Hamilton and Non-Competes

My house is smitten by Hamilton. We listen to the music incessantly, my wife and I are both reading the Chernow biography, and the kids are fighting over who gets to use the third ticket to the Broadway show when we go to New York in the fall.

So in thinking about the recent conundrum facing the state legislature with respect to reforming non-competes in Massachusetts, you’ll have to forgive me if I contemplate: WWHD (What Would Hamilton Do)?

First, some background. Non-competes are odious devices used, often surreptitiously, by corporations to suppress workers from freely pursuing opportunities. Their use hinders innovation, as demonstrated by numerous academic studies — creating “career detours” and “skills atrophy” warns one MIT professor while the Kauffman Foundation notes non-competes represent an “obstacle to labor mobility”, which is so critical in a dynamic economy.After many years of studying the issue, the White House has decided to weigh in, with Vice President Biden warning that non-competes creates unnecessary friction in preventing a fair marketplace for labor (his “regular Joe” explanation of why non-competes are bad, by the way, is one of the clearest and most direct you’ll ever read).

In Massachusetts, many of us have been working to get rid of non-competes for a long, long time. I give Bijan Sabet credit for first sounding the clarion call on the issue almost a decade ago with his December 2007 post on the issue. Since then, policy makers, entrepreneurs, labor leaders and investors rallied together to educate legislatures on why they are so corrosive, negatively impacting camp counselors, sandwich shop makers and PhDs alike.

At first, this broad coalition of reformers were set on eliminating non-competes entirely. But in the last year, those of us who have been engaged in this issue have come around to compromise. In business, you get to make crisp decisions — ship a product, include or delete certain features, make hardchoices about raising capital and signing partnerships. But in politics, compromise is the lingua franca. Even the most ardent supporters of eliminating non-competes have begun to realize that pragmatic compromises are the only path to achieving real reform.

So when Massachusetts House Speaker DeLeo signaled his willingness to take on the issue of non-compete reform, many of us were heartened. The bill that the House unanimously approved is a good one but has a few flaws. On Thursday, the Senate addressed these flaws and passed a stronger reform bill and now the two bodies will convene to try to negotiate a compromise.

And here’s where my mind drifts to Hamilton. This orphaned, immigrant Founding Father was an ardent advocate for his beliefs and values. His intellectual battles with other Founding Fathers over the fundamental pieces of the very formation of America, particularly James Madison and Thomas Jefferson, are legendary. Yet, in situation after situation, even hot-tempered Hamilton learned to compromise.

So let’s not allow this moment to pass and result in yet another legislative session consisting of debate and hearings but nothing to show for it. Inspired by Hamilton, as they take up the final details of the bill, I implore our state legislators: let’s not throw away our shot.

If you want to reach out to the legislators who are on the joint House-Senate committee to negotiate a compromise solution, email:

An Audit Is Good For You (Honest)

There is a funny ritual in board rooms when it comes time to determine which board members will go on which board committees. I have seen the same pattern almost every time on every board I have ever been on.

“OK,” intones the CEO hesitantly. “It’s time to select committees. We have the compensation committee and the audit committee. Who wants to be on audit?”

Smirks and eye rolls ensue. A deferential kabuki dance begins. “Well, I’d be pleased to take compensation even though I know it’s a lot of work,” begins the largest shareholder, staking their claim on the juicier post. “But if you prefer comp, I suppose I could take audit.”

Every VC worth their salt knows that the compensation committee is where all the power is – setting the CEO’s compensation, evaluating her performance – whereas audit committee is a snooze. Reviewing revenue recognition policy, discussing the finer points of GAAP and interacting with auditors is less fun than a visit to the dentist. And, besides, in the early days when there is little revenue to recognize and the numbers are too small to merit much debate, there is little reason to even form the audit committee and bother with the expense and time of conducting an audit.

Or at least that is the conventional wisdom. In recent years, I have changed my views. Serving on the audit committees of a venture-backed startup is no longer rote but rather a central and strategic function. Further, I think entrepreneurs should embrace going through an audit rather than holding off as long as possible – which is the typical modus operandi for startups in the first few years.  Let me explain (as succinctly as possible, before I put you to sleep since this topic is not known to be particularly scintillating !).

