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Taking The Leap

When I left BigLaw, the plan was to start PlexMarkets, an exchange where anyone could trade futures contracts whose value is tied to patent litigation outcomes. The idea was to give companies that are frequently sued for patent infringement the ability to transfer patent risk to the capital markets and to give investors with an appetite for exotic risks the opportunity to invest in a new type of high-yield bond. 

It wasn’t a bad idea, but what was missing was a standardized and widely accepted method of pricing patent risk. Without risk pricing methodologies, there was really no chance that market participants would be willing to transact on the exchange.

Market readiness for an idea is one factor Noam Wasserman uses when he frames how people should think about taking the leap to start a new venture. The essential question is whether the market is ready for your company’s offering. In his book The Founder’s Dilemmas, Wasserman also says would-be founders should ask themselves whether their careers have equipped them with the skills, network, etc. required to run the companies they want to start and whether they have a firm family/financial foundation to support them through the ups and downs of founderhood. 

This short video does a great job of explaining Waserman’s framework in more detail.

Wasserman suggests re-thinking your plans if you find yourself deficient in any of the three areas - career, market, and personal. Based on his analysis of data from thousands of founders and early-stage ventures, he suggests that’s its better to wait until you optimize in each of the areas than it is to leap if you’re deficient in any one of them. 

Things get interesting when people take the leap anyway. If people waited for all the conditions to be just right, they might never start something new. And thinking about founderhood simply doesn’t lend itself to the same risk-reward framework you might use if you were trying to price, say, a patent bond. People are driven by their passions, and they use things like faith, persistence, or an “I’ll figure out” attitude to fill in the gaps.

There’s a fourth factor that’s at play here, and it’s your gut. Experience teaches us that the proverbial gut check is as important as your self-assessed progress along the other dimensions. Getting good at knowing when to trust your gut is just as critical in founding your new venture as is gaining skills, timing the market, or feathering your nest egg. Innovation by its very nature leaves founders with incomplete information, and they base important decisions on gut checks all the time. That’s not a bad thing. In fact, I’d say that the best founders understand almost intuitively when they should set aside analysis and trust their gut instincts instead. 

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Sriracha Sauce Empire

I love Sriracha sauce. It goes with everything. I put it on chicken, eggs, in stir-fries, you name it. I go through more of this stuff than catchup. You could say I’m a fan of this brand. 

Which is why I was eager to read an LA Times profile on David Tran that my colleague Frank sent me. Mr. Tran is the founder of Huy Fong Foods Inc., which distributes the delectable hot sauce in the clear bottle with the rooster and green cap. The profile gives us a little bit on Mr. Tran’s background:

When North Vietnam’s communists took power in South Vietnam, Tran, a major in the South Vietnamese army, fled with his family to the U.S. After settling in Los Angeles, Tran couldn’t find a job — or a hot sauce to his liking. 

So he made his own by hand in a bucket, bottled it and drove it to customers in a van. He named his company Huy Fong Foods after the Taiwanese freighter that carried him out of Vietnam.

The LA Times reports that Huy Fong Foods doesn’t own a trademark to Sriracha, that the company ran out of inventory in 2007, and that Mr. Tran has no interest in anything but sauces.

Yet, the company sold $60 million worth of sauce last year, and its revenue is growing at 20% per year. Not bad. 

No trademark, no brand extension, supply chain management problems, and no e-commerce capability. This is heresy in the world of consumer products, especially these days, where new brands are launching online every day, each one with a grand product vision and a founder vying to build a meaningful business. 

Would I have invested in Mr. Tran’s company if I were given the chance? Mr. Tran has never taken outside money, so I probably never would have been given the opportunity to back Sriracha.

When his supply of chilis ran out, Mr. Tran could have substituted supermarket jalepeños or brined peppers in his recipe. But that could have ruined his product, and he decided instead to ask his customers to wait for him to fill their backorders. (They did.)  

Mr. Tran came to the U.S., a former SVA major on the wrong side of a bloody conflict, with a seeming determination to grind it out. His story and the story of how he built his Sriracha empire is a reminder of what a committed founder with nothing to lose and an obsession with his product can achieve.

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Give, Match, Take.

I spend a good chunk of my time meeting with founders, giving feedback on businesses, fundraising decks, IP strategy, whatever is needed. Most of these meetings don’t lead to an investment, and many of them involve companies that aren’t a good fit because they’re too early, off-theme, or something else is just off.

