Post Category → Ethics

Bad Advisors: The Problem with Localism

TL;DR Nutshell: One hour with an advisor who has exactly the domain expertise your company needs could be infinitely more valuable than 100 hours with someone who doesn’t. Yet, unless you live in a large ecosystem, that all-star may not be in your city. So go find her. Time is precious and mistakes are costly. Never put localism before competence and results.

Related Reading:

My wife loves farmers markets.  I love healthy, delicious fresh food, as well as supporting decentralized agriculture over conventional mega farms.  But I also personally have a ‘thing’ against rewarding inefficiency and mediocrity. I dislike the way in which a lot of the pro-local ethos appears to almost celebrate how badly businesses can be run – hand-made, hand-picked, artisanal, small batch, etc. etc. If it doesn’t actually produce a tangible benefit to the consumer (better taste, as an example), why should I wake up early on a Saturday morning just to reward your bad business skills?

Funny thing is that there’s one local farm here in Austin that has begun to just dominate farmers markets. More variety, more staff, consistent quality, better pricing, even better branding. They’re everywhere. I love it, and whenever I have to go to a farmers market, I usually just end up shopping at that one booth. And when I’m not at a farmers market, I’m probably shopping at Whole Foods, which is the farmers market fully self-actualized. Say what you want about its prices, but John Mackey and WF took the pro-local, pro-environment, humane food value structure and scaled it (out of Austin) like no one else has since. And it is spectacular.

Touchdowns; Not Pep Rallies. 

Now back to tech. Celebrating your local business / startup ecosystem is a great thing. There’s deep value in the close, repeat relationships and networks that develop through working with people within your city. But with that being said, there is still a completely unavoidable fact: nothing comes even close to supporting a local startup ecosystem as much as the building of scaled, successful tech companies. All the meet-ups, startup crawls, networking events, hackathons, pitch contests, publications, parties, etc. are great and important in their own way, but, to repeat, nothing matters more than the building of great companies. Touchdowns. Wins.  Pep rallies do not attract the kind of deep talent that ignites a local economy; awesome companies do.

Once you accept that building successful companies trumps all else, there’s another unavoidable fact: working with highly competent, experienced advisors with truly valuable insight for your specific company, whether they’re in Silicon Valley, Seattle, Los Angeles, New York, Austin, Houston, Boston, London, Dallas, or wherever, comes first, second, and third before working with someone who may be more accessible to you locally, but can’t deliver nearly as much value. 

If it’s my company, my capital, and my employees on the line, I ain’t got time for the guy selling his tiny backyard tomatoes across the street, even if he knows everyone in town. I need that big, juicy peak game stuff, and if I have to go to the coasts to get it, so be it. Hit your goals with quality, imported help (if necessary), and you’ll sow a dozen A+ farmers in your city for the next entrepreneur to reap. THAT’s how to support your ecosystem.

Bad Advisors <> Influencers. 

Bad advisors are usually influential, well-known people in a local economy. They aren’t bad people. They just don’t have very useful advice, and often give bad advice, to early-stage founders. 

If you want to start a startup-oriented business – let’s use an incubator as an example – and generate a lot of buzz around town, you are going to want to work with the influencers in your community. They know whom to call, what strings to pull, and can even usually put in some cash, to help establish your incubator’s brand around town. What do all of those influencers expect in return? Profit? Perhaps. But more often than not, they want access. They want to be involved. How can they get involved? As mentors /advisors.

So it should not surprise you that when a new incubator, accelerator, co-working space, or other startup-oriented org launches in your town, a significant portion of the people involved will be there not because of the value they can bring to startups, but because of the value they brought to the person starting the incubator, accelerator, or what not. They may be C-suite executives at a prominent local company who have never worked anywhere with fewer than 200 employees. They may be wealthy businessmen in industries totally unrelated to your own. Sometimes it’s just a guy who is really F’ing good at networking.

It’s an unfortunate fact of reality that many business referrals, even in tech ecosystems, are made more with an eye toward perpetuating the influence of the person making the referral (reward people who refer back, are part of your ‘circle’) than the value that the recipient of the referral will receive. Finding people who care more about merit than about rewarding their BFFs is extremely important for a founder CEO. Those people will be honest with you when there simply isn’t anyone in town worth working with. I find myself saying that often about lawyers in specific niche specialties needed by tech companies, although increasingly less so each year.

Widen your network. 

