Articles by David S. Rose

Are there any websites or blogs where I can find many different authors/enterpreneurs/CEOs/etc sharing their insightful business experience in one place?

There are several good answers here. Another multi-blogger site is the Gust.com/blog, which has lots of consolidated advice and experiences from some of your favorite Quora startup bloggers, including Tim BerryAntone JohnsonMartin ZwillingBob RiceIlana Grossman and, of course, Yours Truly.

And as long as you’re there (or if you don’t feel like reading :-), there are also many hundreds of short video talks from a large selection of the word’s leading entrepreneur/investors, including: Alan Patricof, Bill Payne, Chris Twiss, Nelson Gray, Ann Winblad, Basil Peters, Cindy Padnos, Bob Rice, Brian Cohen, Brigitte Baumann, Dan’l Lewin, Dave McClure, David Hornik, David S. Rose, Ellen Weber, Esther Dyson, Ian Sobieski, Jeff Seltzer, John Huston, John May, Jordan Green, Howard Morgan, Josh Kopelman, Liddy Karter, Mark Suster, Mark Schneider, Parker Gilbert, Phin Barnes, Rachel Sheinbein and Sharon Wienbar.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Who is the most important person in a tech/web startup (visionary, programmer, etc.)?

Since Bill Hewlett joined with Dave Packard in 1939 to create what is today the world’s largest personal computer company, there has arisen an evergreen debate as to who is more important in starting a tech company: the techie or the business guy? Steve Jobs or Steve Wozniak? Bill Gates or Steve Ballmer? Jim Clark or Marc Andreessen?

I propose that it is time to reject the notion of the “business guy” (or “business gal”) entirely. The underlying problem is that there are really three different components here, and like the classic three-legged school, they are all essential for success, albeit with differing relative economic values. What gets things confused is that the components can all reside in one person, or multiple people. And what gets people upset is that there are different quantities of those components available in the economic marketplace, and the law of supply and demand is pretty good about consequently assigning a value to them.

Perhaps surprisingly, the components are NOT the traditional coding/business pieces; nor are they even coding/UI/business/sales, or whatever. Rather, here is the way I see it, from the perspective of a serial entrepreneur turned serial investor, listed in order of decreasing availability:

1) THE CONCEPT
A given business starts with an idea, and while the idea may (and likely will) change over time, it has to be good on some basic level for it to be able to succeed in the long run. How excited am I likely to be when I see a plan for a 2008-model buggy whip? another me-too social network? The 87th investor-entrepreneur matching site with no investors? The base concept has to make some kind of sense given the technical, market and competitive environment, otherwise nothing else matters. BUT good ideas are NOT hard to find. Not at all. There are millions of them out there. The key to making one of them into a home-run success brings us to:

2) EXECUTION SKILLS
It is into this one bucket that ALL of the ‘traditional’ pieces fall. This is where you find the superb Rails coder, AND the world-class information architect, AND the consummate sales guy, AND the persuasive biz dev gal, AND the brilliant CFO. Each of the functions is crucial, and is required to bring the Good Idea to fruition. In our fluid, capitalistic, free-market society, the marketplace is generally very efficient about assigning relative economic value to each of these functional roles, based upon both the direct result of their contribution to the enterprise and their scarcity (or lack thereof) in the job market.

That is why it is not uncommon to see big enterprise sales people making high six figure, or even seven figure, salaries or commissions, while a neophyte coder might be in the low five figure range. Similarly, a crackerjack CTO might be in the mid six figures, but a kid doing inside sales may start at the opposite end of the spectrum. Coding, design, production, sales, finance, operations, marketing, and the like are all execution skills, and without great execution, success will be very hard to come by.

BUT, as noted, each of these skills is available at a price, and given enough money it is clearly possible to assemble an All Star team in each of the above areas to execute any Good Idea. That, however, will not be enough. Why? Because it is missing the last, vital leg of the stool, and the one that ultimately–when success does come–will reap the lion’s share of the benefits:

3) THE ENTREPRENEUR
Entrepreneurship is at the core of starting a company, whether tech-based or otherwise. It is NOT any one of the functional skills above, but rather the combination of vision, passion, leadership, commitment, communication skills, hypomania, fundability, and, above all, willingness to take risks, that brings together all of the forgoing pieces and creates from them an enterprise that fills a value-producing role in our economy. And because it is THIS function which is the scarcest of all, it is THIS function that (adjusting for the cost of capital) ends up with the lion’s share of the money from a successful venture.

It is thus crucial to note that the entrepreneurial function can be combined into the same package as a techie (Bill Gates), a sales guy (Mark Cuban), a UI maven (arguably Steve Jobs), or a financial guy (Mike Bloomberg). And that it is the critical piece that ultimately (if things work out) gets the big bucks.

Who do you think got the biggest relative return from the development of Trump Tower? Architect Der Scutt (the IA)? Engineer Irwin Cantor (the coder)? Broker Louise Sunshine (the sales gal)? EVP George Ross (the biz dev guy)? Or whomever happened to be The Entrepreneur in that deal?

