mutual admiration society going. He and I have worked together on the Startup Visa initiative. He's said nice things about me and my book. I think he's a great guy. I even contributed a chapter to his previous book, Do More Faster.

But none of that is enough to get me to recommend this new book, co-authored with Jason Mendelson.
In fact, when I received my advance copy, I was a little worried. I generally try and stay away from topics like "how to raise VC" or "how to sell your company" because the startup landscape is already saturated with tips and tricks. And reading a term sheet has all the entertainment value of watching dried paint get even drier.

But Venture Deals is quite a surprise: it's readable, engaging, and addresses issues way below the surface.

It is not a how-to manual or a collection of tips. It's an in-depth explanation of what the @$%$ is going on when an entrepreneur considers raising money or doing an M&A transaction. And even if you don't think you're going to do that for your startup, this is very valuable information to have - because you never know who might approach you in the future. This is a book you'll want to have handy, just in case.

I've dealt with a bunch of different kinds of investors over the years, from so-called "dumb money" all the way up. The hardest thing to understand when working with them is that they are subject to forces and incentives that are rarely disclosed openly. When I came to Silicon Valley, I was inducted into a body of accumulated wisdom about how to handle them. This is the same advice I hand down again to entrepreneurs who are seeking my counsel. That advice is completely consistent with what's contained in Venture Deals.

For example, the right way to think about a term sheet is as a negotiation over just two things: economics and control. Everything in a term sheet is negotiable - if and only if you already have sufficient leverage. (Do you know the sources of leverage in a VC deal? Wouldn't you like to?) There are many founder-friendly terms you can push for, from automatic acceleration to reduced vesting - but each risks reducing the alignment of interests between founders and investors. And even if you're an old pro at raising money, you're likely to find a few surprises in here. Are you sure you know the formula for how your VC reserves capital for your future rounds (I didn't)?

And even the most battle-tested entrepreneur would be forgiven if they were a little confused by the following bit of poetry in a term sheet:
Antidilution Provisions: The conversion price of the Series A Preferred will be subject to a narrow-based weighted average adjustment to reduce dilution in the event that the Company issues additional equity secuities...
Now even though us old pros know that there are different kinds of antidilution provisions, are you absolutely sure you remember which one is the good kind and which is the horrible kind that caused all those problems in 2001? Are you sure your lawyer will catch it if the formula isn't quite right? Wouldn't you rather be sure? I've lived through a crisis where a company's antidilution provisions kicked in and nobody could agree on how the formula was to be interpreted. I wish I'd had this book on my shelf back then.

Which brings me back to my claim at the top about having a super-mentor in book form. Venture Deals explains not just what to do but why it works that way.  Every VC term sheet I've ever seen has come with a claim that its terms are all "entirely standard" and "as simple as possible" - whether it was one page or a dozen pages long. That can be frustrating, but what do you do about it? Which terms really are standard for good reasons, which are standard for bad reasons, and which are just gotchas designed to skew the negotiation?

Venture Deals has negotiating tips, same as other books, but - much, much more importantly - its negotiating section is called What Really Matters? When you're in the thick of it, only a truly great mentor can tell you which provisions are negotiable, which are negotiable-but, and which are really non-negotiable. ("negotiable-but" means you can possibly win that fight, but it will damage your reputation in the process.)

Now, it's important to keep in mind that Brad and Jason are themselves VC's, albeit ones with an entrepreneur-friendly reputation. So you always have to take their advice - like anyone's - with a grain of salt. But they've thought of that, too. Throughout the book, they've given space for brief commentaries by an experienced entrepreneur, Matt Blumberg, CEO of Return Path. In several places he gives an important counterpoint to Brad and Jason's perspective. It's a combination that is unique to this book.

I hope all of you who are reading this - no matter where you live, no matter what kind of company you have - will one day get to make the pilgrimage to Sand Hill Road in Silicon Valley, or another famous startup hub. It's an exhilarating experience. But it's not without its risks. As the old saying goes, "watch your wallet." And bring your copy of Venture Deals.

Wednesday, July 6, 2011

The Lean Startup Book is here

I am no longer writing a book. The Lean Startup Book is done. Finally, really, truly, done. On July 4, I celebrated Independence Day by making my very last revisions to the paper (!) page proofs, and mailing (!) them back to my publisher. (Yes, I also sent them a scanned PDF via Dropbox.) The finished book will come out on September 13, featuring an amazing cover designed by my IMVU co-founder Marcus Gosling and refined and tested by so many of you.

