There are a few things you forget after being a VC for a while. Hiring and recruiting is harder than I remembered – not the sales part, but just finding people and interviewing them. Making tough decisions about how to spend your limited cash and other resources is harder than I remembered. There are a million and one details that you don’t have an executive assistant or a CFO to handle for you. Travel planning alone is a time sink.

I have to reach out a lot more proactively. I didn’t realize how easy it was to just answer the phone and email all day, but as a VC, a lot comes at you. When I was a VC, it took incredible discipline for me to put that aside and actually be proactive, and I wasn’t doing it very well. As a CEO, the phone doesn’t ring much, which means I reach out a lot more.

One other thing that is much easier as an entrepreneur is the focus. I find that my top few priorities are quite obvious, and I’m not really at loose ends about what is most important to be working on right now. Sometimes there are too many top priorities, and it’s almost paralyzing, but mostly I can just crank without too much reflection. As a VC, I found that much harder. While there were still a million things to do, deciding which ones were priorities was much harder for me. Of course, there were some obvious times when we were doing financings and such, but often I had many different potentially valuable things I could do, and no good way to decide between them. And the feedback cycle was so long that it was hard to even come up with good rules of thumb.

I travel a lot more now, visiting potential customers and partners, and my kids are having to adjust to having me gone more, which can be heartbreaking. I’ve been lucky to have dinner with my kids an awful lot the last few years, and that’s getting harder. But my family definitely senses my excitement and enthusiasm, which helps a lot.

By the way, I’m not the only one who has done this. Danial Faizullabhoy also did this relatively recently, you could ask him what it’s like. Other folks I know who made this transition are Darlene Mann and Perry Wu. There are also VCs who occasionally step into CEO roles for a while, like Alex Mendez at Storm Ventures.

Mostly I loved the intellectual stimulation of having a really smart person or team come in and passionately pitch their best idea to me. I had to assimilate a lot of information, and learn to think at a pretty high level, just to ask decent questions. Getting to do this several times a week was a fabulous experience.

So why did I leave? What’s not to like?

I missed the feeling of taking real risk, the kind of risk that makes you feel alive. I wanted to build something of my own, and feel the energy first-hand again. Go to sleep at night thinking about something, and wake up energized to start working on it. So when the stars aligned to present a huge opportunity perfectly suited to my experience and abilities, I left my cushy job to jump on it.

Other than hardcore libertarians, I think there are few who would debate that government funding of fundmental research is a good thing. Much of this research is done at top universities funded by government grantd, but there are also institutions like DARPA, NASA, and NIH that are directly funded. Most corporations, with their focus on quarterly earnings, have too short a timeline to spend significant amounts of money on research that doesn’t have an obvious return on investment in a relatively short time frame.

There have always been a few exceptions, and what is interesting is what they seem to have in common. For example, Bell Labs springs to mind as a great exception. They produced literally thousands of innovations, most of which were (at the time) commercially unusable. Another classic example is Xerox PARC. Once again, tremendous innovative and fundamental research, with little commercial application. What is interesting about both these companies is they were essentially monopolies, and highly profitable, such that their products were referred to as “taxes”. Today we see companies like Microsoft and Google engaged in similar research efforts (although Google’s is pretty young still).

I heard Steve Ballmer speak the other day, and he boasted several times about Microsoft earning $20 billion last year. Many who were with me groaned about the egregious “Microsoft tax” and expounded on how much better the industry would be if everyone used Linux and OpenOffice and the $20 billion were returned to the users.

This prompted a spirited discussion at lunch, which included some long-time Microsoft execs. The “Microsoft tax” is pretty small for each individual. Which creates the greater good: giving each computer user a small amount of money back to spend as they wish, or allowing Microsoft to engage in fundamental research that may improve the lives of everyone? Viewed this way, it looks much the same as increasing the income tax 0.01% to pay for NASA. Of course, this only applies to the $1 billion or so that Microsoft spends on research. The other $19 billion that is dividended back to shareholders is more like a reverse Robin Hood – take from computer users, give to MSFT stockholders.

Now, there are plenty of egregiously profitable companies – Exxon Mobil for example – that don’t spend nearly as much on blue-sky research as they could (despite their marketing that says they do). Perhaps instead of legislating lower profits for them, the federal government should consider legislating more pure research? Of course, this would be hard to verify, but it would be a start.