The moral of the story is that for a successful company, we need to bring together all of the above pieces, realize that whatever functional skill set the entrepreneur starts out with can be augmented with the others, and understand that the lion’s share of the rewards will (after adjusting for the cost of capital), go to the entrepreneurial role, as has happened for hundreds of years.

Bottom line?

The most important person in a startup is…The Entrepreneur!

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

What are the advantages of stationing your startup in New York City opposed to Silicon Valley / SF?

  • The world’s fastest growing tech startup ecosystem
  • A much more tightly knit startup community, compared to the larger but more diffuse West Coast community
  • Access to many, many more world market centers (advertising, finance, fashion, media, food, etc.)
  • A city that from the Mayor on down is devoted to helping the tech startup community expand exponentially
  • The world’s largest Tech Meetup (not to mention Meetup.com itself)
  • Significantly easier access to European and South American startup centers
  • Many more world-class universities
  • Believe it or not, more organized angel groups (although not individual angels)
  • Seasons

and most importantly…

The uniquely available joy and delight of living in the most amazing, energetic, global epicenter in the world. A 24-hour melting pot of culture, theater, music, night life, sports, business, leisure activities and more, all within walking distance (or just a couple of stops away on the subway.) What’s not to love??

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

How long does it take for investors to approve the idea and to grant the necessary investment?

The question is based on a misunderstanding of how venture capital investment works.

First of all, VC funds do not invest in ideas. What VCs invest in are operating  companies that are ready (or almost ready) to scale. There are many wonderful ideas, all of which are not fundable. Only companies get funded.

Next, VCs don’t have an unlimited amount of money that is given to companies as long as they deserve it. As such, its not like applying for a loan at a bank. Instead, they have a limited amount of money entrusted to them by limited partners, and they invest in a very, very few companies each year.

In fact the odds are 400:1 against a company getting funded, as that’s how many companies a VC looks at before deciding on which one to invest in.

Now, with that as background, it will typically take one to three months to negotiate and diligence a venture investment, if the company manages to get one at all.

There seems to be a lack of long-term investment in startups. Why is the 3-5 year exit strategy more desirable than a 10-20+ year timeframe?

Precisely because seed stage investments in private startup companies are NOT Warren Buffet’s types of investments. Early venture and angel investments are much, much riskier than Buffett’s, with more than half of them typically failing completely and losing the entire investment. As such, the returns on an early stage portfolio typically come from only one or two investments out of every ten.

If an early stage fund therefore targets, say, a 20% annualized gross return (to compensate for the risk and for the GP’s carried interest), that means every individual company in the portfolio needs to be at least theoretically able to return that entire amount for the whole portfolio.

Play out the math, that means each investment needs to be able to generate 200% of the initial investment each year (of course, nine out of the ten won’t get there, but the fund hopes like hell that one will.)

Because that 200% is an annualized return, that means if the investor is going to hold for four years before an exit (taking the midpoint between your 3-5), the company needs to be able to generate 2x2x2x2 at exit, or a 16x return.

If, on the other hand, the money must patiently wait for its payoff for fifteen years (taking the midpoint between your 10-20), the math goes:

2x2x2x2x2x2x2x2x2x2x2x2x2x2x2 at exit, or 32,768x. Which means that a $1 million investment today in a “long-term play” has to pay off with a future value of over $32 billion…and that’s just the VC’s share, and assuming no other investment into the company during those 15 years. If the VC fund took the typical 20% interest, that sets the IPO value of the company around $160 billion, or roughly eight times the value at which Google went public.

NB: The math is very rough, and is estimated off the top of my head, but is intended primarily to illustrate to underlying challenge of very long term, risky investments.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

Of the private companies trading on secondary markets, how much (percentage) of those companies’ stock is available through the secondary market?

On average…none.

The secondary market for private company stock is brand new, and so nascent that it is virtually nonexistent.

For a very brief time, when Facebook, LinkedIn, Groupon and Zynga were still private, there was a quick flurry of private secondary sales through platforms like SecondMarket and SharesPost. But there was much, much, much more smoke than fire, and I would be extremely surprised if even 1% of those four companies changed hands in the secondary market.

Down the road I believe that we will begin to see a viable private secondary market emerge, but that is unquestionably years away.

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *

 

What tools can I use to manage relationships with investors?

Gust.com is the most widely used tool platform for both sides, with hundreds of thousands of companies and tens of thousands of investors using it to track and manage their relations with the other. It’s the official collaboration tool of the Angel Capital Association (and the equivalent national angel investor federations in 20 other countries.) It’s also used by over 300 venture capital funds. For a longer discussion of its utility for entrepreneurs from pitch to exit, see my answer to: While raising money, what tool are you currently using to manage your relationship with investors?

…and for a discussion of the investor-side tools, see my answer to: What are some ways you keep track of startups you are evaluating/diligencing/investing in?

(Needless to say, the author of this post is completely biased, as I am the Founder & CEO of Gust :-) )

*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *