I've been blogging for five years about the start-up, innovation economy and I almost never write about politics.  But this week is different.  This week, the Massachusetts Legislature is about to vote on a bill to (finally) reform education in Massachusetts – to lift the cap on charter schools, empower commissioners to reform the worst-performing schools and create "Readiness Schools" that get around the usual bureaucracy and drive towards academic excellence.

The importance of passing this legislation cannot be over-stated.  I've been somewhat involved with education reform through my activities at Facing History and Ourselves and my role on the Governor's Readiness Finance Commission and I am passionate about its importance to our state's future.  Local business leaders are all over this issue.  Recently, a large coalition formed (including the Progressive Business Leaders Network) and organized by The Boston Foundation called the Race to the Top coalition has been hammering on this issue and building momentum.  A strong education reform bill is now in front of the Legislature for a vote this week.  The teacher's union is against the reform – no surprise – as it will reduce their power.  And those of us who are passionate about the Innovation Economy in Massachusetts are too busy to hang around the State House and lobby.

So here's what you can do.  Read this editorial in the Boston Globe by Scott Lehigh that summarizes the bill.  If you agree with it, take action.  Take two minutes to click on the link below and write your state rep or senator and send them the message that you are IN FAVOR of education reform and that they shouldn't give in to pressure from the teachers' unions.  We desperately need to move forward on this issue and seize the moment.

http://ffs.capwiz.com/DHTML/CAjsform.js

And if you have a blog or tweet, spread the word!  I'll tweet this from www.twitter.com/bussgang and you can retweet away.  If you want, you can even use this Twitter list of the 17 state legislators who are on Twitter to send them the message. http://bit.ly/2VtWU7.

Take action – get engaged.  Now is the time where the pro-reform voice needs to be heard.

(follow me on Twitter at www.twitter.com/bussgang)

A few weeks ago, Fred Wilson posted a presentation he delivered on What Makes the NYC Start-Up Scene Special.

I was inspired to deliver a similar presentation today to a group of Harvard Business School students who are interested in entrepreneurship in Boston. There’s been alot of chatter in the community about a start-up renaissance in Boston.  Don Dodge of Microsoft had a great post listing out all the amazing start-up resources in the Boston community that’s worth reviewing as well.

Yahoo’s ex-president (and fellow HBS EIR) Susan Decker was there to serve as a good foil for my Boston vs. Silicon Valley quips. 

What Makes the Boston Start-Up Scene Special?
http://static.slidesharecdn.com/swf/ssplayer2.swf?doc=cfakepathbostonstartupscenepicturepresentation-11-09-091103193606-phpapp02&stripped_title=what-makes-the-boston-startup-scene-special-2416701

View more presentations from bussgang.

And here’s the video:

http://b.scorecardresearch.com/beacon.js?c1=7&c2=7400849&c3=1&c4=&c5=&c6=http://b.scorecardresearch.com/beacon.js?c1=7&c2=7400849&c3=1&c4=&c5=&c6=

http://vimeo.com/moogaloop.swf?clip_id=7537191&server=vimeo.com&fullscreen=1&show_title=1&show_byline=1&show_portrait=1&color=00ADEF

Here's the video from the talk I gave at HBS on what makes the Boston start-up scene special.

http://vimeo.com/moogaloop.swf?clip_id=7537191&server=vimeo.com&fullscreen=1&show_title=1&show_byline=1&show_portrait=1&color=00ADEF

I find the preponderance of males in VC an annoying and stubborn phenomenon.  When I first entered the start-up game as an entrepreneur in the mid 1990s, I didn't think much of the "VC gender gap" as there were plenty of women executives around.  In fact, between one third and one half of the executive teams at my two start-ups (Open Market and Upromise) were women.

As the father of a capable, ambitious daughter, perhaps I'm over-sensitive to the issue, but since becoming a VC seven years ago, I find it amazing that only 5-10% of the VC industry is made up of women.  Only 25% of all VC partnerships have a single women partner and only 7-8% have more than one women partner.  Anecdotally, even fewer women are "management company GPs" as opposed to "employee GPs" – in other words, true owners of VC funds as opposed to deal partners.  What other major industry remains 90-95% male-dominated?  What's the deal?

