Those who know me well have likely heard me say that a partnership is a terrible way to run a business. But it’s the way almost everybody in this industry is structured. There’s only a handful of firms out there who have a named CEO (VantagePoint comes to mind). Amongst the vast majority that are partnerships, a scarce few are run with true “managing partners” who play CEO-type roles.

Talk to any partner at a typical firm and they’ll tell you that partnerships are amongst the sharpest of double-edged swords.

• Edge 1: It’s great to have a group of smart minds around the table. It can be terrifically valuable to have the collection of experiences and perspectives, the added Rolodex power, and the critical minds that force intellectual honesty in investment decision-making.
• Edge 2: It can also lead to very inefficient decision-making, get people bogged down in politics, and lead non-deal things to fall through the cracks due to lack of clarity around responsibilities.

While there are times when the negative edge of that sword leaves me wishing I could be a sole proprietor, “superangel” style investor with no one to answer to but my investors, those moments are far less frequent than the reminders of why the good edge of that sword can be so powerful.

Yesterday was one of those. I brought Jane, an entrepreneur with whom I’d been working for about a month in to meet my partners. I was quite excited about her business, and felt like we were likely pretty close to offering her a term sheet.

I expected that it would go like these meetings most often do when one of us feels that way. We’d spend an hour hearing her story and digging deep into the business. Then she’d leave and we’d share reactions, thoughts, and concerns. My partners would at some point (maybe immediately) express that they generally share my enthusiasm for the opportunity, and we’d come up with a list of outstanding issues and questions that I need to address before we’d be comfortable moving ahead with an investment.

We had what felt like a pretty good meeting yesterday, but I knew that Jane hadn’t been on top of her game. The story was a little disjointed, the go to market strategy not clear enough. But still, I figured Jane would leave and I’d help clarify and reframe some stuff and we’d be good to go.

And then Russ and Mark hit me across the head with a pair of 2×4’s.

One of them said to me, “it’s critical to this partnership that we’re open and honest, right?” I agreed. “Well, I like the concept they’re trying to get after, but I’m not sure I liked a single thing about how they were going about it.” And he proceeded to very constructively bang through a list of lethal criticisms. My other partner was right there with him – adding, amplifying, and supplementing the litany of body blows the business was taking.

I was disappointed and a little defensive at first. Then I really heard what they were getting at, and I saw that they were absolutely right. I had gotten over-excited by the combination of macro opportunity – my partners agreed with me on that point – and terrific people whom I thought would be great to work with. It’s a great combination, for sure, but that excitement led me to ignore the fact that these guys hadn’t yet come close to adequately connecting the dots on just how they were going to turn this vision into a real business. It was very quickly clear to me that we should not invest in this business as currently conceived.

I feel great about the outcome. The partnership really worked – I got the hard questions I needed to hear, and which it turned out I couldn’t answer. Heck, if I was a sole proprietor Super Angel, I might have just risked flushing a half million bucks on a not-ready-for-prime-time idea.

But stopping what might have been a misguided investment decision is less than half of it. Even better is that in the 24 hours since the meeting I’ve had three conversations with Jane. They’ve been incredibly productive and satisfying conversations, and my enthusiasm for her has only grown. Jane has effectively countered some of my criticisms, but she’s also realizing that much of what Mark and Russ were getting at are critically important issues, and they have her completely rethinking some elements of her business.

While Jane no doubt would have preferred to walk out of our conference room yesterday with a term sheet, I think she actually believes today that this process is getting her business turned in some exciting and important new directions.

I don’t know where this is going to lead, but I know I’m looking forward to working with her on it. It may be that we never get there, but I hope what happens is that Jane and I spend the coming weeks digging in together, collaborating as she refines and improves the business model. If nothing else, that process is going to lead us to have a much better understanding of each other, and a terrific feel for what it would be like to work together. If we do decide to work together, we’ll both have an exponentially greater level of conviction about the relationship than we otherwise would have. In today’s hurried and frenzied deal environment, that’s all too rare.

2011 was a great year for us – perhaps the most exciting and fulfilling of my 12 years in the venture business, as we started investing in earnest the $25MM seed fund we closed at the end of 2010. We expanded our team, built the beginnings of a fantastic portfolio, invested with a world class collection of partners, and generally had a boatload of fun. Time will no doubt expose that we made a mistake or three in there, but at the moment they haven’t yet emerged. We are proud of the deals we’ve done and the momentum we carry into 2012.

I’m particularly excited by some of the things we launched to support the community and bring more value to our portfolio. Our Ambassador Program and Board of Advisors kicked off late in 2011, and both are bearing fruit already.

But as we reflected on the year, something was clearly missing. We realized that the incredibly active, robust state of the early stage market in New York had evolved in a way that was keeping us from doing some of what we like most – old fashioned, roll up your sleeves, small dollar seed investing. There’s been a tremendous grade inflation in the seed market – the average seed round is now well north of $1MM, with some so-called seeds as large as $4-5MM. In many cases we think this evolution has been driving entrepreneurs to overcapitalize their companies before they know where they’re going, and sell too much of their equity in the process. In response to that, today we are announcing our new High Peaks Seedlet Program.

