If you are an entrepreneur or an early stage investor of any kind, it’s very likely that you have failed at some point in your career. I have. I have made a lot of mistakes. If you haven’t, it’s likely that you will or you haven’t pushed hard enough. I think any general post about when to sell in business probably lacks any specific detail that would be helpful for any entrepreneurs and probably wouldn’t give much insight into how I think about the subject. I am not talking about the decision to sell because someone offers you a good (or great) offer for the business but rather the situation where it’s the option of last resort. No one is making money and realizing their vision for the company. Lots of people have different opinions on the matter. I have found that the obvious flags for shutting down a business, while incredibly disappointing for everyone, are not nearly as agonizing as times when it’s not so obvious a decision. People like to retell stories and make it sound obvious – but that is often just revisionist history. It makes for a better (and shorter) story.
I was involved with a company in the past where I wrote the first check to seed fund the entrepreneur with an idea that we all thought had merit. We made some great progress over the following months including some good initial customer interest that led to a series A with a new co-investor who also had a lot of domain experience. We also had an outside board member who I had and still have a tremendous amount of respect for (who was originally brought in by the founder) and had a lot of experience in similar markets and businesses. In other words, we had the right ingredients for success. So what happened?
Over the next 12 months, we realized that the product/service that we had built really didn’t hunt with customers. The initial “interest” we had poorly interpreted and we missed key functionality in the design that was required for success. We spent the next 12 months trying to “fix” things. The founder for good personal reasons had physically moved and was commuting – working just as hard (or harder) but it compounded the problem. By the time we got the founder some help to refocus the business – and we got some great people to help working full time – it was too late. This is all hindsight – at the time it seemed like a good strategy. We spoke with new potential investors as the cash began to run short and we just didn’t have enough new customer traction to get anyone new to invest. Maybe we just didn’t give the new team enough time to figure things out. At the time, I believed that we could re-trench and rebuild and initially was willing to continue to fund the business regardless of any new investor – concluding that while we missed the target initially we could move forward and build success. I was motivated by the opportunity. In addition to believing in the opportunity, emotion was a big factor for me as I had been involved with the business since the very beginning. I was a believer which sometimes gives a rose colored tint to any situation. I believed in the new executives and their ability to change course.
But in the end we sold the business. I agonized about it. We didn’t write another check – no one did. The company was sold for essentially just assets. All employees found a new great place to work and a future. My co-investor deserves credit as well – which is a great argument for having multiple investors – in that they were very clear on shutting the business down. There was no disagreement with management either on the path forward. We had not delivered against the numbers, we had tried to fix things without enough tangible evidence. It was time to sell. This is what happens to many startups. It’s a bitter pill. No one likes it to end this way. But that risk is required in order to achieve the rewards that venture and startups offer.
I guess we will never know if it was the right decision ultimately – but it was the right decision at the time. For everyone. We as venture investors contribute money but anyone working at a startup is giving something just as precious which is their time. I would make the same decision today. I probably will remember more about it it some ways than the successes like Sandforce – a story for another post. It just didn’t make sense to invest more money and time. For me, these are hard decisions investors and entrepreneurs have to make together with less than perfect information. It made sense for employees and founders and for investors. The not so obvious flags looking back were lack of product market fit clarity after working at it for some time against a backdrop of a substantial future commitment in terms of time and investment, a collective effort that had repeatedly missed the mark. It was the right decision. I like to think I don’t give up often – but being thoughtful about when to sell I think is part of being an early stage investor and entrepreneur.
I recently got some excellent feedback from an entrepreneur that I have worked with in the past and he told me that many of the venture blog posts are full of buzz words and high level strategy and one of the things he was interested in learning more about is how and why I make the investments that I do. Great subject. The company announced the funding round today. For GuideSpark, the decision was simply (1) revenue momentum and (2) an outstanding team.
GuideSpark is a digital video employee communications company with a SaaS solution that transforms how companies engage and inform their workforce about key topics such as healthcare reform and company benefits. The company was founded in 2008 and today has about 50 employees. I met the team on Valentine’s Day and we closed the investment on April 23rd. Several other venture firms passed. Though I know it felt like an eternity for the team, it was a relatively quick first meeting to close in just over 60 days.
The team at GuideSpark is impressive. I obviously got to know the executive team the best but have had the chance to meet just about everyone and it’s just an impressive group all around. These are people I want to work with and would work for if I had some skill that was still useful in an operating capacity. Just one example, the CEO and founder Keith Kitani is an impressive individual. He struggled with the business for several years before finally figuring out the product market fit that really worked to accelerate the business. Success so far hasn’t come easy for him and his other co-founders but they have persevered and iterated on the product making progress (in terms of revenue and customers) with each turn of the offering. The two other founders – John Wolff (Channels) and Joe Larocque (Customer Success) also deserve a lot of credit for supporting the company through some challenging times and also welcoming an organization around them in more senior positions. They are focused on GuideSpark being successful. I like a team that thinks that way. Many say it, but far fewer are able to act on it.
