Berberian's Blog

Rhythm of Communication

Over the last seven years I have made several angel investments - all of them at a seed stage. A couple I have been intimately involved with as a board member but most of them I’m just a passive investor that from time to time will meet with the CEO/founder and offer some advice.

Two things are clear for me as I reflect on my experience: 1) 2 in 10 will probably pay out - the rest will just go away and 2) the two that will pay out have great communicators as CEOs.

Being a great communicator doesn’t make you a good CEO - but good CEOs know how to communicate. They not only know what to say but also know the rhythm of communications.

A good rhythm of communications in my world has three key ingredients - frequency, data and analysis.

Frequency: Be a clock - predictable. As an investor I want to be kept up to date on what’s happening with the company. As a CEO the last thing I want is someone to ask my investor, “How’s ACME doing?” and they reply with “I don’t know I haven’t heard from them in a while.” Investors are some of your best spokespeople - you should update them frequently - once a month is a good rhythm plus any special events. A simple email will work - maybe a face to face every few to six months. As the company matures once a quarter or twice a year is fine especially if they have a formal board. Bottom line - be consistent - don’t provide info one month then skip three - then it just feels like something is wrong. Set a reminder on your calendar. If not much has changed - then the email is short and sweet - but it isn’t absent.

Data: Just the facts. Investors want the key info on the business. As a CEO I want my investors to have the info to understand the current dynamics of the business. Regardless of stage - state the cash position, burn rate / profit, status of fund raising activities (if any), sales, key metrics etc... Bullet points and tables work great. Don’t make folks hunt for the pulse of the business, it should be front and center. Use attachments for details if that is necessary.

Analysis: Under promise and over deliver. This is the narrative section. This is where I as a CEO tell the story of the business through my eyes. I try to communicate the good and the bad but really try to avoid extreme happy or sad. I want to be perceived as an optimistic realist that is in control of the key issues of the day. As an investor I like to see CEO reflect on the goals of the business and the steps he/she is taking to get there.

In the end establishing a rhythm of communications forces you to pause and account for your activity back to your investors. It is a time to reflect and perhaps self assess your progress. If you are writing the update and say to yourself, “Geez I haven’t done much these last 30 days” then its time to kick it into high gear. If you never update your investors (blogs don’t count they lack lots of vital info) - you’re losing an opportunity to get more champions to sing your praise and you are holding yourself accountable to no one. If you rely on simply responding to inbound requests for info - you’re making the job 10x harder than it should be and you are letting the investor plan your day. Get in rhythm.

Proud Father

My daughter, Marlo (age 14), decided to write two songs for her 8th grade capstone project. I didn't have a capstone project in 8th grade - maybe I just went to a slacker school - well times are different. Anyways she did this on her own with the help of her gracious mentor, Monica Augustine, and some expert recoding assistance from Tom Higley. Monica is playing the piano and Tom is everything else. It took us about 3 hours to put this all down, however, Marlo has been working on the piece for several months.

Huge thanks to Monica for coaching Marlo not only for this project but for the many years of voice lessons. Tom - thanks for opening up your home on a short notice to help Marlo put a professional finish on this project.

Enjoy.

When to Fire the Sales Guy

I've hired and fired several sales execs in my life (not a 1:1 ratio but pretty close). Selling is hard - the average sales exec probably has a half life less than 24 months. Maybe I'm just bad at picking them.

Here is a typical decision tree that I used in the past (note I just made this up five minutes ago but it summarizes my thinking at the time). What is really hard for a sales guy are the "maybe" decisions. If the tech guy is really good - he may convince the CEO that the product is fine but the sales team just doesn't know how to sell.

So if you are in sales - my heart bleeds for you. You have an incredibly hard job in an incredibly tough market. Remember it's not you (well it may be you) - it's just the nature of the job.

What is Really Amazing about US Air Flight 1549

For you non pilot types who don't read aviation blogs some interesting tidbits...