In a private company, the audit committee’s purpose or charter is typically:

  • hire the auditors and oversee their work, including reviewing the financials
  • recommend monitoring procedures to improve operations
  • deal with any complaints associated with the financials or controls
  • adhere to any relevant compliance matters

The audit committee is thus where the “rubber meets the sky”. Entrepreneurs are dreamers and optimists, always looking to the future. Audit committees are evaluative and grounded in what actually happened, not what might happen. That is why the audit committee’s role becomes so central at the time of exit. In either an IPO or an M&A transaction, suddenly everyone is focused on financial results and controls and what actually happened and how it was reported and accounted for. If entrepreneurs and boards took the audit committee more seriously from inception, they would save themselves a lot of heartache at the time of exit, never mind avoid some of the classic scaling pitfalls when operations get sloppy.

Let me give you one painful example I recently experienced. I served on the audit committee of one of my portfolio companies. The company was scaling fast and we found ourselves in the enviable, yet still problematic position, of many scaling companies:  our finance and operations team was too thinly staffed, our VP of Finance was a bit over their head and we were scrambling to bring in a more senior finance and operations executive. Because I was busy and sitting on a lot of boards and committees, and because I trusted that the CEO and VP of Finance were on top of things, I was not particularly worried about the fact that our audit seemed to be delayed. No alarm bells went off when the typical audit period of a private company (May, June, July) went by without the audit committee being called to convene and review the completed audit.

When the new head of finance showed up and finally dug into the audit process, he discovered that we had inappropriately accounted for some of our transactions. A company we thought was EBITDA positive suddenly turned negative and our accelerated customer acquisition was proving to be unprofitable. We caught the problems in time to hit the brakes, but I know that if I had been more proactive in my role on the audit committee, we could have mitigated the impact.

Mistakes like these happen in good companies run by good people because everything is moving quickly, everyone is spread thin and everyone is focused on the next product release, the next deal, the next quarter, the next year and the next valuation inflection point. The audit process is that point in time where you bring in skeptical outsiders to slow things down and look backwards. Immersing yourself in that process is a valuable function for a board and any entrepreneur – and an underappreciated one.

Welcoming Jesse Middleton as our Newest General Partner

I am thrilled to welcome Jesse Middleton to the Flybridge family. Jesse is joining us as a General Partner to help lead our NYC office.  This hire is a big deal for us.  Jesse is the first General Partner we’ve hired in over a decade.  Jesse is a tremendous entrepreneur and executive, having for over the last five years been a part of the creation of one of the most successful start ups in history – WeWork – and serving as an active angel investor in NYC.

Here’s his blog post announcing his arrival:

My venture into venture (capital)

In February I took a look at my journey into the angel investment world. I had been doing it for only a little over a year, but I learned a ton. I learned that I loved discovering and getting to know new founders. I learned that I enjoyed helping to solve some of the earliest challenges that those founders face. I learned that I had the ability to celebrate with the people I backed when they had huge wins and, more importantly, I learned I could be a shoulder to lean on when things (often) didn’t go as well. But my biggest takeaway was a personal reflection: that I wanted to focus on investing in and supporting these amazing founders full time.

These last five and half years helping build WeWork have been a wild journey and I’ve loved every second of it. I got to experience the earliest days of startup life when we all came together at 3am to put the final touches on our first WeWork buildings. I also got to experience the meteoric growth and success as we barreled past 1000 employees and announced our 29th city. Thank you to everyone at WeWork for every single moment. But, as I announced in May, it was time for me to leave WeWork and become a full-time, professional investor.

Today I get to share the next big step of my adventure — I’m joining Flybridge Capital Partners as a General Partner. I will be leading our New York office alongside the one and only David Aronoff. I couldn’t be more excited to be a part of the Flybridge team!