One of the things that has impressed me the most so far is Keith’s ability to hire a great team. Only really in the last 12 months has the business started to grow fast enough that he could rationalize other executive hires – and convince and recruit them to join. The executive team includes now Bob Benedict (CTO), Shep Maher (VP of Sales), Jennifer Turcotte (VP of Marketing), and Stephanie Copeland Weber (VP of Customer Success). It’s unusual for me to invest in a company with such a high caliber team at the start because usually the companies are earlier in their development. Just after I invested, we recruited Chris Krook as the VP of Finance who I think will also make a huge impact on the company’s success.
The second reason was customer and revenue momentum. The company has more than 100 customers today including names like 7-Eleven, Adobe, SurveyMonkey, DPR Construction, Leap Frog Enterprises and Infoblox. The number of customers has more than doubled since my first meeting in February. MRR has grown almost as fast – just under 100% growth over the same period of time – roughly 6 months. The numbers are still small but I saw clear momentum with customers and revenue. I am not a benefits expert. I am still educating myself about the market. The sales team at GuideSpark has a good time poking fun at me because I haven’t been able to close a customer for them (yet). I just don’t know F500 HR departments well – which is the general buyer. It’s a long way of saying – while I don’t know the specific HR market as well as I know other markets, I know SaaS and I believe the customer growth was a good proxy for everything else.
I was incredibly fortunate to have had a teacher in high school that took time during the summer to teach me how to translate ancient Greek texts. While I never actually translated the original text, I have a great appreciation for the history (and the gift my teacher gave me). Interestingly, like so many things in history, our modern culture has taken the meaning to put it to its own use and the actual translation so far as I can tell doesn’t contain the phase “Do no harm” which we all generally associate with the oath.
For many years I have told entrepreneurs and other investors, that like physicians, venture investors should take some kind of venture equivalent of the hippocratic oath. While I know many associate venture more with the word hypocrisy (the two words are of completely different origins), when I was first getting started 13 years ago I didn’t appreciate the significance. As a venture investor, I try to help companies succeed in any way that I can. Its all the usual things like hiring and recruiting, strategy, financing etc. But sometimes I have found it means getting out of the way. The relevance of the oath is that I believe my first job is to not screw anything up that is working at a company. I am not nearly as skilled as a physician (and the consequences including death don’t apply) so the analogy only works to some extent. Venture investors can kill companies however and entrepreneurs invest everything they have in terms of time and energy trying to make these ventures succeed. Often venture investors will walk into a situation thinking they know the answers. It can be disastrous. Each company has a cadence, a personality and a lot of things that are working to build success.
I am sure I am better at it today than I was when I started, but I try hard to bend myself around companies as opposed to pushing companies into some other mold of success. I have seen many venture investors that have “been there done that” with a successful company dispense advice on what and how to do things with authority without regard to what is working at the company and the impact. They are usually great at talking and poor at listening. Venture investors don’t run companies – management teams do – but a vocal, opinionated, investor can cause a lot of damage if they don’t respect what is working. I understand that sometimes things have to be broken to be rebuilt and made better. Those are tough choices but made usually with the team. For me, however, since the goal is to build success and value for the company, doing no harm is a basic oath I try to make foundational with how I work with entrepreneurs and teams.
I originally published this post on Storm’s blog but thought it ought to be here was well.
I recently had the opportunity to speak at the OpenStack Summit in San Diego. It was a great conference and all the content is online for all to enjoy which is truly an opensource gift for those who couldn’t make it in person.
While its still early for OpenStack, I know its going to be a major disruptive force. OpenStack gives the opportunity for enterprise companies (or service providers) to offer similar basic capabilities as service offerings such as AWS to internal groups (or external customers) on their own private cloud. I am excited about the possibilities and so much so that I put together an entire presentation around the opportunity for startups and venture investors. My presentation with video captures most of our current thinking.
If you prefer just the slide deck
The high level summary is that OpenStack has started what will be a complete rebuild of the enterprise data center. It will take time and it won’t be a straight path but this shift represents one of the most fundamental changes to enterprise infrastructure in my 12 years as an IT investor. Many existing companies will adapt and thrive – many more will fail – but the massive disruption in the enterprise IT market will create enormous opportunities for startups in the years ahead.
Let me know what you think.
I have been an active venture investor for 13+ years. I have never been more excited about the opportunities in enterprise IT. I will post more in the future about Openstack, the cloud, mobile and the changing landscape but Matt Asay of ReadWrite and 10Gen did a great job of summing it up in his article “It’s Official: Legacy Tech Vendors Are in Permanent Decline
With Oracle, IBM, Microsoft and SAP all repeatedly missing key earnings numbers, a clear and troubling trend has emerged.