All pilots practice over and over for loss of power right after takeoff - it is one of, if not the most dangerous part of a flight (landing is the other dangerous part - at least for commercial aircraft). Ditching a plane - landing in water - typically results in the loss of life. When you touch the water, there is a high likelihood the aircraft can catch a wing or hit at an incorrect angle which may cause the plane to spin and break into pieces all at a lethally high speed. Very bad. From AV Web:

"U.S. Airways Flight 1549's ditching into the Hudson is all the more remarkable given the relatively poor odds of all occupants surviving such an accident. But it has happened at least once before. In 1963, an Aeroflot twin-engine Tu124 enroute to Moscow ran out of fuel after trying to sort out a landing gear problem. The crew ditched on the Neva River, the aircraft remained afloat and was towed to shore. All 52 occupants survived.

In May 1970, a DC-9 enroute to St. Maarten from New York ran out of fuel after three missed approaches at St. Croix. After a ditching in poor weather, 22 of the 57 passengers died, along with one crew member.

One of the most spectacular ditchings occurred in 1996 and was caught on video by a tourist. An Ethiopian Airlines 767 had been hijacked and forced to re-route to Australia. It ran out of fuel and ditched off the Comoro Islands, midway between Madagascar and the African coast. Ten of the 12 crew members and 117 of the 160 passengers were killed, despite almost immediate rescue efforts from people nearby on the beach. Later analysis of the video showed that the aircraft dragged its left wing, initiating a turning moment and break-up sequence."

Another tidbit, the pilot was also a glider instructor - so he had a meaningful amount of experience landing without an engine - that said he probably never flew a glider as big as an A320!

Amazing flying - miracle story.

My Trip to Monterey

This past week we went on a family trip to Monterey with some friends. I was excited to get out of town - not only for the change of scenery but also to play with Renee's Christmas gift - a new DSLR with HD video. My job in the family is to make sure my wife and daughter have coolest gadgets - maybe a little self serving - but they are like minded so it's a win-win. Below is our first attempt at using HD video - enjoy the show (especially the orcas making a move on a little seal!).

Monterey from Paul Berberian on Vimeo.

Partner Dynamics and Nuclear Warheads

MAD - Mutually Assured Destruction - not only is it a Cold War strategy - it is my method of dealing with partner dynamics.

For example, three of you start a business. One founder takes the role of CEO (highly recommended, otherwise it confuses the investors - co-CEOs seldom work). In the typical organization, the CEO gets the final say when there is a disagreement - unless his/her co-founders decides to go nuclear.

The principle is simple: you and your partner(s) each possess one nuclear warhead for the life of your business - just one (you can’t buy or build more). In all matters the CEO has the final word - except if one of the partners launches his/her warhead. At which point - for that one decision - the matter sides with the one that partner. If multiple parties launch, then the CEO must launch to set the matter right.

In practice it has worked well for me. When it comes to warheads everyone is equal which keeps the dynamics of a true partnership. Everyone can win a huge decision - once. As such, the warhead becomes so precious that it never gets used - the mere threat of a launch sets off a series of diplomatic discussions. Using the warhead is a signal that the partnership has broken down - the ultimate wake-up call that something is wrong. It is designed as a measure of last resort - everyone fears being in a company post detonation. If a warhead is detonated, it will be the beginning of the end.

Here is a real life story. I was the CEO of Raindance - Todd my partner/co-founder had the only warhead left in the company other than me (the hired senior management do not get warheads only partners/founders). We had a member on the senior management team that was very disruptive (a relatively new hire). I wanted to give the dude some time to work things out, Todd wanted him gone. We talked and argued about the matter but I stuck to my position. One day Todd had enough and said he was ready to push the button and launch his warhead. In the past 6 years Todd never even threatened to launch until this day.

