Joining A Startup As CFO Is A Good Path To The Top

Indra Nooyi, CEO and former CFO, PepsiCo, via Wikipedia

Indra Nooyi, CEO and former CFO, PepsiCo, via Wikipedia

Every investor is looking for the “dream team” of executives to put money on. Often I find that experienced investors scan ahead to the management page of a business plan, even before they read the product description. That’s how important the people are. The Chief Financial Officer (CFO) role is usually considered second only to the CEO, because financials are critical.

In fact, about 25% of CFOs make it to the CEO position, although not necessarily in a single step, like Indra Nooyi, PepsiCo’s CEO. The latest Crist Kolder report finds that the percent of female CFOs, as well as CEOs, continues to rise and is at an all-time high. Read more

Martin Zwilling , Founder and CEO, Startup Professionals
September 21st, 2014

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:

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:

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:

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 @ *

Bad Notes on VC

This week. On the phone …

Me: So, you raised venture capital?
Him: Yeah. We raised a seed round. About $1 million.
Me: At what price?
Him: It wasn’t priced. We raised a convertible note.
Me: With a cap?
Him: Yes, $8 million.
Me: Ah. I see. So you did raise with a price. It’s just a maximum price. You’ll find out the minimum when the next round is raised.
Him: Huh?

Last week. At an accelerator …

Me: Raising convertible notes as a seed round is one of the biggest disservices our industry has done to entrepreneurs since 2001-2003 when there were “full ratchets” and “multiple liquidation preferences” – the most hostile terms anybody found in term sheets 10 years ago. Convertible notes have both features in them but for some reason entrepreneurs don’t understand it. It’s like we need a finance 101 course for entrepreneurs
Him: But when I raised my first round we didn’t know how to price the company. There were no metrics. So a convertible note was easier.
Me: Ok. Well. How will you price the next round? Your A round?
Him: On metrics. We’ll have some proof points by then.
Me: Cool. What proof points? How will the lead determine a value? Revenue multiple? EBITDA multiple? Cashflow projections?
Him: Um. I’m not sure.
Me: There is no rational explanation for valuations of A round companies by ANY objective financial measure. It’s simply what a market is willing to pay based on a future belief that your company will grow and non-linear rates and be worth much more in the future. In finance they call it “terminal value” but the truth is the price is as arbitrary at your A round as it is at your seed round. If we priced it based on any metrics your company would likely be worth less than 7 figures at your A round. Objectively.
Him: But it’s much cheaper to just use the Series Seed term sheets that every law firm has put out so convertible notes make more sense because they’re cheaper and easier.
Me: Then why don’t you take that same Series Seed doc and stick a price in it. That way you don’t have a max or min price but you have a price
Him: But then what if people don’t want to pay that price?
Me: When an investor signs a note with a cap they must assume they are willing to pay the cap or why would they invest? Either that or they’re dumb. Plus, if you price it then when you go to your next round of financing there is no haggling with future investors on what the note should be priced at. The price is simply the price

Last year …

Me: So why did you choose a convertible note?
Him: We didn’t want to price our round
Me: Did you have a cap?
Him: No. Just a discount to the next round
Me: So, who was willing to invest in that? Was it friends and family? I can’t imagine any rational investor would sign up to that.
Him: Yes. Mostly former colleagues and friends.
Me: Ah. I see. So they backed you – a person they trust. A friend. If you’re wildly successful early on or if they help you achieve a great valuation they actually pay a significant price for their eventual stock even though they took much more risk than a future investor and backed you early. How do you think they’ll feel if your next round is at a $50 million post money valuation and their hard-earned $25,000 is worth 0.05% of your company? Less than you’ll probably grant your most junior employees in stock options?
Him: Not so good. Obviously he’d be pissed off. I hadn’t really thought about it.
Me: I know. You and everybody else.

Last year …

Me: So you raised a convertible note? What was the cap?
Him: $12 pre. We raised $2 million.
Me: How are your negotiations with VCs going?
Him: A bit tough. People seem concerned about valuation
Me: Why do you think that is?
Him: They think $14 post is a bit too high
Me: But I thought you told me it was a convertible note? Doesn’t their investment determine the price of the next round? Isn’t $12 pre just a maximum?
Him: Yeah. But people seem pretty focused on that number. Raising lower seems kind of like something is wrong. And now I have to explain to team that they’re taking more dilution than they expected if we do a down round
Me: More dilution? A down round? I thought it was a convertible note with a cap? Didn’t you consider that raising at $8 million was a possibility?
Him: Um. We never thought about it.
Me. Huh.

Tonight. At dinner …

My colleague: We have a bit of a problem. They raised multiple seed rounds and each at different prices with convertible notes. They raised $2 million but when you add up all of the liquidation preferences if they convert at our proposed share price the total liquidation preferences would equal more than $7 million
Me: Yup. I see that all the time. I know how to structure around that to protect the founders from getting screwed on a multiple liquidation preference. But most VCs don’t bother so many convertible note founders get screwed and never know it until they sell their companies.
My colleague: Whoa.
Me: Yup. The whole industry has strangely accepted this artificial structure for all the wrong reasons. There are a million ways to do quick, easy, low-cost rounds with prices. There are a bunch of ways to offer cheaper pricing to people who commit early without notes. But founders these days seem strangely unfocused on finance and on terms that could hurt them even though we fought to the death about these same terms 10 years ago

The scoop.

These are all real conversations. I have them all the time. I’m bored of it. 99.9% of the time I have no vested interest in having the debate. I’m just trying to be helpful because in this case more than any I truly understand the structure from both sides of the table. People keep taking the sucker’s bet and I can’t talk them out of it.

Here’s some more details on Convertible Notes if you’re interested.