Through our Seedlet Program we are returning to what we think seed investing should really be – small, high risk-high reward bets on great founders with truly nascent ideas. We will write checks as small as $25,000 and as large as $250,000. We’ll do some Seedlets by ourselves, and will partner with angels and other firms on others.  And we’ll move fast in our decision-making.

Admittedly the name sounds a little silly. We batted around a number of options before realizing that Seedlet was a name that everyone would understand. Our Seedlets will target companies that might be pre-product, or might be just a single founder with a brilliant idea. They’ll be high risk bets, but they’ll be made at the formative stages where we like to operate, and where we believe we can be most effective. And importantly for the community, they’ll be made at a stage where despite the hype around seed investing, hardly any institutional investors are actually playing anymore in New York.

We think we’re offering something unique and important here. It will be good for us, good for the companies we invest in, and good for the community. If the early signs we’ve seen since getting focused this stuff are any indication, we’re going to land in the middle of some really exciting opportunities. We hope some of our friends in the business will join us in venturing whole-heartedly back into true seed land.

We will close our first Seedlet this week – a $150,000 investment in an alpha-stage consumer web company (though it will be a couple of months before we announce it). We’re looking at a handful of others, as well. Ideally, we’d like to do 6-10 Seedlets this year.

So send us your ideas and leads. And if you’re an entrepreneur who’s trying to figure out just what kind of round you should be raising, drop me a line and we’ll talk. We’re always happy to objectively help entrepreneurs think through these critical early decisions.

Here’s hoping that 2012 is the year that seed investing returns to what it is really supposed to be, and here’s hoping that High Peaks is a big part of that.

Bill spent some time talking about how to try to manage the flow and cadence of an interview to your advantage. A lot of people fall into the trap of thinking too little, and talking too much. He offered some good advice on avoiding these traps.

First, Bill made the excellent observation that most journalists – and most smart people for that matter – tend to ask long-winded, overly explanatory questions. The trajectory of a single question, particularly in a focused, one-on-one setting, tends to go something like this:

Many of these meandering questions can take up to half a minute. Makes you wonder who’s supposed to be the interviewee sometimes! Bill’s point is that in a world of tough questions, you can do yourself a real service by recognizing that the question almost always comes twice, or is dead simple to guess at right away. So take advantage of that, and when you know what the question is going to be, stop listening and start thinking. You can usually get at least 5-6 seconds of thought in, which is an eternity when you think about how that time would sound as silence, if you started thinking only after the question was finished. And frequently you can get a fair bit more time than that. Use it wisely.

Second, as for talking too much, Bill emphasized that brevity is best. But in our efforts to sound smart and thoughtful, we often end up saying the same things twice and/or rambling on and on. But in an interview, you want to give the journalist those juicy little quotable nuggets. So keep it brief and make it easy for the nuggets to be found. If the interviewer wants more, she’ll ask for it.

Furthermore, Bill suggested that the vast majority of big PR blunders – those horribly regrettable, foot-in-mouth statements – come at the end of talking too long, continuing after the answer has been provided. So shut yourself up before you get into trouble. As he put it – know where your answer’s finish line is before you open your mouth.

Bill then wrapped up with his Five No-No’s of talking to the media. I’ve added a sixth, below, that came out of our Q&A:

1. Don’t answer “What if. . .” questions.  There’s rarely upside in getting into deep speculation. Journalists love to talk about things like “what if Google launches a competing product,” or “what if the government changes regulations about X.” Your best bet is to deflect it, acknowledging that you’re always paying attention to the dynamic environment, but focus on discussing what you’re actually doing, not what might happen.
2. Don’t discuss what you don’t know.   You’re not obligated to have an answer to every question. And you’re far more likely to get yourself in trouble if you stray outside of your comfort zone. So don’t do it. Either gracefully say you really don’t know enough to offer a helpful answer, or perhaps suggest that there is someone else in your business who is better positioned to answer that specific question.
3. Don’t predict, project, or assume things about others.  Similar to the “What if” questions, there’s just not much upside.
4. Don’t put words in other people’s mouths.  Stick with speaking about yourself, your company, and your views. Even if you know what others have said, there’s not much benefit in engaging in “He said/she said” talk.
5. Don’t respond to heresay. Journalists will frequently try to bait you with things they’ve heard in the marketplace. You are in no way obligated to respond, and responding to those questions can lead to accidentally answering, or implying things you didn’t intend to.
6. Neither speak negatively about the competition nor deny its existence.  Never take direct shots at the competition or any individuals. Never tear the competition down. It WILL come back to bite you. But don’t ignore or deny its existence, either. Be thoughtful, and acknowledge generically that there are others doing interesting things in the marketplace. But then talk primarily about what you are doing and why. You can speak generically about the others by saying things like “There’s a lot of interesting stuff going on in this space, and we looked long and hard at all of the players. But we saw a real opportunity in X, which we think nobody has effectively addressed. And that’s what we’re after.”

It was a terrific session, and I know all the folks on our team learned a lot. Hopefully some of that translated well here.

