CEO

Dave McClure on why seed-stage startup valuations have been increasing

price-insensitivity by 2 types of investors:

newly-minted / n00b angel investors, who have more money than experience, and/or are in it primary for fame more than fortune… in my first few years after leaving PayPal, I was in this category. while I did have tech expertise, I had limited knowledge of startup pricing, legal structure, or terms, and limited ability to change or negotiate much anyway. many current and ex- Facebook, Google, Twitter, LinkedIn, & Zynga folks fall in this category. they are eager to get in the game, and are probably not doing it as much for returns as for cool / fun factor. same applies to non-valley investors who want to get in on big-name valley deals. (or angels from less-active regions looking at more-active regions).

I completely agree.

I definitely qualify as a n00b investor. But I’m not doing it for fame. I’m doing it to help other startups and give back to the community. And to make money.

My rules for investing:

  1. I only invest in products I use myself. Heavily biased towards consumer and mobile.
  2. I only invest when the deal makes sense. I won’t over pay for an investment.
  3. I won’t ask for advisor shares. A company can offer them if they see value in my help.

I’ve passed on many companies that I love and I think have a good shot at being successful. The deals just didn’t make sense for me. Investing in early stage startups is very risky.

Early stage startups raising rounds at high valuations are losing investments from super helpful, super active angels/super angels like Dave McClure. That’s unfortunate.

Sometimes companies are giving angels advisor shares in order to offset the high price of the round. That’s one way to get around the price issue.

But another way is to stop raising rounds at crazy valuations. The price of your round matters much less than who is in it and what value they add outside of the money. Experience counts for a lot.

A CEO needs a strong board

Boards create an atmosphere of accountability for an organization, which drives performance (and many other positive qualities) from the top down in a business. Budgeting and planning, reporting on performance, organizing and articulating thoughts and strategy – all these things are crisper when there’s someone to whom a CEO is answering.

As a startup founder and CEO, you might get trapped into thinking you want a board that’s very hands off. You want to keep full control over everything.

Actually, having a strong board is a huge advantage. Being challenged every day, getting an outside view that might be a little clearer than your own, just being accountable to someone else… all lead to being a better CEO and running a better company.

I love the debates we have in our board meetings. Sometimes they stress me out, but at the end, Posterous always comes out ahead.

The CEO should not be the CFO. Delegate that work as soon as you can afford to

I just ran payroll for the last time.

Last month I hired a part time CFO who will be handling payroll and about a hundred other legal and finance related tasks that I’ve been taking care of since I started the company almost three years ago.

It was tough giving up this responsibility. Until now, I was the only one signing checks, dealing with employment and stock paperwork, going through the stacks of paper mail that’s delivered to my house every week.

But I got to point that I had to offload this work to someone else. It was getting in my way. I had a bookkeeper, but that wasn’t enough.

Being a founding CEO puts you on a slippery slope that takes you away from doing what you love most, working on the product that led you to start the company. I even wrote about this last year, but I didn’t take my own advice. 

How did I end up spending so much time on operations work? It sneaks up on you. There was no single day when I had a giant stack of work on my desk and thought, “Hey, I should hire a CFO to take care of this for me!”

Instead, every day or every week, there was something new to take care of. New employees, new benefits, additional vendors, more bills to pay, more expense reports to review, more paperwork to sign. It just kept building up over time.

As these items come up, the CEO has to take care of them, there is no one else. And I enjoy doing this stuff. I grew up doing the books at my dad’s restaurant. But that’s a mistake. Even though you could do it all, it’s not the best use of your time.

Last month our new CFO came into the office and I transferred all the finance knowledge that was in my head over to her. It was an incredible relief. Not only did I gain a ton of time that I could now spend on product, hiring, and other more important tasks…I also gained peace of mind. I finally had someone else looking at our finances and helping me with the operations side of the company.

It’s hard to bring yourself to give up this responsibility, trust someone else, spend money on another expense. But believe me, it’s worth it. I should have hired a CFO a year ago.

Update: Got a couple good questions. When should you hire a CFO? Right after your raise a series A. Even if you are just 2 or 3 people, it’s worth it. You pay per hour so it doesn’t matter if it’s 5 hours per month or 50, it’s just great to have someone else dealing with that stuff.

What’s the difference between a bookkeeper and a CFO? We had a bookkeeper for a while and she did a great job paying invoices and keeping expenses in quickbooks. A CFO goes beyond that. Think of a CFO as a member of your team with a legal background. They can interface with your lawyers, handle all contracts, prepare an operating plan, and go beyond a bookkeeper.

Does business school teach people how to assert power, before they’re actually ready to be leaders?