I am incredibly proud of the result. If you've been waiting for a comprehensive account of the Lean Startup and how it can help you achieve dramatically better business results, this is it.

The book contains tons of case studies. Some are from famous companies that you've heard of, like Dropbox or Groupon. Some are from obscure startups who you haven't heard of -- yet. And others are from unusual folks we don't normally think of as entrepreneurs, from corporate managers to government agencies.

But the book is much more than just stories. What I am most proud of is what I hope will be a significant contribution to our collective conversation about entrepreneurship.

What really constitutes product/market fit? I believe it is time to put that concept on a quantitative footing, so we can move past the unhelpful, "if you are asking, you don't have it." Can you tell the difference between being just on the cusp of greatness and being helplessly far away? I believe we can.

What is entrepreneurship, really? I believe entrepreneurship is the management discipline that deals with the domain of extreme uncertainty. Anyone who is trying to innovate without knowing what's going to happen is an entrepreneur, their venture is a startup. Most of our management tools, like planning and forecasting, require a long and stable operating history. Does anyone feel like our world is getting more and more stable every day?

How do you know when to pivot and when to persevere? Readers of this blog know that entrepreneurship is rife with failure, and a big part of the Lean Startup method is to pivot rather than stubbornly launch and hope for the best. But how do you know when to pivot? We all know companies that seemed to pull out a win just when all hope seemed lost. How do you know if that's you?

Here's the description you'll find on the book jacket itself:
Most startups fail. But many of those failures are preventable.  The Lean Startup is a new approach being adopted across the globe, changing the way companies are built and new products are launched.

Eric Ries defines a startup as an organization dedicated to creating something new under conditions of extreme uncertainty. This is just as true for one person in a garage or a group of seasoned professionals in a Fortune 500 boardroom. What they have in common is a mission to penetrate that fog of uncertainty to discover a successful path to a sustainable business.

The Lean Startup approach fosters companies that are both more capital efficient and that leverage human creativity more effectively.  Inspired by lessons from lean manufacturing, it relies on “validated learning,” rapid scientific experimentation, as well as a number of counter-intuitive practices that shorten product development cycles, measure actual progress without resorting to vanity metrics, and learn what customers really want. It enables a company to shift directions with agility, altering plans inch by inch, minute by minute.

Rather than wasting time creating elaborate business plans, The Lean Startup offers entrepreneurs - in companies of all sizes - a way to test their vision continuously, to adapt and adjust before it’s too late. Ries provides a scientific approach to creating and managing successful startups in a age when companies need to innovate more than ever.

I Need Your Help

If you've read this far, I'm guessing you're at least a little bit interested in the book. If so, I'd like to make one specific ask. Would you help me out by pre-ordering the book right now?

It's available for pre-order from many retailers, including Amazon.com, and you won't be charged until the book comes out September 13, 2011. So it's more like a reservation. The entire traditional publishing world is driven by pre-orders, so if you are willing to take a moment and pre-order, you'd really be helping me.

Let me explain why...

Why you should pre-order the Lean Startup Book

A few months ago in Austin during SXSW, Andres Glusman (of Meetup.com) arranged a very special meetup. We got together all of the Lean Startup meetup organizers that were in town for SXSW. It was an amazing experience. All of them are busy taking this idea and transforming it into a movement. They are experimenting and innovating and sharing their results. I felt privileged to be there.

One of the questions that kept coming up at that meetup -and at countless events since- was why I decided to go the traditional publishing route for my new book. It’s a fair question: the publishing industry is slow-moving, frustrating to navigate, and technologically backwards. They are remarkably un-lean in the way that they work. Most books are still published on a waterfall-style schedule, with massive amounts of work-in-progress inventory building up at each step. Customer data is rarely used to make decisions.

At the same time, self-publishing options are getting better every day. I already reach thousands of entrepreneurs through this blog, my Leanpub-powered ebooks, and even printed versions created via print-on-demand at Lulu. Not to mention the megaphone at my disposal through Twitter, conferences, etc. I think it is safe to say that if anyone out there is seeking out new ideas about entrepreneurship, they will eventually find their way here.

So why do it?

I spent over a year researching my publishing options, digging into the structure of the publishing industry, and really trying to understand what its strengths and weaknesses are. But what surprised me most about that search was that I learned as much about myself as I did about publishing. Media businesses are amplifiers – of people, of ideas, of (too often) total BS. The real question when engaging with them is – what do you want to amplify and why?