David and I met five years ago at a Flybridge event. We became fast friends and I’ve been able to look to him for guidance and mentorship (and he’s always up for a drink) ever since. I met the Boston team a few years ago when I helped launch WeWork Boston and have loved our interactions as well. Flybridge has had a strong presence in New York for years. David opened the office here four years ago and the partners have invested in some amazing companies including 33Across, BetterCloud, Bowery, Codecademy, MongoDB, NS1, Raden, Shine and tracx. With my arrival, we plan to support our “family” of portfolio companies here even more while also doubling down on investing in the New York City startup ecosystem.

When I first sat down with the Flybridge team, we talked about what they were looking for in a new partner and where I wanted to take my journey next. Two things became abundantly clear very quickly:

  1. They were great investors, board members and champions of their portfolio companies and their founders.
  2. As good as they were at being great investors, they were even better people.

Every single person I talked to throughout the process echoed these two things. As I got to know them better, it quickly became clear that working alongside the whole Flybridge team just felt… right.

WeWork’s mantra is to “Do what you love” and that’s what I know I’m continuing to do now. I’m excited to dive in, to get to know the Flybridge Family (52 active companies and their thousands of employees) and to continue to support the New York community that I love.

If you’re working on something interesting, are looking for feedback on your new idea, thinking about raising your first round or simply want to shoot the shit about startups and NYC over a drink don’t hesitate to say hi. You can reach me at jesse@flybridge.com, on Twitter and on Facebook.

More Visas for Immigrant Entrepreneurs – Babson and Alaska

“…a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

  • Supreme Court Justice Louis Brandeis, 1932

A few years ago, I was frustrated with the lack of progress on immigration reform out of Washington DC. I brainstormed with an immigration lawyer friend, Jeffrey Goldman, and came up with the idea of the Global EIR program: a public-private partnership where a university could sponsor an H1-B visa for an immigrant entrepreneur, avoiding the onerous lottery system. Last year, we partnered with the state – with the support of the legislature, the governor and the Mass Tech Collaborative – to launch the first global EIR program in Massachusetts in partnership with the University of Massachusetts under the leadership of vice provost Bill Brah. That program is now over one year old and has seen tremendous success thanks to Bill’s indefatigable drive as well as the support of the state and private sponsors SVB, Goodwin Procter and Mayor Bloomberg’s foundation.  Specifically:

  • 20 visas issued to immigrant entrepreneurs (100% approved by USCIS)
  • 16 companies (most of whom wouldn’t be in the US if not for the program)
  • Over 200+ jobs created across those companies
  • Over $100 million raised by those companies

In partnership with my friend, Brad Feld, we created the Global EIR Coalition to take the program national and hired Craig Montuori to lead the new non-profit. Brad helped extend the program to Colorado in partnership with the University of CO Boulder.

Earlier this year, New York got into the act, partnering with the CUNY system to launch their version of the Global EIR program. They plan on issuing 80 visas to immigrant entrepreneurs.

And today, I am thrilled to report that both Babson and the University of Alaska have announced that they are launching their own Global EIR programs. Babson is consistently named the top ranked entrepreneurship school in the world and so a bellwether in the field. Alaska is the first West Coast program and has the opportunity to draw from its strong relationships with Asia and Russia.

If you’re interested in learning more about the program, supporting it philanthropically, applying for it, creating it in your home state, or whatever, contact one of the local chapters or get in touch with Craig via the Global EIR Coalition website.

Onward towards rational immigration reform – state by state!

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Stayin’ in MA: The Future of Innovation in Massachusetts

I am thrilled to present this guest post by Nick Shanman, our Content Manager, who helped us analyze the impact our popular program Stay in MA has had since inception.

As a student at Northeastern University, I know first hand the difficulty in finding valuable events at a reasonable price. I personally have opted out of entrepreneurship/tech related conferences because the hundreds of dollars in fees would exceed my student budget. When Flybridge asked me to write this post regarding the Stay in MA program, I knew it would be a great opportunity for local companies and students to understand how important it is for us to work together. Whether it’s through events, networking, or internships, keeping students in Massachusetts after graduation will directly correlate with how our businesses–and therefore our state–performs from both an innovative and economic standpoint.