An outstanding Kauffman Institute study, “Gateways of Venture Growth”, analyzes this issue and comes up with some thoughtful but unsurprising conclusions.  They point out that the industry remains very clubby, and the lack of female role models creates a self-perpetuating cycle. Professor Myra Hart of Harvard Business School writes, “Women trying to launch or further careers as VCs have fewer first-degree connections with those (men) in positions to hire or promote them.”

Another issue that holds women VCs back is the fact that the academic backgrounds of VCs tend to be in technical areas, such as computer science, engineering and biotechnology where, again, females are in the minority.

In talking to my women VC friends, they reinforced these two major issues, but held out some cause for optimism going forward.  Irena Goldenberg of Highland Capital in Europe (an formerly an associate with us at Flybridge Capital before she went to HBS and then Geneva), believes there are more female VCs in life sciences as the medical field has a higher ratio of women to men then, say, engineering.  Our senior associate, Robin Lockwood, told me she thinks VC profiles simply lags entrepreneur's profiles.  As more women entrepreneurs emerge, more women will become VCs.

Here's a thought-provoking observation that an anonymous woman pointed out to me (and please do not accuse me of channeling Larry Summers on this – I'm just passing along what I heard):  she believes the VC industry is male-dominated because men are more wired to take risks than women.  Gambling, she points out, is more popular amongst men than women.  Thus, risk-taking with capital is more likely to be comfortable for men than women.

Some women have been able to break out as strong investors and industry leaders.  In my informal survey, a few experienced women VCs stood out as strong role models:  Venetia Kontogouris at Trident Capital, Annie Lamont at Oak, Patricia Nakache at Trinity and Nancy Schoendorf from Mohr Davidow.

I guess when you have a clubby, tightly-woven, self-perpetuating network, it's hard for women to break in.  It's a stubborn phenomenon, but I hope we can figure out how to correct it.  Otherwise, our industry is tragically losing out on 50% of the world's best talent!

Follow me on twitter:  www.twitter.com/bussgang

President Obama’s compelling healthcare speech last night made the case for acting now. In a follow-up email that he sent to millions, he urged action to finally address this pressing issue, positing that we are “closer now than we have been in 60 years.”
Here’s my question – where can I find an analysis of the impact of the plan on entrepreneurship? Why has this major engine of job growth been silent or ignored in the debate – or have I just missed it?
Anything that creates friction in entrepreneurship is a bad thing for our innovation economy. I have seen aspiring entrepreneurs hold back in pursuing their start-up dreams because of fear of losing health coverage. Lowering the barriers to allow the flow of great talent to seek great opportunity needs to be a fundamental tenant of the new plan and I’m concerned that our leadership isn’t focused enough on this lens.
Has anyone seen any good data or dialog on this topic? Led by former venture capitalist Karen Mills, shouldn’t the SBA be a strong, relevant voice here?

When I was at Harvard Business School (HBS) in the early 1990s, entrepreneurship was an afterthought.  When I joined the venture-backed Internet start-up Open Market in the spring of 1995, I was one of only a handful of graduates that joined a start-up out of business school (at a fraction of the salary of my classmates, I might add!)

Today, the entrepreneurship department is the largest department at HBS.  Students aren't just joining start-ups, they're creating start-ups.  The annual business plan contest is a huge draw and it is estimated that as many as 40-50 start-ups are created each year by students coming out of the school.  Today, 50% of all HBS alumni describe themselves as entrepreneurs 10-15 years after graduation.

I always love my visits back on campus, interacting with the students, judging business plan contests and hearing about the latest faculty research.  That's why, when one of my former professors invited me to join HBS as an "Entrepreneur in Residence" at HBS, I eagerly agreed.  It's a very part-time gig and will not take away from my day job in any way, but instead will give me a chance to learn from all the brilliant faculty and students running around campus.

I will be working, in particular, with Noam Wasserman, who runs a great course and blog about "Founder's Dilemma".  Noam's research in choices founders make and his very popular course will be a great learning environment for me as well.

So if folks have any answers to the question, "What would I advise HBS students who want to become entrperneurs", let it 'er rip!