I was shocked. I went home that night and thought about how I misread his willingness to go along with my decision - I was losing his trust and confidence. The next day I came in and negotiated a deal with Todd. I decided to fire the guy but I needed 6 weeks to stabilize the leadership team - Todd agreed with my time-line as a compromise. Todd was happy, he backed down and all was right with the world - the missile was still in the silo. Getting rid of the guy was absolutely the right decision.

If you respect your partners - MAD works - at least in my world.

Closure or Just Another Day

I went for a walk yesterday with my friend Jim. We stopped by the post office to get my personal mail and I noticed an envelope I have seen numerous times over the last two years but never opened (I’ve let Renee have the honors).

That envelope contains a check from the individual that hit us head on July 28th, 2003 (administered by the State of Hawaii). On that date, he was released from jail at 8:00am. He decided to get high on crystal meth and go for a drive. He walked away from the crash with minor injuries - impact speed of over 120mph – we didn’t.

Jim asked what I would do if I saw him. I thought about it for a split second and said, “Nothing. Maybe I would say something lame like, ‘What goes around comes around – have a nice life.’ I have no grudge – I don’t even know his name.”

Today I opened it (it is all he can afford to pay based on his life circumstances). As you can see he will remember us for a very long time – at least 100 years at this rate.

How the Pie is Sliced – My Simple View of Startup Economics

Many years ago, I was discussing with my father the appropriate chunk of equity to give some new partners in my first startup – they were negotiating for equal ownership. He offered this observation: Only man distributes things evenly – God doesn't give everyone the same slice of pie, why should you – if you put in all the money, you should have the largest ownership stake.

That makes since – but as I interact with many new entrepreneurs, I still encounter those that think/hope they can hold on to their precious equity. It is a rare situation where a founder owns the largest piece of pie by the time the company is sold (if they use outside financing).

Look at this very simple table:

Entity	Founding	Angel	Series A	Series B	Series C
Founder 1	50%	35%	21.4%	11.9%	5.3%
Founder 2	50%	35%	21.4%	11.9%	5.3%
Option Pool		10%	10%	10%	10%
Angels		20%	12.2%	6.8%	3.0%
Series A Group			35%	19.4%	8.6%
Series B Group				40%	17.8%
Series C Group					50%

 

There are numerous assumptions with this basic model. I assume that with each round more options are placed into the pool to attract employees. The amount of dilution is not set in stone (green box) – but from where I sit, it's about right +/- a few points either direction. If you need to bring in a CEO expect to give up 5% if it is later in the company life – more if it is earlier (up to 10%) – this may come from the option pool if there are enough shares to accommodate the hire (btw COO 2%-3%, CFO 1% -2%). The investors from one group will usually participate in subsequent rounds to maintain their ownership stake. It is common to get some options from round to round as a reward for a job well done – but usually they do not make up for the dilution from the fundraising.

Dilution and amount raised aren't necessarily linked. Money raised is more a function of the opportunity and investor. A huge opportunity requires an investor that can fund the company to success – a smaller opportunity requires a smaller investor. Each investor, however, needs a piece of the pie that makes sense for their fund. It is unlikely a VC with a large fund will put in a little bit of money early on for a small stake – they need to invest proportionate to their fund size and anticipate future rounds of financing.

So how do you protect your equity? Grow as fast as possible with the least amount of money. If you think you'll need lots of cash – resign yourself to dilution – and raise money when you can. The lowest a founder/CEO will be diluted is around 5% - that is no investor will dilute you to 1% (unless they don't like you) – they will grant options to make your ownership stake interesting to keep you engaged in the business. Other positions will likely fall below the CEO. When I was at Raindance, by the time we went public I had about 4.6%. If you can get to profitability very quickly – do so – it will help with future fundraising, maybe even eliminate the need altogether.

So how do some companies raise gobs of cash with less dilution – it's simple they are having huge success. If you are dominant in your field and you are growing like crazy, you'll be able to give up less equity with each round. If, however, you are doing well but your victory isn't certain –then expect dilution. If you are doing just OK – then it gets harder.