If I had to sum up what I learned in one thought, it’s that we should remember that an interview is something that we can exercise a lot of control over, if we’re thoughtful about it. And if we do, we’ll be much happier with the results. Finding time to think before answering, working hard to limit our answers to just the basics, rather than rambling on, having the confidence to defer and deflect questions that would not serve us well to answer – all of these things are in our control. Focus on them effectively, and you’ll serve yourself, and your company, much better.

For opening night, we chose to tackle the question of how to talk to the media. We hear from a lot of entrepreneurs that while they increasingly finding themselves talking to the media, speaking on panels and generally having great opportunities to advance their company’s message, they don’t really know how to make the most of those opportunities.

So we brought in Bill McGowan and Lucy Cherkassets of Clarity Media Group to do a media training session. And they hit it out of the park. These guys are seriously experienced in media training, having coached and advised the likes of Jack Welch, Roger Goodell, and leadership at some of the most important and exciting technology companies out there – Facebook, Google, Groupon, Square, Spotify, Gilt Groupe, and many more. Bill taught the seminar, and his style was casual, engaging, entertaining, and clear – just what we hope for in our faculty at HPU.

Bill is a multi-Emmy-winning TV journalist from a past life, so he comes to this stuff really knowing what he’s talking about. His thoughts are well worth sharing more broadly, so I’ll offer the highlight nuggets in some combination of notes and thoughts in this and a follow-up post. To begin, here are a few of Bill’s primary rules of the road for startup company media training:

1. Always Be Branding.  Don’t fall into the “pronoun-itis trap.” If you’re talking about your company, use your brand, not just “we.” When you’re building reputation and brand equity, you’ve got to constantly be hitting people over the head with your brand. Mark Zuckerberg has the luxury of just talking about what “we’re” doing. You don’t. If you’re talking about your company, make sure to use your brand name every minute or two.
2. Be a Storyteller. People want to hear stories, not recitation of facts. Think about the anecdotes that can bring your products and your business to life. And get in the habit of keeping notes on the best ones. If you have a compelling customer experience, jot it down. If there’s an interesting moment of inspiration in a product discussion, share that as you talk about that product’s launch. As Bill said, “good stories are catnip for journalists.”
3. Have a Key Message Checklist. And stick to it.  Bill was super clear that every founder/CEO should have in her pocket at all times a clearly thought out list of the handful of bullet points that she would want to communicate about her company in any media opportunity. If you don’t have that list, you’re going to miss opportunities, and end up merely answering the questions you are asked. Answering questions is all well and good, but it misses the point that when somebody creates a media engagement situation for you, they create an opportunity for you to broadcast your message to the world. Be prepared, so you don’t let the opportunity slip away.
4. Don’t Prepare Backwards. Very related to #3, and one that I found particularly interesting. Bill pointed out that what most people do when they are about to do a media interview or speak on a panel is prepare by trying to anticipate the questions they will be asked and then scripting their answers. “Backwards!,” Bill says. Refer to your Key Messages. Think about what you want this unique audience to hear, given the context. Be super clear about these points. Then listen carefully to the questions and figure out how to fit what you want to talk about into them. As Bill said, “a media interview is not Q&A. It’s a chance to talk about what you think is important.” This strikes me as a great point, but one you also need to be careful on – taken to the extreme, nobody wants to sound like a politician on this stuff. We’ve all suffered the pain of, for example, hearing Herman Cain think that a question about our Pakistan policy creates an opportunity to talk about his 9-9-9 plan. So be careful how you do it. But as Bill pointed out, there is no rule that says you have to only answer the specific questions.
5. Plan for the Worst. While preparing backwards is not a good idea, you should do some worst case scenario planning, and prepare for those questions that you desperately don’t want to be asked. As Bill pointed out, any good journalist will know what they are, and will ask them. Their job, at some level, is to expose you and make you uncomfortable. So don’t get caught off guard. Be aware of what might be coming, and have a plan.
6. Don’t ever get on the Phone Cold. This is one I’ve broken a bunch of times. Bill feels strongly that you should never ever just answer a call from a journalist and say “Sure, happy to talk. Fire away.” It’s always credible to say you’re in the middle of something and buy yourself at least a few minutes. Do it. But most entrepreneurs get so excited by having the opportunity to be heard that they dive headfirst into what might turn out to be a shallow pool (see #5, above). Your best bet, in Bill’s mind, is to say “Hey, I’m tied up right now. Can you give me an idea what you’d like to talk about and then I’ll call you right back?” Then put the phone down, pull out your key message checklist, and get focused. When your head is clear, call them back.

So there’s a start. This was a lot for me to chew on when I heard it the other night. I’ll share more – and specifically some of Bill’s “No-No’s” – in an upcoming post. But in the meantime, a huge thanks again to Bill & Lucy for providing this incredible education to us. I’d encourage anyone who needs help on this stuff to reach out to Clarity Media Group – they’re awesome.

Roger’s post did a great job describing how to manage the timing and flow of interest from a range of investors. It’s very important stuff, and you’ve got to pay attention to it if you want to optimize your outcome while also keeping your eye on the ball in running your business. But there’s another level you can take it to in working and planning to maximize success, and that’s how you plan and work to make due diligence happen on your terms, not on the random terms that investors will dictate if you let them.