Since I have 4-part mens arrangements of most of these songs, we looked for another singing VC. The one we found, who shall remain nameless, backed out before our first rehearsal, saying he was “too busy”. I tried to argue that this activity would be good for deal flow development and foment strong relationships within the business, so it should count as “work”, but for some reason he just laughed at me.

In the end we brought in David Binetti, who is an entrepreneur considering becoming a VC, and (by the way) a great singer. We had a couple of (short) rehearsals on the roof of our building – we didn’t want anyone to hear us – and spent a little time reworking the lyrics – they were so 2004! We were a little surprised that we actually sounded pretty good. We also joked about picking a name, settling on Up-Round Sound. Other contenders were Top Quartile, Here’s the Pitch, and J-Curve. We decided we weren’t old enough to be the 4X Seniors.

With the songs ready to go, we talked to a number of VC firms (who shall also remain nameless) about singing at their holiday parties. Turns out most VCs are very particular about their holiday parties, and don’t want random groups of people breaking out into song in the middle of them. So, quite a lot of people were deprived of the enjoyment of laughing at themselves while listening to our close harmony renditions. We did end up performing at the Gabriel Ventures party, where we were very well received. I’m sure it had nothing to do with the fact that everyone was 3 drinks in and pretty much everything was funny. We will be singing for the Band of Angels party tonight and that’s probably it for this year.

We have no idea if this quartet will continue to sing together, but we are in the process of acquiring matching socks. Most likely we’ll be available for weddings, bar mitzvahs, and funerals any time all 4 of us are free at the same time, which is approximately as often as pigs fly.

Read on for the lyrics we wrote to Jingle Bells and Deck the Halls (once again, with thanks to Onset for the idea and some of the lyrics).

Jingle Bells

Dishing out the dough
In the new Web two-oh way
O’er Sand Hill we go
Seeding all the way
Bells on cell phones ring
Mobile deals look bright
What fun it is when startups sell to Google overnight.

Jingle Bells, YouTube sells,
Facebook’s on the way,
Oh what fun it is to do
A hot deal every day.

Jingle Bells, YouTube sells,
Facebook’s on the way,
Oh what fun it is to ride
The bubble of the day.

A year or two ago
I thought I’d make a play
Put five million bucks
In a high-priced Series A…

The team was rather poor
The business plan was weak
But what the heck, it’s AJAX-based
We sold it at the peak.

Jingle Bells, YouTube sells
Facebook’s on the way!
Oh, what fun it is to do
A hot deal every day! (ka-ching!)

Deck the Grid

Deck the grid with cleantech power, fa la…
Ethanol deals every hour, fa la…
Khosla Ventures, we all follow, fa la…
Valuations high, we swallow, fa la…

See the broadband growth before us, fa la…
Click the ads and join the chorus, fa la…
Viral growth is what we’re seeking, fa la…
Buy us when our traffic’s peaking, fa la…

Fast away the old web passes, fa la…
Hail web two-oh lads and lasses, fa la…
Fund we joyous, blog or wiki, fa la…
Any content that is sticky, fa la…

“The formalization of this program is a natural evolution for us at Charles River Ventures,” said Bill Tai, general partner, Charles River Ventures. “Over the past year, roughly one-third of the projects we have committed to have been seed projects. It’s a sign of a fundamental change in the nature of company formation today, particularly in the Internet segment.”

Formalizing the program sounds like a good idea, and we are considering a similar program here at Woodside Fund. (Update: we figured out that 20% of our deals are already at less than $1m for the first investment.) But, I think there are three very important points that haven’t been explored very deeply in the discussion:

• The bridge loan can create clear mis-alignment of incentives between investors and entrepreneur
• If the VC chooses not to go forward, the company is at a significant disadvantage trying to raise additional capital
• Success of the program for the VC depends on a fairly high attrition rate

Josh Kopelman mentions both of the first two in his post about the program, and has also written a separate post about the problems of bridge loans. An even more detailed article on the first two was written this week by Jon Callaghan in PEHub, which I highly recommend.

The third point is one that I want to explore a bit, as it is barely touched on by Fred Wilson. Just because a company takes a small amount of money does not mean it takes less time. Most early stage VCs claim to add quite a bit of value to their entrepreneurs, helping with recruiting, strategy, resources, customers, etc. Seed stage companies usually require MORE of this than more mature Series A companies. And yet, this kind of program contemplates investing an increased number of companies given their small investment size. Where will the time come from?