Eight years ago, Flybridge created the Stay in MA program, a scholarship fund for Massachusetts-based college students.  The program was inspired by a blog post Scott Kirsner wrote on the tragedy of Massachusetts students not remaining in the state after they graduate and the role industry organizations could play in changing this by making it easier for students to attend their events.  Our goal was–and still is–to foster entrepreneurship and innovation between students and the community by providing financial assistance for students to attend technology and business-related events in the state. We noticed an abundance of students leaving Massachusetts after graduation and realized that if firms like ours influence young entrepreneurs to stay, our ecosystem will continue to grow and thrive.  With financial support from our friends at Gunderson Dettmer, we’ve been able to continue to grow the program and provide students from throughout the Massachusetts university and college ecosystem with the opportunity to attend events and network with the entrepreneur and business communities.

We are often asked about the impact the Stay in MA program has had over the years, so we decided to take a look back at the entire program thus far to see the results. As of today, Stay in MA has given out over $62,000 in scholarships to students and helped over 1,200 students experience amazing learning and professional networking opportunities for no cost to them.

Our students come from over 50 schools throughout Massachusetts.  And while the Boston and Cambridge based schools have had the most student participation, over recent years we’ve had students from many schools in other regions including the University of Massachusetts at Amherst, Cape Cod Community College, Clark University, Mount Holyoke College, Regis College, Salem State University, Stonehill College, Wellesley College, Wheaton College, and Worcester Polytechnic Institute (WPI) participate in the program as well. Any student studying in a full-time institution of higher education in MA, whether undergrad or grad, is eligible for a Stay in MA scholarship. We are continuing to expand our reach, and hope to get more and more schools involved over the course of the year.

As of 2016, MIT, Harvard University, and Boston University are our top three schools in the Stay in MA program, having received over 500 scholarships combined. This list highlights the top 10 schools in terms of number of scholarships given. We’re extremely proud at how evenly spread these numbers are across the board.

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Stay in MA partners with local organizations in the industry to connect these students with truly valuable events. Students have the freedom to choose any event they have interest in, from a variety of industries from Big Data to Life Sciences to Venture Capital. Propel Careers has been our most popular partner, with events in Entrepreneurship, Diagnostics, and Biology.  Here are the top 10 events students have attended through Stay in MA since 2009:

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The attendance numbers are great… but we also were interested in how the program has impacted the students who participated in it over the years, so we decided to conduct a survey of all Stay in MA scholarship recipients. The positive feedback has been amazing!  

Of the 50 students from 10 different schools we heard back from (disclaimer, it was tough to get in touch with students from early years of the program as their school email addresses has expired, which we’ll fix by doing more regular surveys in the future!), we received great data regarding their careers after our program and thoughts on how the program impacted their growth. Below, we created a few charts demonstrating the percentage of students that stayed in MA upon graduation, an incredible 87.5%, students who still live in MA, a whopping 77.8%, and the diverse set of industries they work in today, with Tech in the lead at 37.8%.

 Students who lived in MA upon graduation              Students who still live in MA

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              What industry do they work in today?

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As you can see, students really did ‘Stay in MA,’ in a wide variety of fields, and we could not be more proud. We hope that the events they attended through our program had an influence on their decision to continue working in Massachusetts. It’s because of these students that our state and the city of Boston is growing into a recognizable hub for technology and innovation.

What have students had to say about the Stay in MA program?

“Your award helped me build my network, which is now strong enough that I’d have a hard time leaving. I think the program is great!”

“I❤ Stay in MA…. It’s a critical program for students to get funding to attend great events in the greater Boston region that they otherwise wouldn’t be able to.”

“I learned about the program when Kate Castle came and talked in one of my Marketing classes at BU. It was super easy to apply for the scholarship. It allowed me to take a Content Marketing class at General Assembly without having to worry about the cost. I’m currently working for a Boston startup on their paid marketing campaigns, and I’m even writing my first eBook!”

“I want to thank you for funding my experience for the MassBio Commercialization Part 1 event. The event was filled with a lot of key insights and provided a wonderful opportunity to connect with leaders in the field. I sincerely appreciate having the opportunity.”