So why take the meeting? I suppose it’s because I just like to be helpful. And I suspect I’m not any different than other VCs I know who value “good citizenship” and want to strengthen the start-up communities where they live. One friend, a VC in NYC, actually enjoys taking a meeting with a founder who just wants feedback more than he likes meeting with a founder who is explicitly seeking capital from his firm. As a VC, he says “no” a lot, and saying “no” is not fun. With a feedback-only meeting, he can be helpful within a discreet period of time (e.g. a 1-hour coffee meeting) without having to ding the founder at the end. His thought process makes a lot of sense.

All of this makes me think of Adam Grant’s research on how giving and helping behaviors make people more productive at work. The Times recently profiled Grant and his research. He reminds me of my favorite teachers: generous almost to a fault, always available for office hours, motivated by a deep desire to positively impact students’ lives. 

I’m eager to get my hands on Grant’s new book, which looks at how a person’s orientation to giving back affects his or her career progression. The Times reports that

Grant’s book, incorporating several decades of social-science research on reciprocity, divides the world into three categories: givers, matchers and takers. Givers give without expectation of immediate gain; they never seem too busy to help, share credit actively and mentor generously. Matchers go through life with a master chit list in mind, giving when they can see how they will get something of equal value back and to people who they think can help them. And takers seek to come out ahead in every exchange; they manage up and are defensive about their turf.

I’ve seen all three types throughout my careers in science, law, and VC. We all know the takers; they’re the people who only reply to your e-mail if and when there’s something in it for them. They’re generally to be avoided. The matchers are harder to spot. They seem like takers until you realize that they’re happy to give you what you need so long as you bring something valuable to trade to the table. Finally, we love the givers - people who are generous with their time and resources and who seem to give without regard to what they can get in return. We need more people like that in the world. 

Indeed, the research says that most people are matchers. It’s hard to be a giver all of the time. People have family, friends, financial obligations, and other priorities that conflict with opportunities to give. Even taking can sometimes be the right approach. Sometimes you just need to sit there and receive what the other person is generously offering to give you. 

Ideally, I’d like to spend most of my time in giving-mode. Keeping track of what I’ve given and who owes me is exhausting. And the thought of consciously taking from others without the smallest thought to how I can reciprocate is just gross. 

I can’t say I’m there yet. Depending on the situation, I’ll give, match, or take. I can’t say yes to every meeting or request, but I’m trying to get better. For now, it’s good to learn about research that validates an intuition I’ve had for a long time: professional success isn’t at odds with helping others, and, sometimes, nice guys finish first.

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The Rise of the Government-Backed NPE

Reuters reports today that the governments of France and South Korea have set up entities whose main purpose is to aggregate patent portfolios. According to the story:

Both countries have launched patent-acquisition companies, with the goal of helping domestic technology firms and possibly making some money in the process. China and Japan are making moves into the business too.

Government efforts aimed at developing and commercializing home-grown intellectual capital have a long history and a mixed track-record. However, buying patents on the secondary market as a way of advancing economic policy is something governments have not traditionally done. 

Aside from the novelty of this model, the rise of the government-backed non-practicing entity (“NPE”) is interesting for a couple of other reasons. Apparently, France and South Korea are getting into the patent aggregation game despite the reputational risks that come along with looking like a patent troll. Just a few years ago, some friends of mine with  solid private equity and patent experience were on the verge of raising a sizable fund to execute a patent acquisition and monetization strategy. Their lead investor, a European government with a diversified investment strategy, backed out at the last minute over worries that it would suffer serious blowback from being seen as the financial investor behind a patent assertion campaign. My, how things have changed.

Will the new model work? I think it depends on whether the goals are strategic or financial. The fact that France and South Korea are managing their respective programs themselves suggests that both countries are pursuing strategic objectives for now. Otherwise, I would have expected each to have partnered with professional fund managers who would run their acquisition and monetization programs for them. As the Intellectual Ventures source quoted in the article said, generating financial returns from monetizing patents can be surprisingly difficult. If that business weren’t hard enough, it now faces political risk in the form of the SHIELD Act and other measures the U.S. Congress and agencies are considering as ways of disrupting the patent assertion business model. 

France and South Korea are probably smart to focus on trade policy and other strategic imperatives. Over time, it will be interesting to see which governments join them in the patent space, how the goals of government-backed acquisition evolve, and the track record governments establish in meeting those goals. 