The take home here should be to (i) understand why those influential (but sometimes clueless) local people are being pitched to you as advisors, even when they don’t really have very good advice (but they may have money, and it’s green), and (ii) go find the advisors you really need, wherever they are. But please save your equity for the people actually delivering the goods. Vesting schedules with cliffs. Use them.

Videoconferencing is pretty damn good and cheap these days.  I use it with clients all the time. LinkedIn and Twitter make it 100x easier today to expand your network than even 10 years ago. Hustle. Every founder team does not need to fit the super extroverted, Type A entrepreneur stereotype, but I’ll be damned if any company can succeed without someone who can get out there and shake the right hands.

Interestingly, some people are working on building curated (important, get rid of LinkedIn’s noise) marketplaces to help founders find well-matched advisors, hopefully at some point across geographic boundaries. Bad Ass Advisors appears to be the best example I’ve seen thus far. If BAA doesn’t become a hit, something like it will. The value prop is obvious.

 Most startup ecosystems have some awesome people to work with. Find them. Local can be valuable.  But as your company grows and evolves, don’t let the geographic boundaries of your city force you to settle for influential, but not very useful advisors. Customers > Community. All day. Every day. Never forget: you’ll help your local economy and ecosystem far more by going big and going far than by going local.

VCs and Founder CEOs: Coaching v. Undermining

TL;DR Nutshell: For a first-time founder CEO, the process of acquiring the skills to run a successful, scaled company will inevitably involve mistakes, learning, refining, iterating, etc. The best VCs engage founder CEOs as coaches, constructively pointing out weaknesses and pushing them to become great leaders. The worst VCs go into an investment having already decided that the company needs a “real CEO” and will use every mistake, no matter how common, as a reason to reinforce their viewpoint.  Know how to distinguish between the two, or you’ll be sorry.

Background Reading:

One of the great things about being a VC lawyer is that you get to observe a volume and breadth of companies and founder teams that really isn’t accessible to most ecosystem players. Executives see only their own companies. Investors see only the ones they’ve invested in. But VC lawyers interact with teams that cross geographical, investor, industry, and all kinds of other boundaries.  More data points means more opportunities for pattern recognition, and I’ve noticed that the relationship dynamics between a first-time founder CEO and her lead investors – one of the most important relationships in the trajectory of a startup – often fall broadly into one of two categories:

  • Coaching – The functional category – The founder CEO understands, from Day 1, her role as the leader of the Company and that, cap tables and corporate governance issues notwithstanding, the Board and VCs are there to provide input, guidance, constructive criticism, and whatever else is needed to help the CEO exercise her judgment in leading the Company.  If the CEO makes a mistake – the budget was missed, some projections were off, a new hire turned out to be a dud, all mistakes that happen very often, especially in the very early days of a startup – everyone acknowledges the error, provides guidance on how to improve, and keeps moving. Investors offer suggestions, connections, and other resources all built around developing the CEOs personal skillset.
  • Undermining – The dysfunctional category – Because of the differences in experience, influence, and often age, an almost parent and child-like relationship develops between VCs and the founder CEO.  Very common mistakes like those described above don’t result in constructive advice for improvement, but in “this should NEVER happen” scoldings and early discussions about what kind of ‘talent’ is missing on the team. Communications become far more about what the founder CEO is doing wrong than about how she could start doing them right.

No one is born with the skillset needed to run a successful, scaling company. Founders know that, and experienced investors absolutely know it. Even more so, the early days of a startup are often so fast-moving and full of uncertainty that problems arise through no fault of the management team, but just because sh** happens. A lot.

A group of VCs who are committed to giving the founder CEO the necessary runway and resources to become a great leader is an invaluable asset to a founder team. But, unfortunately, in every ecosystem there are also investors whose routine playbook is to pretend that every hiccup, every miss, is just another reason why they need to pull out their rolodex and bring in some ‘adult supervision.’

Coaching ≠ Entrenchment

To be crystal clear, founder CEOs sometimes do need to be replaced, particularly when the Company has reached a size/scale where it really isn’t a ‘startup’ anymore; think Series B/C+. A Board of Directors has a fiduciary duty to do what maximizes the value of the entire Company, and if it has become clear that, after repeated attempts at building the necessary skillset, a CEO simply doesn’t have what it takes, she should step aside or be removed.  If the ship is sinking, it’s unfair to let everyone drown when you could’ve replaced the captain. 