I’ve written and spoken often about my desire to see the Lean Startup movement change the world by stopping the obscene wastes of people’s time: from products that fail, from marketing initiatives that have no impact, from IT projects that are doomed from the start, and, of course, startups that are building something nobody wants. When I had to decide what to publish, I asked myself this question: who is causing most of that waste and how to we reach them? When you put it that way, I think the answer is pretty clear: there are countless managers, investors, and business owners out there, doing the best they can, using outdated and obsolete tools to try and create and launch new cool stuff.

Unfortunately, most of those people are not reading blogs about entrepreneurship. In fact, a large number of them do not even consider themselves entrepreneurs, or think that they have an entrepreneurship problem. I’ve written about this before, in the context of why it’s important to teach MBA’s about entrepreneurship. Consider the total amount of funding for doomed projects that comes from VC’s, large company M&A departments, government grants, and private equity firms. How much of that investment is squandered because the funder is relying on vanity metrics for evaluation?

I once received a phone call from a fund manager for one of the large university endowments. This is someone whose job is to invest large amounts of money with the most successful venture capital firms in the world. She wanted to get my perspective on the industry, technology trends, and – of course – she got an earful about the importance of Lean Startups. But after a few minutes she asked me a question that really stuck with me: “you know, our VC’s often show us how much progress they’re making by introducing us to the next hot company that they’ve invested in. Quite often, those companies look very promising, have lots of traction, and are poised for massive success.” (She didn’t need to explain – but I understood the subtext - that these conversations often happen right around the time the VC is raising their next fund.) She continued, “And yet, oftentimes these hot companies fizzle out unexpectedly, sometimes as soon as six months later. How can we tell the difference between the next big thing and the next big fizzle?”

This is the kind of person who badly needs a new paradigm for understanding entrepreneurship. She works every day financing the next generation of startups. And because she works with outdated tools, much of her money - not mention the time of thousands of people that money hires - is being wasted.

In the Lean Startup movement, we know how to fix these problems. We know how to shift attention from vanity metrics to actionable metrics, using “innovation accounting” to measure real progress. If you’re reading this blog, that means that you are a classic early adopter – and I thank you.

But the people we need to reach next are classic mainstream customers. They are not looking for new ideas about entrepreneurship, they are too busy trying to get their work done.

I believe this is the function of traditionally published books these days: to help bring new ideas to a mainstream audience, even when they aren’t looking for them.

So that’s why I decided to publish a traditional book this fall. And that’s also why I’ve been so focused on coming up with reasons why you should pre-order the book before then. You see, the thing about mainstream customers is that, most of the time, they only want to read books that everyone else is reading. That’s why bestseller lists (and app stores) are so effective. They set up an information cascade that helps mainstream customers decide what to buy.

Which brings me back to the meetup-of-meetup organizers. I felt a little sheepish telling them this same story. It's self-serving. Although I truly believe this book is about you and the work you are doing to change the world -- for better or worse -- it's my name on the cover. But at that meetup, the organizers only wanted to know: how can we help? who do we need to tell? how many copies do you need to sell? They are the ones who encouraged me to write this post, and speak directly about why this is important to me.

Of course, if you’ve ever tried to launch an app on a platform dominated by an app store, you’ll know how hard it is to break into the rankings, which drive a huge amount of the distribution. The same thing is true in publishing – the key to a successful book launch is to have the book debut as a bestseller. This signals to mainstream readers that the book is worth reading. So just like in the app store, a successful launch requires a strategy for “making the list.” (you can see my somewhat dated thoughts on app stores here)

And that’s where you come in. All mainstream books are officially released on a Tuesday. Why? Because the bestseller lists are calculated on a weekly basis, and they all run Tuesday-Tuesday (a few run on a monthly cycle, but with the same effect). Thus, to have your book debut as a bestseller requires that you sell more copies in that first week than the other existing bestsellers. Luckily, pre-orders (no matter how early) count as sales towards that first week's total.

So that is what I'm asking you to help make happen. We have a chance to take this set of ideas truly to the mainstream, to have them take us seriously in a way they never have before and - in the process - to redeem a lot of people's hard work, talent, and energy.

Amazon keeps a sales rank for the book, which has been bouncing around quite a bit. Right now, we're at just about #12,385 [not anymore, see update below]. Will you take a moment and help drive that number down? As always, your enthusiasm and support mean the world to me. Thank you.

(Oh, and I made this handy bit.ly link for easy clicking and sharing.)


[Update 1:12 AM] I just got home from a night of celebration to find this incredible sight waiting for me:
Amazon Bestsellers Rank: #7 in Books
Unbelievable - Amazon rank #7 in books overall, in just a few hours. Thank you all so much.

[Update 7:21 AM] #3 behind George R. R. Martin.