Other ways to protect your ownership: grow slow and use profits to fund expansion, use debt if possible (think credit line, home equity or rich uncle), fewer founders means fewer slices of the pie, go further with less and of course there is always the chance to sell early if the right deal is on the table.

I know there are numerous examples of companies that don't have this type of dilution (those are the ones everyone talks about)– but the bottom line if you aren't on fire – dilution will happen – and from there you'll just have to sell for more to make your piece interesting for you.

 

The First Time...

There is always a first - first kiss, first bungie jump, first heart attack.  In flying – there are a lot of firsts.  As a passenger in a private plane, I suggest you fly with pilots that aren’t doing things for the very first time – it may not be more safe (the pilot may still be reckless), but it will make you feel better.

Last week I took a walkabout to inspire my creative thinking.  I chose to fly myself from Rocky Mountain Metro (KBJC) to Burbank (KBUR).  I asked my good friend, Peter Hoskins, if he wanted a free round trip since he is doing the commuting thing anyways (maniaTV’s offices are in Hollywood – Peter their CEO, is moving out west next month).  Peter was more than happy to go – and has flown with me in the past (he’s not a pilot).

The trip out was fine.

The morning of the trip back there was a low cloud layer over the entire LA basin – only a few hundred feet thick but low enough so that you couldn’t leave the airport unless you were on an instrument flight plan.  Flying through clouds is normal – but it also can be disorienting if you don’t keep your head in the cockpit and fly by the instruments alone.  In fact, a very high percentage of small aircraft accidents (maybe the highest percentage) occurs when pilots get disoriented in the clouds, lose control of the plane, only to then execute a sudden, unexpected, fiery, final landing.

I’m an instrument rated pilot.  I’m current in all my flying requirements to fly by instruments. I’ve trained for flying in the clouds in a simulated environment and I’ve actually flown in real clouds (just a little bit 11/700+ hours  - not much opportunity to fly in clouds in CO either it’s ice or thunderstorms and both are killers) – but always with an instructor – never alone.  Wait I did go in the clouds once with another, less experienced pilot – but that didn’t go too well.

So this early morning in Burbank, Peter is waiting for me in the lobby of the FBO and I approach him and say, “Dude it’s cloudy.  I have to tell you something – I’ve never done this before without an instructor.  I’ve trained for it and I think I can do it – but you have to know this will be a first.  We can wait until the clouds lift in five hours and overnight in Vegas or we can go now – either way I’m happy.  I also have to tell you I’m a little nervous.  So what’s your decision?”

His reply was perfect, “Dude – you’ve trained for it, you seem safe, let’s give it a go, I trust you wouldn’t do anything you weren’t confident about.”

So we go and I explain to him the process of what I was doing – more as a verbal checklist for me than a way to calm him down.  We get in the plane, start the engine, get our clearance and it was different than what I expected – which made me more nervous.  I planned to fly to X then Y then Z and they told me to fly to G then S then L.  So I had to sit there and figure it all out in real time.  The night before, I familiarized myself with the flight plan - now that plan was all wrong.  So we sat in the plane, on the tarmac with the engine running while I studied the new routing.  At one point, I even whipped out my cell phone and called my instructor to ask questions (he also gave me words of encouragement – but I’m sure that made Peter nervous).

Thirty minutes later we were airborne sailing through the clouds.  Everything went just fine (obviously I'm still alive) – it was easier than I expected and my nerves calmed down very quickly after takeoff.

Ok so check that one off the list – first time flying in the clouds without another pilot or instructor.  Thanks Peter for saying yes and not freaking out.

Zenie Bottle Lives Again as Spark...

Zenie Bottle site is back as Spark.  We sold the technology to Lifepics - they have re-branded it as "Spark" and integrated it with their platform.  Jim Booth has the story in more detail.