My experience is that great founders are often (but not always) quite good at acknowledging when they’ve reached their limit– they obviously want their ownership stake to produce a great exit just like everyone else’s, and if they feel like bringing in new management will get that done, they will move aside. But not until they’ve been given a real chance. Even if we all universally accept that no one who raises outside capital is entitled to run a company forever, the best investors and advisors should all agree that, given the massive personal sacrifices that founders make to build their companies, every founder CEO deserves an opportunity to make mistakes, learn from them, and mature into her leadership role without being constantly undermined.

If it’s been 2 years post-investment, you’ve cycled through ideas suggested by your Board, done the reps, studied the books, met with the mentors, things still just aren’t clicking and your Board is throwing out some names, think hard about it. That is just the Board doing its job.

But if you haven’t even closed a decent A round, your VC has you on a “tight leash” because you missed last quarter’s projections, and names (from the VCs own network) are already being suggested for new management, that is bullsh**. What you have there is an investor who planned to replace you before the ink even dried on the check.

The Importance of Transparency and Competition in Ecosystems

When I work with founder CEOs who’ve found themselves in the unfortunate situation of having an “underminer” on their cap table, my first piece of advice is simple: whining will get you nowhere. If a VC has managed to build a decent personal brand all while maintaining a consistent playbook of undermining a CEO’s leadership role from the very beginning, then he’ll respond only to consequences, not complaints.

Scarcity and opacity are the mothers of bad behavior in almost any market. If a market participant has thrived while being an a**hole, it’s because the market mechanisms needed for punishing that behavior, transparency and competition, have been absent. If you want to change the behavior, you have to change the environment. That means:

A. Never stop meeting with outside investors, and avoid contractual provisions that lock you in, early on, to a particular group of investors. Founders do themselves, their companies, and (frankly) their ecosystems a massive disservice by deciding that, once they’ve found ‘their VC,’ it’s time to stop investor discussions and ‘focus on the business.’

This does not mean that you should spend all of your time in full pitch mode – of course not – but you better believe that an investor’s knowing that you may be taking meetings with deep-pocketed California or East Coast VCs (who are increasingly looking outside of their core markets) will make them think twice about their behavior on the Board. It should not surprise anyone that the country’s VCs with the best reputations for how they treat founders (in addition to financial returns) are predominantly located in ecosystems with much more capital (and hence competition among capital) than the rest of the country.

B. Find Truly Independent Perspectives for both the Board and the management team. See: How Founders Lost Control of Their Startups, Apart from Ownership. Your independent director(s) should be actually independent – not people whom your ‘underminer’ has picked for 4 other boards before yours.  And you should know that pushing executives from their personal network onto the management team is a common way that ‘underminer’ VCs slowly unhinge the existing leadership. People remember who really got them their job.

C. Talk to other founders. Every founder approaching a VC round should be talking to the companies who’ve already taken money from their prospective VCs.  And I don’t mean just the rocket ships your VC suggested you talk to.  Recruiters know that the real data on a recruit comes from the people she didn’t list as references. You want to know how a VC treated the companies that hit road bumps, and that means doing your own diligence.

And when future founders come to you for feedback on a particular VC, play your proper role in the ecosystem and be honest. I certainly will be.  The best VCs deserve your praise – every ecosystem needs more of them, and the underminers deserve to be called out.

In any ecosystem, the best way to increase the number of coaches and marginalize the underminers is to (i) bring in new, competitive outside capital, and (ii) be transparent and honest about the capital that is currently available. Don’t whine about the players. Change the game. 

Navigating Referrals in a Connected Startup Ecosystem

Nutshell: Referrals and recommendations from influential people in your startup ecosystem, or from people you trust, are an extremely important way to build your startup’s set of advisors, mentors, service providers, investors, etc.  But there’s a wide gap between an authentic referral made on merit v. one made because of quid-pro-quo business relationship hiding in the background.

Background Reading:

Cheap “Networking” v. Respect

I have never set foot on a golf course, and really don’t care to any time soon. I honestly don’t know anything about wine other than that I’d generally prefer a good beer over it. I have no idea what anyone on ESPN is talking about every time I’m sitting in my barber’s chair. And I still need someone to explain to me why everyone on there is so dressed up, to talk about sports? Why, might you ask, would any ambitious lawyer who cares about biz dev make zero effort at improving his game on what many consider to be the core pillars of business networking?

In short: when I recommend anyone to a client: an advisor, a service provider, an investor, even a specialist lawyer, I believe it should be solely because that person actually deserves the referral – meaning that I think they are the best for the task – and not because I expect to gain something personally from making that recommendation, or because I “like” them. I don’t care about anyone’s golf game, sports knowledge, or whether they will refer anyone back to me – and I expect the same in return.