Having observed hundreds of financing processes from both sides of the table, there are some clear patterns as to how they play out. One of the more troubling and time consuming patterns is that of the investor who is bumbling through his processes (and I’ll tell you, process is a generous term for what we VCs frequently put companies through!), feeling pretty interested in a company but groping aimlessly in search of that thing that’s going to get him and his partnership over the hump. You can burn a lot of cycles at this stage of the process. And I think it’s frequently completely unnecessary.

So how can you, as entrepreneur, speed things along? My shortanswer to this is to spend some time up front with people who’ve seen these processes dozens of times before (ideally a VC friend or a multi-time entrepreneur) and do the work to anticipate what all those derivative analyses and data requests are likely to be. Poke all the holes you can in your business. Think about your business like an investor will. Go so far as to do your prospective investors’ work for them. Assemble a collection of diligence materials in a Dropbox folder that you can give them access to.  Then, when you’re getting into diligence with a prospect, don’t let them get distracted. Drive them through that material.

A critical point to realize here is that there are two competing threads in the entrepreneur-investor dynamic. One is the thread of your story – what is the most compelling way to engage an investor’s interest and describe the problem you are solving and what your brilliant solution is. That narrative is generally best told with a real storyteller’s arc to it.

The second thread is that of the investment recommendation that the VC is ultimately going to write for her partners. That follows a much more plodding and analytic approach. You’d never want to construct your pitch deck around the outline of a VC investment recommendation – you’d bore those investors to tears. But you do need to recognize that it is this framework they will ultimately need to wedge your business into. So you may as well help them do it. Here’s a few key sections of that investment recommendation that you should address:

PublicStuff was founded by Lily Liu, a talented first time entrepreneur with Carnegie Mellon and Harvard Kennedy School degrees and several years working in municipal government in California and, most recently, in the Bloomberg administration. Lily, through PublicStuff, is taking a practical and elegant approach to helping governments better connect, communicate, and interact with their citizens – “crowdsourcing customer service,” as Lily calls it. And it’s selling like crazy.

PublicStuff helps governments extend customer service through web, phone, and mobile platforms that let citizens of PublicStuff communities report incidents (potholes, downed power lines, litter, etc.), check service status, and monitor resolution.

Using the PublicStuff administrative platform, municipalities can better track and manage resolution of service tickets, and eliminate the inefficient, usually paper-based systems that dominate these environments today in all but our largest cities. For both sides, it’s a simple, elegant, lightweight solution that is improving municipal service delivery in 50 communities across the country. Have a look at Plano, TX’s website to see PublicStuff in action.

Remember the movie Startup.com? It’s one of my favorite memories from Internet Bubble v1.0, when I got my start in the venture business. If you’re an entrepreneur who hasn’t seen it, watch it tonight. It’s a terrific historical perspective on the madness of the Bubble and the tragedy of its bursting, told through the experience of two entrepreneurs and their startup, GovWorks.com. The lessons about the challenges – interpersonal and otherwise – of building something from scratch are timeless.  The trailer is here:

Startup.com chronicles friends-turned-entrepreneurs Kaleil Tuzman and Tom Herman as they work to build GovWorks.com, a collection of websites that aimed to completely change every element of the way that governments and citizens interact. It was a totally logical, yet wildly ambitious goal. They raised $60 million of venture capital, grew from 8 to 250 employees in 2 years, and then imploded.

GovWorks was a business that, if more intelligently managed, deserved to succeed. So with PublicStuff, it’s been fun to think about successfully reinvigorating the failed GovWorks vision.  Fortunately for us, as investors, Lily is taking a far more rational and measured approach to capital raising and company building. I firmly believe that she will ultimately dominate the government services marketplace, but I think she’ll be a whole heck of a lot more thoughtful about how she gets there.

Consistent with Lily’s measured approach to building her business, we took a relatively measured approach to our decision to invest. It’s not that easy to take your time in developing a deep understanding of investment opportunities in today’s overheated NYC startup environment – things are moving far too fast in most cases. Fortunately, with PublicStuff, I met Lily just as she started this past summer’s ER Accelerator program. Biased by a pervasive belief in the venture community that any business that sells to governments is all but DOA, there wasn’t an overwhelming amount of interest from the investor community right out of the gates. But I was intrigued by what I saw, and signed up to be a mentor to Lily through the program.

It became quickly apparent that, unlike so many of today’s startups, Lily had identified a very real marketplace itch that needed scratching. Even as a tiny company with only a couple of employees, she was steadily signing up new customers, pushing out new product releases, and proving over and over that the market wanted what she was selling. Most impressive to me – she sold her first 35 municipal clients without ever meeting one of them in person.

We talked to several of those customers and heard rave reviews. In September I asked my colleague Rahul to join Lily at the annual convention of the International City Management Association to see her selling in action and to talk to as many potential customers as possible. By the end of the day, Rahul had become the company’s #2 salesman (no one will ever eclipse Lily), and had secured over 30 warm leads. He called me excitedly with a “fish in a barrel” report of his sales efforts. The PublicStuff offering is so strongly desired by these customers, and so simple to explain that someone who only tangentially knew the company was able to quickly become an effective pitchman.