Even though I graduated from college (gasp) 18 years ago, I still think about the school season as my annual planning cycle rather than the calendar year.  Having three school age kids reinforces this life rhythm.

And so as I was thinking through my personal goals for this coming year, and discussing individual goals with each of my kids (a recently adopted ritual I highly recommend for any parent), this article from The Economist caught my eye.  The article's subtitle, tells it all:  "Depression may be linked to how willing someone is to give up his [or her] goals."  The article describes research published in the Journal of Personality and Social Psychology by Carsten Wrosch and Gregory Miller, where teenage girls who had strong "goal adjustment capacities" – the ability to disengage from unattainable goals and reset their attention onto new goals – avoid feeling down and depressed.  In contrast, girls who get stuck on their goals and can't reset are more susceptible to depression.  The implication is that if you aren't facile at adjusting your goals, and they're overly ambitious goals, it can lead to depression.

Applying this research to entrepreneurs is an interesting thought experiment.  As investors, we VCs are always attracted to entrepreneurs who set big, hairy audacious goals (BHAGs).  Who wants to invest in an entrepreneur whose pitch is, "I'm going to make a nice living in a small niche," as opposed to, "I aspire to achieve world domination"?  Yet are those entrepreneurs more susceptible to depression and defeatism when they're unable to achieve those outrageous BHAGs?

To reconcile these two views I am reminded of an excellent book I recently read by renowned Stanford psychologist Carol Dweck, called Mindset.  Dweck's research shows that successful people in business, sports and life have "growth mindsets" rather than "fixed mindsets".  The "growth mindset" is one in which a person believes that one's world view is less about ability and more about lifelong learning.  "Growth mindset" individuals feel they can always learn from experiences (failures and successes) and develop resilience because they're focused on personal growth rather than achievement tied to rigid objectives.  When a "growth mindset" individual faces adversity, they focus on the learnings and the self-improvement opportunities that come from adversity.

I have seen in my own work that the best entrepreneurs do set BHAGs, sometimes outrageous and unattainable ones (create a $100 million company in 5 years from scratch?  Is that really possible?), and push themselves to achieve excellence.  But the ones that really distinguish themselves are the ones who embrace the "growth mindset".  They embrace life long learning, no matter how great their achievements, and allow themselves to occasionally hit the reset button and adjust their goals without breaking stride when reality intrudes (such as, say, the greatest financial crisis since the Great Depression) are the ones that can blend the best of both worlds.

What kind of mindset have you seen work best?

Follow me on twitter:  www.twitter.com/bussgang

One of the things I continue to struggle with as a VC is the unfortunate fact that I am in the business of saying "no" all the time.

Saying "no" in the context of how you invest your time is one thing – fellow VC blogger Brad Feld did a good blog post on this topic in the context of time management a few weeks ago as did Y-Combinator's Paul Graham.  But I really struggle with saying "no" to entrepreneurs.  Entrepreneurs pour their hearts, souls and dreams into their start-up ventures and to summarily dismiss them remains the hardest thing about the job.  One of my entrepreneur buddies asks me whenever I see him:  "So – did you crush any entrepreneurs' dreams today?"  Very funny.  Ha ha.

One of the reasons for this dynamic is that VCs are in the business of trying to see everything (i.e., learn about and meet with all the best deals out there) but do nearly nothing (i.e., invest in only one or two companies a year).  My blog post on this topic a year ago was a bit tongue in cheek (VCs and Deal Flow), but only a bit.

My dilemma becomes more acute when I try to explain why I am saying "no".  In particular, how do you say no when the reason for turning down the investment opportunity is the team?  It's easier to say no when you have concerns about the market, the business model or the price.  The entrepreneurial team is great, you would enjoy working with them, you think they are money-makers, but there's something in the general model that prevents you from pulling the trigger.  Those are the easy ones.

The hard ones are when you are saying no because of the team.  Successful start-ups typically follow Thomas Edison's genius formula:  10% inspiration (in start-up land, the vision or idea), 90% perspiration (in start-up land, the execution).  Whether you like the idea or not is irrelevant if you don't believe the team has the wherewithal to execute it successfully.  Sure, a team can evolve over time and new leaders can be brought in, but very few VCs invest behind teams they don't believe in.