I have never come across a sophisticated A, B or C round venture capitalist who thinks convertible notes are a smart move for entrepreneur or investor. They only people I have heard promoting them tend to be super early stage investors or accelerators and often when I talk to them about the structure they’ve never given much thought beyond “they’re easier,” “they’re cheaper” or “it’s faster to raise this way” none of which is actually true.

I’ve heard: “Well it’s great because you don’t have to agree terms with your investors. You can negotiate that later!’

But do you want to start a relationship with your most important supplier – that of capital to fuel your business – by avoiding talking about his or her expectations in terms of rights or privileges? What if when you have that conversation you don’t agree? It’s like punting on discussing with your future husband or wife what religion you’re going to raise the kids. If it’s important to you wouldn’t you discuss it up front?

“But how do I offer cheaper prices to early investors?” Simple. If you want to give them a 50% discount offer them $1 of common-stock warrants (no liquidation preference) for every $1 of stock they buy. If you want to give them a 33% discount you offer them half of a $1 common-stock warrant for every $1 share they purchase. And so forth.

“But lawyers will charge much more for equity.” Not in my experience. Lawyers don’t make money on your seed round in any instance. They are investing in your relationship in hopes that you do an A, B and C round. A few M&A transactions. IP. Employment. Stock Option plans. Maybe an IPO – who knows?

Well … the reason I want to do notes is so I can do multiple closings. Try doing THAT with equity. Um, ok. How about you close your first capital (say $500,000) and put in the docs that you have up to [90] days to raise an additional $1 million at the same price at your discretion.


I actually use this method on at least 50% of the deals I close. I often will fund 80+% of a round and move quickly. I give the entrepreneurs usually 30-60 days afterwards to top-up a round with other helpful angels or seed funds that we mutually agree. That way neither of us have to wait for stragglers and the entrepreneur can be picky about whom they let in because they don’t feel pressured to get answers quickly.

[Update: From Twitter a commenter says, “One of the advantages of notes is that you don’t have to have a lead.” – and other lies first-time founders tell themselves. No lead equals nobody owns responsibility for you if things aren’t going well. You WANT a lead. Could be a VC seed lead, a VC lead an angel lead. But in life investors are looking for somebody inside the tent to tell them what to do if you need more money. It’s like the Pottery Barn rule, ‘If you break it you fix it’ as in … If I’m the lead and I help round up other investors and things hit a pothole everybody knows I own helping the founder through it. This is why Party Rounds in VC suck.”

Ok. Truthfully. I don’t have some big dog in this fight. I really just want to champion Finance 101 to entrepreneurs. I just simply want to help you to avoid signing a silly deal if I can get through to you.

But wait. Is there ever a situation where a convertible note is a good idea?

Yes! Thanks for asking.

Convertible notes were previously used primarily for “inside rounds” in which the existing investors provide you with bridge financing to get to the next round.

Why don’t they set a valuation then?

Well. For starters – you and they both don’t necessarily want to set a price because you’re hoping a future investor will pay a higher price for the next round given progress has been made. If you set a price now then that will be used as a benchmark for the next investor to justify a lower price.

But why would my investor do that? Isn’t it like you said about angels? They are paying now to increase price and they will convert later at a higher price? Isn’t that conflicting advice?

Well. Actually not. Because they are existing investors. Here’s a couple of reasons why.

1. They already locked in stock at a lower price. So if the next round is higher they have a much lower cost of ownership than the next investors anyways

2. They would likely have had to participate prorata or some portion of it in the next round financing anyways and at the price that the next round investor chooses. So it’s less of a big deal if you’re an insider

3. The higher their next round the more they can “mark up” their initial investment which is usually a multiple higher than the bridge so if they achieve a higher price later it’s win-win for them.

4. Often since they’re insiders they don’t have a choice other than to shut the company down or to use the fact that you’re out of money as leverage against you. That does happen. But most VCs prefer not to do that as it’s self defeating.

I hope these notes helped a bit. Even though I know most of you will succumb to the industry pressure and just do convertible notes anyways :)



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Great Startups Are Where Soul and Technology Meet

MIT Chapel, Cambridge Mass via Wikipedia

MIT Chapel, Cambridge Mass via Wikipedia

Some entrepreneurs forget that they can’t use people the same way they use technology to build a startup. Inventors, for example, are skilled in manipulating technology, but may have little interest or experience engaging people to make an effective team. Unfortunately, startups are not one-man shows, so entrepreneurs need to study leadership as much as they study technology.

In fact, we can all benefit from focusing on the keys to people leadership from time to time. A while back I came across the new edition of “Leading Out Loud: A Guide for Engaging Others in Creating the Future,” by Terry Pearce, who has been is this space for a long time, and I felt it spoke loudly to every entrepreneur looking to improve his leadership communication. Read more

Martin Zwilling , Founder and CEO, Startup Professionals
September 14th, 2014

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 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 @ *

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.

Dread Startup Problems Or Learn To Enjoy Challenges

Stressed entrepreneur photo via Wikipedia

Stressed entrepreneur photo via Wikipedia

If you can’t solve problems and enjoy it, you won’t make it as an entrepreneur. By definition, an entrepreneur is the first to undertake a given business, and firsts never happen without problems and people frustrations. The toughest problems are people problems, like personnel issues, but there are tough operational problems as well, such as vendor delays and quality surprises.

The real entrepreneurs I know are good at overcoming both people problems and business obstacles, and get satisfaction from the challenge. Some people think this is a talent that you must be born with, but experts disagree. You can definitely train yourself to be a problem solver, if you haven’t already. It’s a key skill for success in every business role, from accountant to customer support. Here are some basics rules: Read more

Martin Zwilling , Founder and CEO, Startup Professionals
September 7th, 2014