Last week Trinity Ventures had a CEO leadership dinner, which included a really great talk by Dr. Deborah Gruenfeld, Professor of Organizational Behavior at the Stanford Graduate School of Business.

Dr. Gruenfeld’s talk was titled, “Acting with Power”. She explained how behavioral cues affect perceived levels of power.

  • You can demonstrate authority when communicating with someone through body language. For example, expanding your body to take up as much space as possible, making direct eye contact, and speaking slowly.
  • Even if you are in a situation with power, there might be times you want to “play low” in order to get what you want. You bring yourself down to the level of the other person. 

There was some role playing, including a situation where someone played a manager in need of work and someone else played the assistant. By not calling the assistant by name, by not looking them in the eye, by not even waiting for a response before storming off, the manager could assert power over the assistant and get stuff done.

Dr. Gruenfeld teaches this stuff to business school students at Stanford. So I left with one big question:

Should business school students be taught how to act with power, before they have earned it?

I was never formally taught how to communicate with people, regardless of power level. I learned from watching my dad, through my managers at Apple, through trial and error. I still don’t claim to be great at it, but I learn more each time I speak. If I talk to a customer at my dad’s restaurant, a teller at a bank, or a bouncer at a Las Vegas club, I act differently to try to get what I want.

Last year when we bought our house, the then-property manager of the unit was terrible, he almost ruined the sale. Yet I played down to him, bought him a six pack of beer, often blamed mistakes on my lack of knowledge, always gave him the benefit of the doubt so that he would stay on my side and help me. On the inside, I knew he was a moron.

 

It seems wrong to me that business school students are being taught how to act in situations they have never been in, how to assert their power over people, perhaps before they even have any.

Silicon Valley startups have a bias against business school graduates. As engineers, we like to think that great innovation means coming up with interesting ideas and actually building them. Young business school students sometimes come off too strong, too cocky. Young product managers talk down to engineers. Could classes like this one be causing that?

Business school should stick to teaching the mechanics of running a successful business as much as possible, and leave the psychology out of it. The interpersonal part of running a company is best learned organically, with experience.

Simply teaching people how to assert power over people and then sending them off into the real world seems a lot like the Stanford Prison Experiment.

You should follow me on Twitter here.

Health insurance options for startups

I wouldn’t go a single day without good health insurance, and I wouldn’t let any of my family be without this protection. Annual physicals and random checkups are one thing, but having insurance in case of a major emergency is absolutely essential.

I never had to think about health insurance while I was at Apple, but once I quit, I was on my own. Since our country doesn’t give us health care, we have to do all the research on plans and rates.

Here are my findings, thoughts, and recommendations after setting up health care for Posterous. This isn’t meant to be definitive in any way. I would love feedback and suggestions.

When I left Apple, I elected to go on Cobra so I wouldn’t have to spend time researching

When we Posterous in June, 2008, I elected to continue my Apple health care through COBRA. I was paying over $400 per month, so it wasn’t cheap, but it meant I didn’t have to think about health care for a while.

When you are starting a company, you want to spend every waking moment coding and building. Trying to figure out which health plan to sign up for was not good use of my time. Instead, I paid the premium and knew I had great coverage.

If you can get it, Anthem Blue Cross Tonik is a great option for cheap health care

The requirements are strict, but Anthem Tonik plans are great if you can get one. These are meant for young, healthy people. You get a few doctor visits a year, a dental checkup, prescriptions, all the basics included. Anything after that falls into a high deductible.

Most startups go with high deductible plans, but these incentivize you to skip going to the doctor when you are sick

The most common health insurance plan I see people signing up for is Anthem Lumenos. This plan is designed for companies who want to keep costs low. It covers preventative care, but everything else falls under a high deductible.

What I didn’t like about this plan is it disincentivizes you from seeing a doctor when you are sick. Do you have a cold? Do you need a prescription? If you know you’ll be paying out of pocket for this, you might choose to skip it. I wouldn’t want someone at Posterous to skip medical care they want.

For Posterous, I chose a high deductible plan that still gives you office visits and prescriptions

After doing a lot of research, I chose to go with the Anthem Solution plan. It’s similar to Anthem Lumenos in that it’s a high deductible PPO. But the main difference is normal office visits and prescriptions are covered, even before you satisfy the deductible.

The max out of pocket is higher for Solution than it is for Lumenos, but I think that’s a fair tradeoff. I’d rather optimize for the common case (random doctor visits) than for the edge case (major medical emergency).

It’s actually really unfortunate that we have to think about these issues at all. We shouldn’t have to make sacrifices when it comes to health care.

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