One curmudgeonly VC I know used to say to entrepreneurs:  "I don't think is an opportunity that suits you." At Flybridge Capital, we try our best to be direct and honest in providing feedback to entrepreneurs to help them with their ventures and perhaps we should have the courage to give it to people between the eyes.  I'm just not sure this blunt feedback would pass the decency and respectfulness test.  After all, who am I to project such an unfair judgment based on a 45-60 minute meeting?  VCs need to "Blink" and make snap judgements after those 45-60 minutes in order to filter and prioritize how they spend their time, but why be mean about it?  So in the end, I often settle for a polite "it's just not a fit for us".  Is that the right approach?  Let me know what you think.  What's the meanest turn down you've ever received from a VC?

VCs have an unfair advantage when it comes to financings.  They simply have more experience doing deals.

A typical start-up company will do 2-4 venture capital financings before a successful exit (or, conversely, an ignomious ending).  A typical serial entreprenur may lead 2-3 companies in their career before calling it quits (or checking themselves in to an insane asylum).  Thus, the universe of financings that even the most experienced entrepreneurs get directly exposed to is typically 5-10 financings over a 15-20 year career.  In contrast, the typical venture capitalist, either individually or across their partnership, will do 5-10 financings in any given year.  Year in, year out,

Thus, VCs and entrepreneurs are not operating on an equal playing field when it comes to negotiating financings and interpreting the impact of the terms involved.

One area that has always struck me where this assymetrical relationship comes into sharp focus is when there's a discussion around the price of the deal.  Entrepreneurs often mistakenly focus solely on the pre-money valuation while VCs look at multiple knobs in the negotiation to drive to a set of terms that, in total, they find acceptable.  And if they don't focus on the pre-money, they focus on their ownership position after the financing, irrespecive of the amount of capital that was raised.

In my partnership, we've come up with a new term (I think it's new – I don't see it written or talked about much) called the "promote" to help communicate with entrepreneurs the real value behind a particular deal so get them to step back from concentrating only on the pre-money valuation or post-money ownership.

What is the promote?  First, let me take a step back and define a few terms.  In the world of VC-backed financings, there are multiple terms that impact the ultimate price of the deal.  The first, and most focused on, is something called the pre-money valuation. That is, what is the company worth prior to the money being invested? This pre-money valuation is own known in shorthand as “the pre” and you will hear entrepreneurs and VCs discussing other company finances using this term (“You were able to raise money at a $9 pre?  I had to struggle to get to $6 pre and I have a prototype and real customers!  Life isn’t fair.”)

But the pre-money isn’t the only term that defines price, the amount of capital raised and the post-money plays a part as well.  The post-money is the pre-money plus the invested capital.  That is, if a company raises $4 million at a pre-money valuation of $6 million, then the post-money is $10 million.  The investors who provided the $4 million own 40% of the company and the management team owns 60%.

Another term that impacts the price is the size of the option pool.  Most VCs invest in companies that need to hire additional management team members and sales and marketing and technical talent to build the business.  These new hires typically receive stock options, and the issuance of those stock options dilute the other investors.  In anticipation of those hiring needs, many VCs will require that an option pool with unallocated stock options be created prior to the money coming in, thereby forming a stock option budget for new hires that will not require further dilution after the investment.  In our $4 million invested in a $6 million pre-money valuation example above (known in VC-speak shorthand as “4 on 6”), if the VCs insist on an unallocated stock option pool of 20%, then the investors still own 40%, there is a 20% unallocated stock option pool at the discretion of the board, and a 40% stake is owned by the management team.  In other words, the existing management team/founders have given up 20% points of their ownership in order to go towards future hires.

This relationship between option pool size and price isn’t always understood by entrepreneurs, but is well-understood by VCs.  I learned it the hard way in the first term sheet that I put forward to an entrepreneur.  I was competing with another firm.  We put forward a “6 on 7” deal with a 20% option pool.  In other words, we would invest (alongside another VC) $6 million at a $7 million pre-money valuation to own 46% of the company.  The founders would own 34% and we would set aside a stock option pool of 20% for future hires.  One of my competitors put forward a “6 on 9” deal, in other words $6 million invested at a $9 million pre-money valuation to own 40% of the company.  But my competitor inserted a larger option pool than I did – 30% – so the founders would only receive 30% of the company as compared to my deal that gave them 34%.  The entrepreneur chose the competing deal.  When I asked why he looked me in the eye and said, “Jeff – their price was better.  My company is worth more than $7 million”. 