With Rahul’s Milwaukee experience in hand, and a growing sense that Lily was a superstar of an entrepreneur, we had everything we needed and signed up to invest. We’re excited to have the deal closed, a terrific group of investors around the table, and a world of opportunity in front of Lily and her team. If you’re reading this, live in a town or small city, and want to help your municipality crowdsource its customer service, tell your mayor or city administrator about PublicStuff. You won’t regret it.

There were a number of sessions that really got me thinking, so I figured I’d jot down and share thoughts from a few of them.

After a brief welcome from VV Managing Partner Matt Harris on the morning of day 1 we were “treated” to a session on board governance, fiduciary duty, and how to keep yourself from getting into trouble as an investor director on an early stage company board. Not exactly the most fun topic in the world, but the folks at Pierce Atwood did a terrific job of keeping it real, relevant, and engaging.

The short summary is that being a director is, as we know, a serious responsibility. And being an investor director creates particular challenges and potential conflicts as we work to balance our dual roles as investors – with obligations to maximize the value of our share holdings, and as board members – with a responsiblity to all shareholders. Tricky stuff, and very important to be thoughtful about. Not surprisingly, the trickiest territory here is generally around bad news situations, where the preferred stock that venture investors generally purchase is in a position to be exercising its liquidation preference at the expense of other shareholders.

I walked away from this pondering one question in particular, about which we had had some fruitful discussion: Do VCs really need board seats? There’s certainly a lot of downside to being a director – exposure to all manner of litigation being the primary issue. What if we were to forgo board seats in favor of documented rights to serve as observers in board meetings? After all, it’s being privy to the information and having a voice in the discussions that really matters. Surely the combination of the moral suasion that comes from being a check-writer and the control provisions that are present in most every venture deal are where the bulk of our influence formally originates. Maybe we’d all be better off if we left the board exposure to others and spent our time more freely operating as non-fiduciarily bound advisors? It’s worth thinking about.

This governance discussion was followed by a real treat of a special guest. Gina Raimondo is the Treasurer of the State of Rhode Island, and used to be a peer of ours in the VV Network, having been an early VV employee and then working as a partner at Point Judith Capital. She ran for state office last year and won convincingly. If you’re not already aware of the amazing work she’s doing to overhaul Rhode Island’s busted state pension system, read this WSJ profile from the summer. We should find out this week if Gina is successful. If she is, little Rhode Island will offer a model for how to reform the dozens of other broken pension systems across the nation. These challenges are not widely enough discussed, but could have crippling impact on our state economies. It is so inspiring to see an old friend leading the charge.

Gina was followed by the Main Event, a 90 minute fireside chat with Fred Wilson of Union Square Ventures, interviewed/facilitated by Fortune’s Dan Primack. This was technically an off the record conversation, so I’ll respect Fred’s wishes by not sharing too many details. But one key takeaway: Fred reminded us all that he didn’t become the Tom Brady of venture capital overnight. He’s been at this game for over 25 years now, and had been at it for nearly 20 before founding Union Square Ventures in 2003. He took an awful lot of lumps along the way, and could probably be described better by Malcolm Gladwell’s Outliers framework than by assuming he is some Tiger Woods-esque prodigal savant. Or at least that’s what I’ll choose to focus on – gives me some hope that with another dozen years in the business I might get good at it! Regardless, a real pleasure to have the time with Fred, the man who built the firm that, with its innagural fund, was the first investor in both Twitter and Zynga, amongst others, and now has a very good chance to become the single best performing venture fund in history.

The downer of the conference was without question the discussion of the fundraising landscape for venture firms. As if we needed it, we had a collection of institutional venture capital Limited Partners to give us the confirmation. In short, it’s abysmal out there, with no reason to believe its going to get better anytime soon. State pensions like Gina’s are rapidly shifting asset allocation models away from venture, as are large university endowments, as they increase focus on liquidity and decrease risk tolerance. VC funds-of-funds are struggling to raise their own capital. Banks and other large financial institutions are almost entirely out of the game post-financial crisis. Go to a gathering of Limited Partners and you’ll struggle to find anyone who’s not making a risk-adjusted-returns oriented shift away from venture.

Ian Sigalow offered some good perspective on this last week. Bottom line, all but a very fortunate handful of VCs have some reason to fear for their (our!) job security in the medium term. Is that a bad thing? Not necessarily. The industry has gotten a bit crowded again, and I’ve always been a fan of creative destruction.  However, I worry about the speed and efficiency by which market forces will adjust in this case. Like many, I suspect we are headed for a medium term that involves a substantial continued shrinking of the venture industry and a resulting decrease in support for entrepreneurial activity. We’ll get through it, no doubt. Such a change will surely create opportunity, which will result in outsized returns and then a flood of funds back into the asset class. But it’s going to be bumpy for awhile. And in a macro climate where innovation and job creation are certainly in everyone’s interest, we as an industry are not going to be able to do quite as much as I wish we could.

The final session of note was a conversation with Dave Balter, founder/CEO of BuzzAgent, one of the early leaders in the Word of Mouth (WOM) marketing space. Dave is a terrific entrepreneur, and the BuzzAgent story is important for its lows as much as for its highs. Dave’s candor about the company’s meteoric rise, rapid fall, and his struggles to stabilize the company and reposition it were reflective and thought provoking. The conversation served as a compelling reminder that we have as much or more to learn from our struggles as from our successes.