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VC Perspectives: Bill Gurley & Bryan Roberts

One thing I want to do with this space is to start chronicling some of the thoughtful approaches to early stage investing that I come across on the web and elsewhere. I think it will be good to keep track of sage advice and valuable perspective as they contribute to my own education on the art and science of investing in startups.

Last week, lots of people were discussing Bill Gurley’s interview with Giga OM. I really like the conversational style of this interview and the plain spoken manner in which Bill talks about a number of topics. He just breaks it down.

His thoughts on what it takes to be a VC resonated with me, especially the idea that VC is a service business. It’s pretty clear to me that successful VCs have a service-orientation to the profession. They’re either really good at serving the interests of LPs or serving the interests of founders. Usually, they’re good at both. The chance to serve founders as an investor and advisor is one of the aspects of the job that attracted me to VC, and I like when I see other investors (and founders too) who have a orientation towards service. 

Here’s the full segment where Bill discusses what it takes to be a VC:

Today, I read a piece by Bryan Roberts where he gives his take on the Series A Crunch and seed stage investing. Here’s the money quote:

For me, seed investing is not a low cost, little-time-required option on the A round.  It is a big investment of time and effort in order to be intimately involved in the formative stages of a company, despite the fact that the dollars-in and percentage ownership don’t hit usual venture fund metrics.

When “commitment front-runs the money and ownership,” you just cannot do a whole lot of seed stage deals. This means that Bryan’s approach is incompatible with the whole “spray and pray” approach that conventional wisdom says is critical to generating financial returns from a seed stage program.

A typical seed stage investor simply doesn’t have enough time in the day to maintain the same level of commitment across all 50-90 portfolio companies in his or her fund. (That’s right. I’ve heard it said more than once that a seed stage program needs to involve 50-90 investments in order to deliver financial returns to investors.)

Of course, Bryan and Venrock are not typically involved in seed stage deals. But wise founders will appreciate the difference between taking seed money from someone, like Bryan, who says he’s front-running money with commitment versus working with someone who views a seed deal as not much more than an option on a startup’s next round of financing. I think the later approach is a lot riskier from the founder’s perspective. When the going gets tough, as it almost always does, the operative approach of the investor could mean the difference between being able to raise a follow-on round or not. And for a startup, that’s the difference between life and death.

Related articles

• Gurley and Om (avc.com)
• Data on the “seedpocalypse” (tomtunguz.com)

The PAE Conference on Twitter

I just got back from the one-day PAE conference jointly hosted by the Federal Trade Commission and the Department of Justice. It was a lot of fun. The conference room at the FTC where the event took place was packed. A number of FTC staff said that they had never seen as big a turnout for an FTC conference on patents or on any other subject. And, as I had hoped, there was excellent viewpoint diversity among the invited speakers. 

A lot of the action took place on Twitter, and I think you can get a good feel for the discussion by reading the tweets that were coming out of the conference. I’ve gone ahead and Storified some of them. You can read them below.

Related articles

• PAE Workshop (a.k.a. Patent Troll-Con) (nonbillabl.es)
• Federal Trade Commission, Department of Justice to Hold Workshop on Patent Assertion Entity Activities (ftc.gov)

PAE Workshop (a.k.a. Patent Troll-Con)

On Monday, I’ll be at the PAE Activities Workshop, a one-day conference that the Federal Trade Commission is hosting along with the Department of Justice. PAE stands for Patent Assertion Entity, which is the relatively innocuous label the FTC uses when it refers to patent trolls.

I’ve posted the workshop agenda below. The speakers list looks great, and it’s apparent that the organizers have made viewpoint diversity a real priority. This is the right approach. Too many events where patents or the patent system is the topic start with a contentious premise (e.g., all software patents harm innovation), accept the premise as true, and  involve only those speakers who agree with the premise. The result is one big echo chamber. 

Today’s event is part of the FTC’s ongoing effort to assess the effect patent assertion is having on competition. Just before Congress passed the AIA, the FTC wrote a mammoth report on PAE activity, which I gave mixed reviews when it was published. I’m looking forward to today’s discussion and will be live tweeting the workshop throughout the day.

Related articles

• Two events on Monday, December 10. (patentlyo.com)
• Feds to take a closer look at patent trolls with patent trolls (arstechnica.com)
• FTC, DOJ to Hold Workshop on Patent Assertion Entity Activities (ipwatchdog.com)
• DOJ looks into patent trolls, affects on high-tech competition (bizjournals.com)

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