My former company, Upromise, is one of the few VC-backed consumer success stories out of the East Coast.  The company has over 6 million households as members and a strong brand in the college savings community.  That said, it’s hard to name many others from Boston, whereas the West Coast is full of them, from Google to TiVo, from NetFlix to eBay, from Amazon to Yahoo – world class brands have been created left and right in the Valley these last 10 years.  And so many people in my travels ask me the question:  "Why are there no consumer hits out of Boston?"

The conclusion I’ve come to is that Boston simply lacks the key ingredients for a great consumer start-up.  All start-ups require the proper ingredients to succeed – visionary entrepreneurs, savvy professional managers and sharp VCs among them.  Whereas you can find these ingredients in abundance throughout New England for software, enterprise IT, bio-tech, data communications, you can’t find it for consumer marketing.

When I was hiring Chief Marketing Officers at Upromise, the first three came from California, NYC and NYC.  Why?  Because there wasn’t very much consumer talent in Boston.  In a meeting with CEO Larry Lucchino the other day, I pointed out to him that, arguably, the Boston Red Sox were the best consumer brand in Boston.  When Interbrand published their 2004 BusinessWeek article ranking the top 100 brands, only Gillette (#15) hailed from New England, and we know where the brains of that operation are heading post P&G acquisition.  The home of the other 99?  NY and CA were very well represented.  When the Fleet Center was looking for a new branded sponsor, no local ones could be found.  Sports area sponsorships are hot stuff throughout the country, but it took a Canadian company (TD Bank North), to care enough to name Boston’s premiere sports arena.  When consumer-oriented entrepreneurs pitch me, they always start their pitch by saying, "Thanks for meeting with us.  No VCs in Boston seem to ‘get’ consumer plays".

On the flip side, Boston has done pretty well creating enterprise IT/software companies, although these companies do typically get acquired before they can really blossom into large, independent market-leaders.  In fact, other than EMC, you’d be hard-pressed to identify a world-beater as opposed to nice, nichey companies.  One depressing way to drive this home is to look through the Boston Globe’s weekly "High Tech 50" – the list of the 50 most valuable companies in MA.  Only 3 are greater than $5 billion in market capitalization (EMC, Raytheon and Analog Devices) and 18 greater than $1 billion.  Akamai is the only one of the 18 to have been founded in the last 10 years.

Back to the consumer angle, I predict things are starting to change.  Investing behind consumer businesses is so attractive, and the general Boston-based start-up talent pool so strong, that I predict new, interesting projects will emerge that have a consumer flavor.  Marketing technology talent is rife in Boston (Digitas and Hill Holiday are great feeders, as well as all the CRM software companies running around route 128).  So let’s hope, like the Red Sox’s infamous 86-year slump, the consumer start-up slump ends for Boston soon!  I’m eager to help fund that next winner!

A breathless entrepreneur is on the other line.  "I’m being courted to become VP of Business Development at this hot, venture-backed start-up.  I have no idea what I should be negotiating for compensation."  She races to the punchline fast, with visions of being cheated by the mean VCs dancing in her head, "Can you simply tell me:  What is market?"

I can only attempt to answer this question with the perspective of the Boston-area, venture-backed start-up market.  Keeping that in mind, and recognizing that every number and opinion has an asterix next to it with a large footnote "it depends…", here goes.

CEO.  $175-225K base, $40-80K bonus.  5-7% of the company, maybe 6-8% if they arrive shortly after the A round.  Larger companies are at the high end of cash and lower end of equity.

COO.  $150-200K base, $25-50K bonus. 1-2% of the company.  This position is rare in companies of fewer than 100 employees.

"Top 3-4" VPs (3 most valuable VPS, for example, might be VP Eng., VP Sales, VP BD, CFO).  $125-175K base, $25-50K bonus, 0.75-1.5% of the company.  Sales VPs are typically at the top end of this range.

"Other VPs" (for example, VP Services, General Counsel, CFO).  $125-175K base, $0-35K bonus, 0.4-0.8% of the company.

Outside Board Member.  No cash or modest monthly cash stipend for consulting.  0.25-0.50% of the company.

There are always special cases and special situations, but these are reasonable rules of thumb.  At the end of the day, "market" is whatever you can negotiate for yourself!

OK, this post has the risk of sounding self-serving, but with all caveat emptors up-front, I thought it worth making the case for why it makes sense to take VC money in certain situations, if available.  Naturally, this is the other side of my previous post, "Top 5 Reasons Entrepreneurs Dislike VCs"!

I highlight the phrase "in certain situations" because, not surprisingly, VC investment makes no sense in the majority of small businesses.  Many businesses are low-tech, by nature likely to be slow-growth or modest in market potential – these are not appropriate to take VC money.  If a business is high-tech, has fast-growth potential and large market potential, it can be a good fit for VC cash.

To help put some dimensions around this, recognize that VCs look to make 5-10x their money in any investment in 4-6 years.  If they can’t see a reasonable path to this, they won’t find the investment appealing.  VCs also typically like to invest a minimum of $5-10M per company (some less, some more, but let’s focus on the bulk of the bell curve).  If that $5-10M investment buys 20-30% of the company over time (typical), it means VCs typically invest in a post-money valuation at the end of the day that ranges from $15-50M.  Seeking a 5-10x multiple on this investment means VCs look to invest in businesses that will be worth $75M-500M in 4-6 years.

Bottom line:  if you have a business that you can see growing over 4-6 years to $10M in revenue and worth, say, $20M in a trade sale, you don’t have a VC investment candidate.  Seek angels or friends and family if you need capital, don’t bother with VCs.  That isn’t a bad thing.  Many friends of mine have what I would call a "lifestyle business" – small, profitable and they own it all!