SAP has missed key financial projections five times in the last 10 quarters. Oracle has whiffed four times in the last seven quarters. IBM has done better, but has tripped over earnings and revenue in the last two quarters. Microsoft? It has gone four straight quarters striking out on guidance for big areas of its business. Across the board these and other legacy vendors blame sales execution or macroeconomic factors.
Perhaps they should instead blame their technology.
The cloud is having a profound effect on everything IT. Trillions of dollars of market share are going to shift hands over the next decade.
This afternoon LSI Corporation announced that it is acquiring SandForce for $400 million in cash and assumed options.
We are excited for the team at SandForce and proud to have been a part of building a company that is helping to usher in a new era of storage. SandForce delivers solid state disk (SSD) processors that power volume flash memory in both high-end storage as well as consumer applications. The primary advantages of flash memory are that it is much faster, more reliable and consumes less energy than hard disk drives. Many of our limited partners and investors that have looked at investing at SandForce over the years will likely remember us saying that flash memory is the most disruptive force in storage since the floppy disk drive. We truly believed that when we made the decision to invest in 2006 as we saw the use of flash becoming more ubiquitous in devices like the iPod. We believed that as more consumer devices took advantage of flash, the price of flash would decrease and its uses in enterprise applications would increase. As the price of flash per GB came closer to hard disk drives, more applications would take advantage of all it had to offer including dramatically faster performance.
In many of the investments we make (and other venture investors) the focus of the product or service changes from first concept. SandForce’s original vision is the same today as it was when we first invested.
We first met the founders of SandForce in early December 2006 and worked together with them to agree on a term sheet just before the holidays. We agreed to invest $3 million and find another co-investor to invest the other $3 million along side us to get the company through its initial development efforts and prove out the technology. While we introduced it to several investors, most venture investors were completely uninterested in semiconductor investing (with some good reasons) and did not see the market opportunity with flash. Fortunately, Carl Amdahl and the team at DCM saw the opportunity and quickly made a decision to invest. We signed the initial term sheet with DCM in March 2007. DCM has been a terrific partner at SandForce.
The company really got to work in the spring of 2007 to validate the technology and expanding the team. SandForce closed its Series B financing in February 2008 with some strategic investors who Storm introduced to the company and were early to recognize the potential impact of flash on the market. Storm participated in this round as well. We focused on many strategic partners to help us bring the solution to market including introducing SandForce to Smart Modular which ultimately became our first publically announced customer in late 2009.
Everything did not come easily. We struggled with our development efforts including having to replace our VP engineering twice during our early days which could have been devastating had it not been for strong founders and a committed team of early engineers. We also were slower to deliver revenue. Originally we had planned to deliver revenue in 2008 but ultimately were not able to get product out until 2009. As the company started to clearly show its potential and the market for SSDs became much clearer, SandForce raised its Series C round led by Jackie Yang of Translink Partners in October 2009. The team at Translink gave the company critical insight into customers and partners in Asia.
The company also went through a difficult transition period in early 2010 as we had to make some changes with respect to management, but we were able to begin to execute to SandForce’s potential in 2010 delivering over one million parts that year. The company has continued to grow and add many key executives and team members which enabled the company to deliver over one million parts in Q3 2011. Storm introduced the company to Sundi Sundaresh in early 2010 as an additional outside board member. Sundi has a tremendous amount of storage experience including most recently having been CEO of Adaptec. SandForce closed its Series D financing in September of 2010 with Eric Young of Canaan Partners leading the investment who clearly saw the vision as well as some compelling evidence from customers.
Storm has certainly done well financially, and we are happy to be able to return more than one-third of our fund to our limited partners. We are grateful for the founders who had the vision and especially grateful to have worked with such a great team that executed so well. While almost five years later, it seems like only yesterday we were busy trying to get our first product out the door. We cannot say enough great things about the team at SandForce. We were fortunate to have worked with so many talented individuals. We are sure LSI will take the opportunity at SandForce and expand on it successfully with such a fantastic group of people and growing market. We are just at the beginning of some amazing new markets with flash memory and exciting days are ahead for new applications. As many know, we have been predicting that within the next five years it is likely that the next laptop you buy will have an SSD. Apple proved us somewhat on the right track with the introduction of the MacBook Air. The windows-based Ultrabooks just coming to market all have SSDs. Once you use an SSD in a laptop – you will not want to go back to a hard disk drive – ever. We would not be surprised if many servers shipped in the next five years begin to have flash drives as standard configurations. If you need the name of a good SSD – We know a company that makes the storage processor and can point you in the right direction. Just make sure it is SandForce Driven.