The investment thesis most VCs have for this kind of investment is that it’s a small amount of money that is designed to both prove a business model or technology is possible, and preserve option value. In many cases, the business model or technology will not prove to be quite as fantastic as the entrepreneur predicted, and the option will be declined. In fact, the dictates of portfolio theory (and investor time) almost require that most of the options be declined. This comes back to point number two above, that many entrepreneurs will end up at a disadvantage going into Series A.

At Woodside Fund, the way we address the above issues is through complete transparency. We work with our entrepreneurs to clearly define the milestones, and what the expectations are around what happens if they are not met. Since we work closely with our entrepreneurs, we can change the milestones if necessary, but we are wary of plans that shift too much. We find that the transparency and proper expectation setting goes a long way to preserve our relationships with our founders, even when things go wrong.

As early-stage venture investors, we look at everything from seed through Series B, sometimes even Series C. We look for areas where we can add value, and make returns for our investors. But we also remember when we were entrepreneurs, and we work very hard to make every investment successful both for us and our company teams.

PricewaterhouseCoopers Start Up Show – Blog Marketing

(local mp3)

Of course, sometimes they are not very well qualified, and I often see many ideas that aren’t fully fleshed out, but I also have a short period of time to give feedback in person, which is much more satisfying than reading a business plan and tossing it out while muttering to myself. And, I’d like to think, helpful to the entrepreneurs too. It can be very hard, giving constructive feedback to an enthusiastic and earnest entrepreneur who thinks he will change the world – sort of like telling a mother her baby is ugly. And sometimes I chicken out, and give some platitude like “my partners just didn’t like it”. But usually I try to give honest feedback, both positive and negative, because I don’t want people to waste their lives working at something based on a false impression that I think it’s a good idea. Not that I would have that much influence, but I don’t even want to contribute to that.

One interesting thing I learned from Blink is that people often can’t explain why they came to an on-the-spot conclusion about something, and if pressed, will often make up reasons that aren’t really true. I try hard to be conscious about why I am passing up an investment opportunity, and to be genuine in my feedback. I am also always trying to refine my “filter” with actual feedback, so I try to research what happens to deals that I didn’t like (and even the ones I like), and take an honest look at if my opinions had any basis in reality. Of course, most deals don’t get funded, so I’ll never know.

For entrepreneurs, there is one piece of advice I suggest you take away from this post: ask for feedback, and try hard to listen to it. If you don’t ask, or even insist, you probably won’t get real feedback. And if you start objecting to the feedback you get, or trying to “answer” it, you won’t get much more. I always have much more respect for entrepreneurs who are willing to listen open-minded to constructive feedback.

A couple months later, the product was still in “internal testing” and had undergone several revisions without the benefit of real outside feedback. I was encouraging the CEO to just “get it out there” so we could learn what people wanted to do with it, and he reminded me of the post I had sent him, and that we didn’t want to blow our beta.

This struck me as a balance that many startups are struggling with right now. You can’t develop your product in a vacuum, and usually you and your engineers are a terrible focus group. However, you don’t want to get public exposure before you are ready, because first impressions are pretty important these days. What’s the solution? Good old fashioned betas, which now seem to be called either “alphas” or “closed betas”.

Back when I wrote code for a living (I’m starting to feel like a dinosaur) “alpha” used to mean feature complete, but not ready for external consumption. “Beta” then would mean ready for a small set of friendly customers to try, for early feedback and bug finding. But now, in the internet land of perpetual beta, the meaning seems to have changed.

I still encourage my companies to release early and often, because today’s tools allow rapid turnaround and product evolution, and the days of 6-12 month product cycles are gone. But because first impressions are so important, and basic functionality so critical, they should go more slowly on the public availability until they are really ready.

I keep putting this off, because I know that I can’t spend just a night or two there and get any real idea of what is going on, and I really don’t have time to be a regular visitor. I probably need a solid week with no distractions to get established, then I might be able to jump back in occasionally to keep up. So, what I really need is a vacation to Second Life. This originally seemed pretty silly to me, but increasingly it seems like a real idea – just like taking a vacation to a new city to explore it fairly thoroughly. I haven’t scheduled the week yet, but I’m definitely thinking about it.