At the time, I wasn’t facile enough with the nuances myself to argue against his faulty logic.  That's why we instituted a policy at Flybridge to talk about the “promote” for the founding team more than the “pre”.  The “promote”, as we have called it, is the founding team’s ownership percentage multiplied by the post-money valuation.  It represents the $ value in the ownership that the founding team is carrying forward after the financing is done.

In my example of the “6 on 7” deal with the 20% option pool, the founding team owns 34% of a company with a $13 million post-money valuation.  In other words, they have a $4.4 million “promote” in exchange for their founding contributions.  Note that in the “6 on 9” deal, the founding team had a nearly identical promote:  30% of a $15 million post-money valuation, or $4.5 million.  In other words, my offer wasn’t different than the competing offer, it just had a smaller pre and a smaller option pool.

Entrepreneurs negotiating with VCs should spend time making sure they understand all of the aspects of the deal, but particularly the elements of price – the pre-money, the post-money, the option pool – and do the simple math to calculate the "promote".  There are many other elements of the deal that affect price (participation, dividends) and control (board composition, protective provisions), but make sure you think hard about the value you're carrying forward, not just the price tag you think the VC is giving your company in the "pre".

Follow me on Twitter at www.twitter.com/bussgang.

With the 4th of July approaching, the unofficial summer is about to begin.  In almost every board meeting with portfolio companies and other entrepreneurs who are raising money, I'm hearing the same refrain:  "The VCs are about to shut down for the summer".  Phone calls and emails won't get returned, partners meetings won't be held, and you might as well put your head down and build your company as best you can and then show up after Labor Day rather than wasting time knocking on VC doors.

I admit this is only my 7th summer as a VC, so I'm still new to this thing, but I just don't get it.  I still work during the summer.  My partners work all summer.  My co-investors and their firms seem to be working all summer.  And even when I'm on vacation at the end of August, if there's a board meeting, a financing, or a crisis, I'm available to my CEOs.  So are all the other VCs I know in the industry.  When I switched from being an entrepreneur to becoming a VC, I remember my friend and mentor Ted Dintersmith telling me:  "Jeff, take as much time off as you can in before you start off, because when you're a VC, you're never really 'off'.  There's always some crisis in the portfolio, a transaction that needs to get done, a personnel issue that needs attention."

it got me wondering what the data showed on this topic.  If the urban legend was true that VCs took the summer off, you would expect Q3 deals to be meaningfully lower than other quarters in the year.  So I looked at the NVCA funding data by quarter (www.nvca.org).  The quarterly chart was revealing – I saw no discernable quarterly pattern.  In fact, in each of the four years betwen 2005-2008, an eerily precise 25% of deals were closed in Q3 (25.0%, 24.6%, 25.1% and 25.0%, respectively)!

Some may argue that the quarterly data is misleading because Q3 covers September and many of these deals get closed after Labor Day.  But this argument seems specious given that all the hard work on both sides happens 30-60 days before a deal is closed, when the VC does their due diligence and term sheets are negotiated.  Rather than rejecting this counter argument prima facie, I decided to dig deeper.  So I looked at our own data at Flybridge Capital Partners and did a more micro seasonality analysis.

We have closed 42 new deals since we started the firm 7+ years ago.  Guess which month was our largest in terms of number and capital?  August, with 9 new deals closed!  December was second and July was third.  So much for taking the summer off.  Looking at the follow-on investments and new deals in aggregate (nearly 120 transactions), our data shows that December was the most active month and August second.  So much for that theory.

I'd be curious to hear what other VCs and entrepreneurs experience on this dimension, but I have to say that the data suggests the urban legend is false.  VCs simply do not take the summer off and aspiring entrepreneurs can get plenty of deals done, all else being equal.