Now back to a high-tech, fast-growth, large market potential business…that is, the VC candidate business.  Why get a VC?  An entrpereneur who has enough money to fund a new business himself said it well the other day:  "Credibility, Connections, Counsel and, yes, Capital".  Prospective employees, customers, partners and service providers all recognize and appreciate the that start-ups with VC investments are more likely to survive and succeed.  A good VC firm and partner should bring a wealth of connections that help in team-building, business development and strategic partnerships.  And a good VC has seen the start-up movie over and over and over again.  A good, serial entpreneur may have run a start-up every 5 years, but a good VC has invested in and worked closely with 10 start-ups in 5 years, thus they should be in a position to see patterns, look around corners and generally help guide and advise the entrepreneurial team in the science of company-building.  And finally, VCs bring capital – not just in the round they invest in, but in theory in their commitment to continue to invest in the company over many years, through good times and bad (albeit at varying valuation rates and thus varying levels of dilution!).

Whether the case for working with a VC is compelling enough is in the eyes of the beholder – the entrepreneur – but in the end, a high-tech, fast-growth, large market potential business is more likely to be successful if the founding team are willing to give up a share of the pie to bring on VC partners who can help them meaningfully grow the pie.

When I first jumped into the VC business and hung up my entpreneurial spikes, I was teased by friends that I had gone over to "the Dark Side".  As the saying goes, there’s truth in jest.  I’ve been surprised at the negative reputation the VC business has.  In analyzing why that might be, I have been struck by a few common themes.  With half apologies to David Letterman, here are the top 5 reasons my entrepreneur friends harp on as to why they dislike VCs:

5) You know the farm story about the commitment levels of the chicken and the pig towards breakfast?  Guess who’s the VC and who’s the entrepreneur?

4) Work ethic.  CEO:  "I need to have a BOD call next week to drive to a decision on this."  VC:  "I’m in the Himalayas for the next 3 weeks and then at a week-long offsite with my partners in Aspen, so let’s just cover this at the next quarterly BOD meeting."

3) Varying defintions of value-add.  Entrepreneur:  "I need strategic insight, business development contacts, recruiting assistance, M&A and financing introductions."  VC:  "We need to work on stronger revenue growth, gross margins, and our competitive position.  See you at the next Board meeting."

2) Take credit for successes, abandon failures.  VC:  "I was like a co-founder there."  Entrepreneur:  "Funny, I didn’t see you at my 7am weekly staff meetings."

1) Board room M.O.:  show up late, pound on the Blackberry, look up and ask a question that was answered 2 hours ago.

Next time, I’ll even the score!

Many entrepreneurs focus on the amount of capital they raise (which always shows up in the press release) and on pre-money valuations (which never shows up in the press release!), but the truth is that the most important thing that matters (assuming "clean terms", which will be the subject of another post) is what I call "Cap Table Math" — the composition of the percentage ownership, or capitalization table, at the end of the financing.

Let’s take a typical series A example and keep the math simple.  Jane and her technical co-founder have a killer idea, 20 rockin’ Power Point slides and a solid prototype.  She lures in two VCs to invest $2.5M each for a total of $5.0M invested to buy 50% of the company – in other words, a pre-money valuation of $5.0M and a post-money valuation of $10.0M.  These VCs inform Jane that although they love her and the idea, there needs to be 25% of the company set aside for all the future hires.  So, VCs get 50%, future managers get 25% and the entrepreneurs get the remaining 25%.  That’s pretty typical.  After a series B round of, say $8M on $12M, where another 40% of the company is sold to investors, more options are created and everyone gets diluted, the founders’ ownership may drop down to 10-15%.

But let’s say Jane decides she can build the company with $1M of angel money from friends and family, giving up only 20% of the company (i.e., $1M raise on $4M pre).  And, she controls the option pool more tightly in the early days rather than hiring high-powered executives, say doling out only 10%.  Thus, she and her founding team have 70% ownership after the angel round and a few key hires.  When it comes time to do the $4M Series A round (to match the $5M of total capital in the earlier scenario), she should be able to command a higher pre-money valuation, perhaps $8M, thus giving up only 33% to the VCs and, even with management ownership of 25% post-money, she and the founding team can keep 42% — a substantially larger share than in the previous scenario (25%).

So should entrepreneurs, mindful of ownership, always focus on taking money from angels rather than VCs?  It’s not so simple.  If a VC is offering you $5M, it’s hard to turn that down for $1M in angel money when there’s no guarantee more money will show up at a higher price down the road after the angel money runs out.  More money means more runway, which often leads to a better outcome.  And, in theory, a good, hands-on VC will add more value than an angel.

As with every tough decision, it depends, but at the end of the day, VCs and entrepreneurs should pay less attention to "pre-money" and instead focus on the make up of the cap tables and, ultimately, the percentage ownership that results when the dust settles.

Welcome to "Seeing Both Sides".  I was inspired to start this blog for many reasons, but the most important one is to help entrepreneurs.  During my ten years as an executive at start-ups (such as Upromise and Open Market), I often viewed the venture capital business as a black art.  Now that I've had a few years to practice that black art, I hope to help demystify it for other entrepreneurs.

Like most experiments, I will start this one off small and see where it leads.  If this blog can help both educate and entertain, it will have served its purpose.

I will avoid promoting Flybridge Capital and our portfolio companies, but will instead leave that to our website and other vehicles.  Feel free to keep me honest on all fronts with your feedback.  Enjoy!