All in all, a terrific couple of days. And always a real pleasure to be around my friends and colleagues from across the VV Network.  As with most such gatherings of peers, it was the dinner and cocktail conversations that offered the most valuable content. This is a hard business, and at times a very lonely one. Having a network of likeminded soldiers fighting similar fights has always been invaluable to me. I’m looking forward to our spring 2012 gathering already.

Inspired a bit this morning by Fred Wilson’s MBA Monday’s series, I’m dishing up a little remedial finance education:

I’m sick and tired of talking about revenue. Sure, I like companies that have sales as much as the next guy, but I think we need a little reality check in how we talk about early stage tech companies.

One of the commonly heard explanations for why the current frothy tech environment is so different from the late 90s goes something like this: “but hey, these companies have real revenue!” And indeed, a great many of them do. But that doesn’t automatically mean that they have business models that will work (see this ridiculous pre-IPO pumping of LinkedIn from Yahoo Finance, nary a mention of profit or business model to be found). And it certainly doesn’t mean that comparing two companies from different sectors on the basis of revenues makes any sense. Yet I hear entrepreneurs and investors alike regularly doing just that, as if a comparative discussion of revenue created an apples-to-apples conversation.

I can understand why this happens, and I’ve no doubt been guilty of it myself. After all, almost all the conversations I have with entrepreneurs and other investors are about companies that are not yet profitable – many of them years away from there. So we need something else to focus on, and thus turn to the top line, lazily comparing companies as if all revenue were created equal.

Surely we’d never compare Amazon & Google on the basis of revenue. They’re about equal on that front ($40B vs. $35B trailing twelve months), but Google is worth 80% more because it’s got a MUCH more profitable business model.

By the same token, we shouldn’t just talk about Groupon’s revenues vs. Dropbox’s vs. Eventbrite’s. Totally different businesses, totally different margin structures.

Let’s look at three successful publicly-traded technology businesses from different sectors. All are in the same ballpark revenue-wise, but with very different business models. We’ve got Intuit, (software), Juniper Networks (network infrastructure equipment and services), and Garmin (GPS devices and applications). And to make it interesting, we’ll throw in a traditional retailer (retailers are amongst the lowest margin businesses), Dick’s Sporting Goods.

Talking only about revenue totally masks the really important stuff, like business model dynamics and how they drive profitability. Investors are generally pretty good at recognizing this and digging deeper, but many of today’s entrepreneurs completely gloss over it, or somehow just don’t get it.An overly-simplified exercise, for sure, but you can see clearly from this example the folly of comparing businesses based on revenue. We’ve got only a 40% range on revenue, but that leads to a 200% range on gross profit, a 300% range on EBITDA, and a 350% range on market cap.

So I’d like to ask that we shift our conversations in StartupLand to focus on a much more important metric: gross profit. Sure, it’s not perfect, but it’s a lot better than revenue. It strips out the first and biggest place that business model differences can hide – how much does it cost to make and deliver those widgets you’re selling.

If you have to talk about one number for a high growth but still unprofitable tech company, I think it’s the one. So I hereby declare myself a gross profit guy.

I applaud today’s entrepreneurs for being dramatically more revenue-oriented than their counterparts of 10-12 years ago. But I would implore them to step up their focus on the profitability of their underlying business models, and focus there even more than revenue. For those of us in the investment community, or for the journalists and bloggers who shape so many people’s thoughts, we should provide some leadership on that front by talking at least in addition to revenue, about gross profit. That, at the end of the day, is what’s going to drive your ability to get profitable. Or not.

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As I sit here this morning, still lingering in the glow of a warm Fire (Kindle Fire, that is) out in Seattle, I thought it was time for a little lovefest. A big one, actually.

I’ve been a huge Jeff Bezos booster for quite awhile now. Those who know me can certainly attest that it I’ve been a booster of his vision and strategic genius since long before the recent bandwagonning, as the techno-press seeks a new messiah for a post-Steve Jobs world. This post is inspired by a story I heard recently that increased my admiration for Bezos tenfold. That story below, but first some backdrop.

Bezos’ key genius, in my mind, is that he has managed to maintain seemingly every ounce of entrepreneurial flair that led to his early success as ecommerce innovator, despite the fact that he now presides over an e-commerce Godzilla worth $100 billion. Amazon has for years now been on an apparent mission to define itself as the official rebuttal to Clay Christensen and his silly little Dilemma.

Nowhere has this been more impressive than in the ebook market. I think Amazon’s innovative work with the Kindle is in many ways more impressive than Apple’s work with the iPod. Sure, the iPod completely blew up the music business, but when Apple arrived at that party they had nothing to lose – every ounce of havoc they wreaked was going to be additive to their business, and if it didn’t work out it would have no damaging strategic impact on their core.