Keeping our student population in Massachusetts after graduation is key to innovation in our state.  We are thrilled that other industry organizations have also stepped up to create unique and compelling programs focused on the student population.  One of our favorites is NEVCA‘s TechGen, the exclusive intern marketplace that connects the best local students with the hottest local companies. TechGen has engaged more than 4000 students in the last year.  There are currently 2000 students looking for summer internships, over 250 companies on the site, and almost 8500 applications in thus far. TechGen also sees the value in keeping students in MA in order to help them launch successful careers.

I actually got my internship at Flybridge through TechGen’s own Sarah Sherburne. I had used their website to find summer internships, and ended up finding a 6 month spring co-op in the process. I could not be more grateful to Sarah and the TechGen program for making it easy for New England students to find real, relevant jobs.

So there you have it folks. Check out our website at http://stayinma.com/ if you’re a MA-based college student interested in applying for a scholarship! And be sure to head to thetechgen.org for great internship opportunities in the area!

Your CAC Math Is Wrong, Too

A few months ago, I wrote a blog post warning entrepreneurs that their LTV math was wrong. In other words, their methodology for calculating the lifetime value of a customer was incorrect and, typically, a grossly optimistic figure. It got a lot of attention and even inspired a new module in InsightSquared to help companies do the correct calculation.

In talking about getting these kinds of calculations correct, one of my portfolio company CEOs made an interesting observation to me. We were talking about our customer acquisition costs (CAC), which represents the other side of the unit economics coin. The company is converging on profitability and is thus getting more and more focused on its unit economics and CAC.

“Our historical CAC is obviously irrelevant,” he declared in the board meeting. “All that matters is our marginal CAC.” This struck me as such an important insight that I would try to unpack it a bit because, as with LTV, most entrepreneurs think about their CAC incorrectly.

Many entrepreneurs calculate CAC by simply adding the amount of money they spend on sales and marketing and then dividing it by the number of customers that they have. If last quarter you spent $100,000 in sales and marketing and you acquired 10 customers, your CAC is $10k. A hypothetical consumer company may spend $100,000 in sales and marketing to acquired 50,000 customers to achieve a CAC of $2.

That simple math may be historically accurate but it’s not very helpful as a planning framework. The historical customer count in a consumer company, for example, typically contains customers that came in through a range of sources – paid (e.g., SEM, SEO, Facebook) and unpaid (e.g., organic). Some of these tactics are highly scalable and others are not. Some may even have reverse economies of scale and, thus, actually get worse with scale.

Customer acquisition is a bit like drilling for oil. Sometimes you hit a gusher and it flows beautifully, but eventually that well runs dry and you need to find another one. Similarly, you may come upon a particular customer acquisition tactic and it might be working beautifully and with favorable economics, but eventually it runs its course and you need to deploy another tactic.

That’s where the concept of “marginal CAC” really matters, as my portfolio company CEO wisely observed. When looking ahead, you want to know what the cost is of the next set of customers that you’re trying to acquire. That is, what is the acquisition cost of the marginal customer. If the only tactic you can scale is Facebook ads, then the marginal cost of acquisition of Facebook ads matters more when forecasting your future CAC, not the blended average that you’ve been able to achieve historically.

An e-commerce entrepreneur we were speaking with the other day cited a historical customer acquisition cost of $150. The CEO then projected that those costs would decline with time – a perfectly logical assertion.  As part of our due diligence, we asked for how the numbers broke down by acquisition channel and discovered that the $150 was a blend of organic and paid channels and that the only paid channel that would scale going forward represented an expensive $300 CAC. Thus, their marginal CAC was most likely to be going up over time with scale, not down.

The lesson? As we head into an era of savvier investors who scrutinize unit economics more thoroughly, don’t get caught looking naive when presenting your CAC projections – make sure you’re thinking about marginal costs, not just historical ones.

Growth vs. Profitability and Venture Returns

There has been a lot of good material written in the last few months about the impact of the topsy turvy fundraising market and the importance for entrepreneurs to shift their focus from growth to profitability. Some of the better posts over the last few months include Joseph Floyd‘s TechCrunch article and Bill Gurley’s The Road to Recap.

