Event: TiECon Southwest 2007 Conference on September 15th: Sean Parker

Anatomy of a Conference: Day D-4:

The TiECon Southwest yearly conference is rapidly approaching (in 4 days), and all systems are a go!

The much-anticipated opening keynote will be delivered by the serial entrepreneur Sean Parker . At 19, Sean had founded the very popular (and controversial) Napster. After Napster, Sean went on to found Plaxo, the site for organizing contacts. Plaxo was later funded by Sequoia Capital.

After some hell raising at Plaxo, Sean Parker left to help Mark Zukerberg with the newly launched Facebook, and became its founding president. Little known fact - Facebook only raised $500,000 until recent rumors that they might be raising more, “at a huge valuation”. Facebook raised seed funding from the Founder’s Fund led by Peter Thiel, who also co-founded Pay Pal.

Sean Parker has gone on to join Peter Thiel at the Founder’s Fund.

tiecon southwest 2007 sean parker, Promod Haque, Andy Bird

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What valuations/ exits are VCs looking for?

The question is often asked, what is considered a “good return” when there is an exit in venture land? Here are some rough guidelines for early stage companies, along with some “VC-speak” that you might hear, when such exits are discussed.

1. Company exited at 0-1x (ie 0 to 1 times the money invested)
“What company? What investment?”

Nobody made money. Founders are broke.

2. Company exited at 1-2x
“We broke even on that deal”

This is not the deal that the VCs are going to brag about.

Generally VCs have “liquidation preference” clauses which mean that they get to take out their money first. Very likely the investors made nothing after the debts were paid off. Founders are, very likely, still broke.

3. Company exited at 2-5x

“We had a good exit”

VCs made some money. Founders made some depending on how good they were at ironing out the initial term sheets. The founders are planning their next venture. Unless the numbers were large, this is not enough to retire on.

4. Company exited at 10x and above

“I told you this was going to be the next Facebook!”

This is the 1 in 20 or so “make the fund” deals that funds hope and pray for.

VCs are entitled to crow, and they do! Everybody is happy - mostly.

Side note for entrepreneurs on valuation: When presenting a business plan, if you are showing a company that is going to be worth 2x in 3-4 years, then it is time to go back and look at the market size and other factors. Most investors will beat a fast path to the exit sign unless they can be shown an expectation of about a 10x or more, or more on their investment, in 3-5 years.

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Blink: Making decisions under uncertainty

blink coverMost entrepreneurs routinely depend upon the “blink” reaction. Given an incomplete set of information on which to base day-to-day business choices, it becomes necessary to make fast decisions, with little more to fall back on, than a gut feeling. However, most business people are reluctant to admit that they use intuition to make critical choices.

In a way, the book Blink by Malcolm Gladwell served to dispel some of the sense of uneasiness that many people have regarding the soundness of using the first knee jerk reaction as a basis for making serious business decisions. Whether or not one agrees that the first reaction is the correct one, most busy entrepreneurs and executives do recognize that in situations where decisions need to be made with incomplete information, some combination of quick analytics, and just plain old gut reaction is crucial.

blink eyesBlink deals with the first two seconds - the time when you meet someone for the first time, or hear about something new. In that first instant of time, you have made up your mind - I like it or I don’t like it. Malcolm Gladwell argues that the rapid cognitive process that occurs in the first two seconds leads to a better judgment than the methodical and deliberative analysis that is generally considered to be a more sound basis from which to make a decision.

I tend to agree with the “blink” hypothesis. While we reject “intuition” as somehow less appropriate as a basis for decisions, than analytics, it is important to recognize that intuition is not just the baseless flash of perception that it is frequently portrayed as. Rather, intuition is a sum total of the facts, and information that is currently available, combined with a rich history of past experience stored in the memory, that the mind subconsciously adds up into a single line item, and delivers as the final decision.

As entrepreneurs making many quick decisions every day, or as investors who need to look through large numbers of business plans to pick the one the will “make the fund”, the ability to make a “blink” judgment is crucial. However, it cannot be overlooked that there are many situations where more methodical deliberation is needed, and appropriate, such as when an investor is doing due diligence on a potential investment. It can certainly lead to uncovering and learning facts that were not known before. But in the end, it still comes back to the sniff test - does this deal smell right. That is when you have to go back to your intuition - and let your blink reaction add up all the tangible and intangible information, and lead you to the best choice.

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Entrepreneur Extraordinaire: Max Levchin of Slide, Paypal

slide logo taglineWhat is the definition of an Entrepreneur? To me, a true entrepreneur is a person who not only dares to dream, but it is someone who has the single minded courage and persistence, to chase the dream until it turns into reality. It is someone who is willing to try 10 times and fail, until they reach that breakthrough moment, when they finally create something of lasting value.

I have heard numerous talks or read many articles, where an entrepreneur’s story has been described from the lofty point of view of implied, instant success. Entrepreneur starts company, grows revenues to x million, has an IPO, and successfully sells the company a couple of years later. And then on to the next success.

Reality rarely matches this idealistic scenario. Very seldom do we find entrepreneurs who simply step on the start-up rocket ship, and blast into mega enterprise space, the first time around. Even less frequently do we find a successful entrepreneur who is willing to tell the real story behind the story, and talk about all the failures that led to the ultimate success.

I once heard Max Levchin, founder of Paypal, deliver a keynote at a conference, where he put a human face on climbing up the golden path of entrepreneurship, and the trials and tribulations on the way. He described his experience of starting a string of “garage” companies (9 in all) with little or no success. Then he spoke about one day, showing up at a business class with the intention of taking a nap in the back of the classroom (it was a hot day and the class room was air conditioned). Turned out that there was only one other person in the class. When the presenter, hedge fund manager Peter Thiel turned up, he found out, much to his chagrin, that he had an audience of only two, Max and another person. That “close” encounter led up to another meeting, and soon, between Max’s software expertise and entrepreneurial drive, and Peter Thiel’s business and finance acumen, Paypal was born.

After Paypal, Max Levchin went on to found his next start-up Slide, a photo sharing site. Today, with upwards of a 100 million viewers, the site, by any account, is a huge success.

Well, a winning streak of two successes, after a string of not-so-successful ventures - is that a fluke? Not really. If you stack up a few wrecks on the road of entrepreneurship, pretty soon you are able to climb high enough, where you can see further, and you know which direction to not go next time. Past experiences tend to successively focus our vision towards where the next success will very likely lie. Also a huge success like Paypal probably brought Max a whole lot of credibility and panache, which made the next success, Slide, all the more likely.

Ultimately, we do realize that Max Levchin got where he did, not just because he was smart enough to see and seize upon an opportunity, but also because he had the tenacity to keep trying until the “fluke” ultimately happened!

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