Amazon, on the other hand, faced the classic innovator’s dilemma. They had become the biggest bookseller in the world, and ebooks were merely the pathetically unrealized dream of Sony and others. But then, in 2007, Bezos took a shot across his own industry’s bow by introducing the first truly viable e-reader. And he took an incredibly aggressive and completely disruptive approach to making the product successful, selling most ebooks at a 40% loss in the early years so as to ensure that he offered a compelling pricepoint ($9.99) to the consumer. A mere four years later, the world’s biggest seller of books sells more ebooks than print books.

Have we ever seen someone so skillfully and unblinkingly stare in the face of their own potential irrelevance? If there’s a comparable example, I can’t think of it (the jury is decidedly still out on Netflix, of course).

But the Kindle was merely one in a series of genius and non-obvious strategic moves. Expanding beyond books & CDs/DVDs seemed an audacious strategic move a dozen years ago – go head to head with Best Buy? Are you crazy? General merchandise, the core of which is electronics, now represents roughly 2/3 of Amazon’s market value.

Amazon Web Services – the web hosting and rentable compute power business launched in 2006 – seemed preposterously off focus. Five years later AWS has almost single-handedly powered the Web 2.0 revolution while establishing a multi-billion dollar business unit for Amazon. A business unit with gross margins that are >2x the mother ship’s core ecommerce business. Nice.

While the Kindle and AWS are amazing for the scope of their impact, I think an equally fascinating stroke of disruptive entrepreneurial genius was the introduction of Amazon Prime – the $79/year membership program that offers members “free” 2-day shipping on every order they place.

I’ve been fascinated by Prime since it launched. It seemed like such a complex and risky strategic move. Clearly, I thought, the guys out in Seattle with the green visors must have known that they’d be instantly cannibalizing lots of highly profitable paid express shipping. And certainly there would be frequent-ordering, freight-paying customers who would shift their activity to Prime and instantly become less profitable.

The stakes around how Prime was priced and launched, it seemed to me, were pretty darn high.

Forgive the exposure of my inner geekdom, but I spent some amount of time imagining how enormously complex the spreadsheet must have been that took in all of their assumptions of the impact of Prime’s introduction on consumer behavior and how that would vary across different segments of Amazon’s customer base. The choice of that price had huge implications, it seemed. Get it right and you’ve got a bonanza on your hands. Get it wrong and you could seriously damage overall profitability.

Given that geeky fantasizing, you can imagine my excitement when I recently was introduced to John, a key member of the Prime launch team. We had a couple of minutes of normal conversation and then I couldn’t wait any longer. “OK, you gotta tell me. . .I’m fascinated by Prime. How did you come up with $79? How big and complicated was the spreadsheet that justified that pricing to the CFO? Did you test a bunch of prices? And how angst-ridden were you all when it launched about whether or not you got it right?”

He looked at me like I was some kind of over-eager freak and then said “I hate to disappoint you, but there was no spreadsheet.”

I couldn’t believe it. No spreadsheet?! No endless hours of analysis? No complex simulation models? How could they know they weren’t about to blow a hole in the side of their business??

He went on to tell the whole story of Prime’s invention.

Like a lot of companies, Amazon has a process by which any employee at any level can submit creative ideas to a sort of innovation committee. That cross-functional committee meets periodically and reviews everything that comes in. Some of the best ideas get pushed into active product development, and some are ultimately released to the market.

The idea for Prime came through that process and was dismissed unanimously by the committee. But apparently Jeff Bezos occasionally reviews everything that has come to the committee. In one such review he came across Prime and immediately recognized its genius. The holiday season was approaching, and he wanted it implemented immediately. So he ordered a team assembled and gave them a 6 week timeframe for fleshing out the offering and launching it. The team worked round the clock, and Amazon Prime was born.

So where’d the $79 price come from? John confessed, “Kind of out of the air. Amazon has always had a strange corporate culture obsession with prime numbers, and 79 was the prime number that felt closest to the right price. But we had no idea if it was actually right.”

The point that the committee missed, but which Bezos realized, was that Prime was not simply an incremental change in shipping options. Bezos realized that, if successful, Prime would massively impact the entire Amazon business by fundamentally changing consumer decision-making. For customers who joined, it would make Amazon suddenly, and without question, the first place they thought of for virtually any online purchase. It became, effectively, a source of everyday free shipping (there’s powerful psychology in our ability to forget the money we’ve already spent on the membership). For partner merchants, it created a powerful incentive to use Amazon’s fulfillment services, so their goods were eligible for Prime shipping.

John said, “We knew that it could be as fundamental a change as when photo printing went from one week turnaround to one hour. It completely changed the interaction between consumers and the photo printers, and the near-immediate turnaround expanded the relevant occasions for photo taking. We wanted to fundamentally change the mentality around online shopping, to expand the occasions where Amazon was the relevant merchant.”

Man, were they right. My wife and I resisted for awhile, but we became Prime addicts a couple years after it launched. It has had a steadily growing impact on our shopping behavior, and now nearly every thought process on where to purchase something starts with Amazon. Why get off the couch on Sunday when you can get it sent to your door at no cost on Tuesday? Early this year I really knew they had me when I found myself unscrewing a dead light bulb one Thursday night and, rather than making a note to go to the hardware store on Friday, I went to Amazon right then and ordered four new bulbs for delivery on Saturday.