I agree with this sentiment to some extent, and have been preaching it with my entrepreneurs for many quarters as well.  I fear, though, that the pendulum is at risk of swinging too far the other way. That is, entrepreneurs are not appreciating or understanding the true value of growth and thus taking the slow road to building a big company. Right now, it’s fashionable to humblebrag about your startup that was a “15 year overnight success”. The problem is that the slow road to success doesn’t typically result in “venture returns”. And the entire VC-backed fundraising model is predicated on generating venture returns.

So What Are “Venture Returns”?

In order for a venture capital fund to be considered a success, they need to deliver on one of two metrics: 1. a cash on cash investment multiple of greater than 3 times invested capital, or 2. a net internal rate of return (IRR) of greater than 15%. You can quibble around the edges, but these are basic truisms of our business that have held true for decades. The reason for these performance milestones are related to the fact that the money is tied up for many years (i.e., is not liquid), and is considered riskier than many other types of investments. Thus, an illiquidity premium and a risk premium are required.

For a portfolio of investments to achieve 3x invested capital, though, the winning investments must achieve something like 10x or better. In any portfolio, you will have mostly losers – investments where you lose all your money or perhaps get your money back after many years of hard work. But a few large winners of more than 10x your money will make the entire portfolio a success. Fred Wilson wrote an excellent retrospective on USV’s first fund, Losing Money, where he cites the fact that they lost all their money in 40% of his portfolio companies in one of the best fund performing funds in the history of venture capital. Yet, they had five companies produce outcomes that were better than 20x, which drove their outstanding results.

What Does It Take To Achieve Venture Returns?

For a company to achieve a 10x or 20x or better return on invested capital, it needs to grow very, very fast.  To bring this to life, take a look at the table below. It represents a profile of three startup company examples that start at $1 million in revenue at “year 1” (note – to achieve its first in revenue often takes 2-3 years from inception). If you model out three different growth rates – 100%, 50% and 25% –  for the subsequent six years, then the fast growing company has a shot at achieving venture returns. It will grow to $64 million in revenue and, assuming a 6x revenue multiple (reasonable assumption for a company growing that quickly at that scale), it would be worth nearly $400 million. Assuming the company required something like $20-30 million in capital over the life of its growth – perhaps accumulated across two to three rounds of financing – and assuming the position of early investors is a post money valuation of $40M (again, reasonable assumptions based on my experience), then a 10x outcome is achieved.

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Lastly, if the third company is growing at only 25% YoY, your firm will lose money–a lot of money. These companies, because they’re slow growers, maybe only be worth 2x invested capital and so worth $7.6M, only 20 cents in return on each invested dollar in capital.Think about that for a minute – six years in a row of 100% growth, executed perfectly, and you get to 10x. But if you achieve “only” 50% growth over six years, which is still outstanding performance by almost any other metric, and have a revenue multiple of 4x (lower than the 100% growing company for obvious reasons), you have a company worth only $45 million in value and investors basically get their money back.

Now obviously this is a simplified example – growth rates change over time, often starting faster and slowing over time as markets mature and the base numbers you’re trying to grow from get larger. But the point is pretty clear:  there’s a reason venture capitalists and entrepreneurs are so focused on growth. To generate venture returns, VCs need companies to consistently grow north of 100% year over year. And if a few companies in a portfolio don’t achieve this, then no one generates venture returns. And if no one generates venture returns, the whole system breaks down.

This example also uncovers a structural tension between the VC and the entrepreneur. VCs are naturally going to push entrepreneurs to grow faster in order to be that one portfolio company that achieves the 10x result that makes their fund a success. The entrepreneur is going to be more cautious to grow at the right pace, without burning too much capital or burning out customers or employees.

So, yes, let’s make sure we’re building real companies that are generating real value, and over time, real profits. But let’s not forget that to get there, our companies need to grow very, very fast over a consistent period of time. Remember that the next time someone tells you to slow things down.