I have pissed off and/or disappointed a lot of people because of this mindset, but in the arc of your own career, particularly in a career based on serving as a trusted advisor, respect will sustain you far more than dozens of superficial connections purchased with steak dinners and side deals.

Build Your Inner Circle

As a founder, the moment you show even the slightest sign of building a strong company, you’ll find yourself inundated with people who want to connect with you. One of your first jobs is to learn, quickly, whom to (politely) say “no” to. You can only have so many coffee meetings before they get in the way of actually building a real company. And if you spend enough time at a few startup events you’ll quickly realize how many “startup people” aren’t actually building real companies. Avoid noise. Find signal.

Building your network (quality over quantity) is extremely important, especially if you’re CEO. But it’s (at least) equally important to build and maintain your inner circle.  More than people with great resources, money, or advice, these are smart, helpful people whose character you’ve judged to be a cut above everyone else’s; meaning that they can be trusted in a way that your broader group of connections cannot.  There is no magical formula for finding these people, or sorting them out from others. Your ability to “read” people will improve over time.

In general, your inner circle should be made up of experienced, smart people who (i) consistently speak their mind more freely than others, (ii) often make recommendations that run against their financial interests or personal connections, and (iii) will give you opinions/feedback that others in the ecosystem don’t have the personal brand independence to give.  Referrals from those people are gold.

Your inner circle can be made up of advisors, investors, experienced founders at other companies, etc. What matters most is that you have one to turn to when faced with those inevitable, high-stakes moments where people with all kinds of incentives are pushing you in different directions, and you need cold objectivity. And as I’ve mentioned before and will repeat here: build diversity of perspectives into your inner and outer circle. The smaller the ecosystem, the harder this is to do – and often times connecting with true outsiders (geographically) can be very valuable.

Lawyer Referrals: Merit v. Kickbacks

With respect to the legal services required for a scaling tech company, a group of corporate lawyers (what we are) generally serve as the quarterbacks of a broader team of specialist lawyers; much like how an internist or general practitioner physician quarterbacks specialist doctors in treating a complex condition. For that reason, the main types of referrals that we (at MEMN) find ourselves making are to specialist lawyers – patents, trademarks, immigration, IP licensing, privacy, import/export, etc.

As I’ve written before, every law firm has built in financial incentives to “cross sell” their own lawyers. If I’m at a law firm that follows the traditional “one stop shop” full service approach, I make money if I can convince you to use our specialist lawyers. It’s called “origination credit.” If you use another firm’s lawyers, perhaps because they have more domain expertise for my type of technology (often the case for patent lawyers in particular), I get nothing. Given this fact, it should not shock you at all when your BigLaw corporate lawyer always refers work to his in-house specialists, without suggesting more appropriate alternatives.

A network of specialized, focused boutiques and solo lawyers should, at a structural level, have a far more merit-based referral system. And it does.  But even among smaller firms there are lawyers who’ve set up kickback relationships that usually aren’t disclosed to clients – and yes these are often on shaky legal ethics grounds. They’re often structured in the form of a referral fee, or % of fees resulting from the referral. While I’m not going to say definitively that these arrangements should automatically invalidate the trustworthiness of a referral, they should at a minimum give founders reason to do their own diligence on the referral before moving forward with it.

It never hurts to ask a referring lawyer: “is there a referral fee arrangement in place here?” If it’s some kind of startup program (accelerator, incubator, etc.) making the referral, I would ask “is the lawyer/firm you’re referring me to sponsoring your program?” ‘Sponsorships’ often mean the firm is, effectively, paying for referrals. This is actually becoming a mechanism by which large firms entrench themselves, through accelerators.

Again, I’m not going to criticize lawyers who monetize their legal connections. I understand the reason behind it.  But with that being said, MEMN’s specialist network does not have any built in kickback arrangements. When I tell a client “you should use X lawyer because she’s the right person, and at the right billing rate, for the task” I value being able to say it with total objectivity. Back to the point made earlier in the post, make your money by becoming awesome at what you do, not by trying to cut shady side deals that taint your trustworthiness.

Financially motivated referrals work great in a lot of product and service vendor-oriented marketplaces, but in the world of top-tier advisors – where trust is your most valuable asset – they should, in my opinion, be avoided. One of the largest benefits of properly functioning ecosystems is how transparent they are compared to large, top-down organizations.  That transparency means meritocracy, if enough people with backbones are able to resist the urge to “cut a deal.”