I said to my wife at the time, “I think our bank account is fast becoming a mere small subset of Jeff Bezos’s bank account.” You win, Jeff.

While Prime is an ingenious business strategy, I think the real genius is what Joe’s story tells us about Amazon’s nimbleness. Now #78 on the Fortune 500, the company has not lost the core agility and nimbleness that defines all great startups. It’s impossible for me to imagine someone like Microsoft or IBM or Wal-Mart or Verizon making such a bold and, ultimately, intuition-driven decision as Bezos’ launch of Prime. They would have first required the McKinsey report and the parade of presentations up the chain of command and then six months or more of carefully calculated market testing. They might have gotten there, but in the process several other potentially great ideas would have been denied the opportunity to bubble to the surface.

At Amazon, Bezos saw an idea, thought it was important, and said go. Six weeks later, it launched. Sure, that approach will no doubt result in mistakes. But mistakes are usually fixable. Failing to act, or stifling an idea before it even gets an audience, is not.

I don’t know where Amazon is going next, but I’ll be actively watching, and very happy to be a shareholder. At least as long as Jeff Bezos is around, they have everything required to reinvent themselves as often as it takes to continue to find new sources of growth.

And for those who aspire to be the next Bezos and create the next Amazon, remember this Prime story the next time you feel reluctant about pushing something out into the market before its been studied and tested to death. If Amazon can emulate the best of the Lean Startup, surely you can.

Bubble or no, it is a simple fact that there is more money flowing right now than there has been at any point in the past ten years. More money is flowing, and more deals are getting done, than at any point since Internet Bubble v1.0, back in ‘97-‘00. The chart below shows quarterly dollars invested and deals done for “First Round Financings.” This represents the number of new companies being funded by VCs, and the dollars associated. These are what I believe to be the most relevant metrics of the frothiness of the environment.

First Round Financings – Deals and Dollars Invested, Q3 2001 – Q2 2011

source: National Venture Capital Association

This environment is enabling a fabulously exciting wave of innovation. But an inevitable, unintended consequence of this environment is that we’ve lost something of the ruthless Darwinism that I think characterizes, at the micro level of any individual company, the healthiest environments for innovation and disruption. In a world of freely flowing cash, companies are able to raise more, hire more, and spend more. The bloated balance sheets of so many startups obfuscates a lot of sins and inefficiencies. That readily available cash enables managers to dodge tough choices, and to abandon a focus on efficiency in favor of an unbridled race for growth.

This all came into renewed focus for me last week when I ran into John Roland, co-founder and CEO of ExtremeReach, on the Acela from NYC to Boston.  John’s company is without question one of the most exciting companies in the Boston scene right now. ExtremeReach is the emerging leader in management and distribution for both offline and online video advertising. It’s been a rocket ship since raising its series A three years ago, and is finally getting the attention it deserves. In just a few short years, John has built a business with revenue that is well into the eight figures, and he’s wildly profitable (think Google-style operating margins).

I passed on leading John’s Series A a few years back, and I’ve since tracked the company closely (painful as that has become!). As John and I were catching up I said to him, “I want you to know, John, that I’m well aware of how wrong I was to have passed on this business.”

John’s response was interesting. He said, “You weren’t wrong, Brad. When we were talking we were so early, and we didn’t have our model figured out yet. We were too hardware focused. You were right that our business was too capital intensive, and that our implementation model was going to make it harder to sell.”

He continued, “Looking back, in many ways the best thing that happened to us was failing to raise capital early on. It made for a very painful year, but it forced us to completely reexamine the business, and we came out in a much better place. I don’t know if we would’ve ever gotten to this point if we’d had the luxury of a lot of capital early on.”

John’s a very bright and reflective guy, and it was interesting (and somewhat comforting) to hear him think back on that transition. While it’s nice to hear him acknowledge that maybe I wasn’t completely wrong, that’s cold consolation when I consider that I did not stick with him and work with his team through the transition to the model that is currently kicking butt. C’est la vie. . .

John’s story is a great example of why, bubble or no bubble, I worry about the ease with which capital is flowing these days. If ExtremeReach were to launch into today’s financing environment, John and his team would no doubt have an embarrassment of options on their hands, even the story they were selling was that original, hardware-intensive model.

And as John recognizes, that’s not a good thing. The availability of capital would have encouraged the pursuit of a suboptimal strategy for some time before realizing how wrong it was. They would have lost valuable time in a competitive marketplace, and likely had to take on more dilution to keep themselves going.

It would be foolhardy, of course, to suggest that every company is somehow better off with less capital. No doubt some great companies would have failed if they hadn’t been able to access abundant early resources. But I am a fan of the discipline and scrappiness that is bred of limited resources, and John’s story is a great example why. Limited cash has a way of focusing managers on what is truly essential, of exposing and rewarding only what really works in an emerging business model.

While the capital continues to flow, I’ll certainly be encouraging most of our companies to eat when served. But not in every case. And even with those that do build big balance sheets, we’ll be aggressively coaching against the sloppy decision-making those resources can enable.

Regardless what your balance sheet looks like, I’d encourage every company to go through the exercise of imagining “what would we do if we had less?” You might be surprised by what you conclude. You might even decide to do it.