Heidi Roizen, Entrepreneur and investor, DFJ
Heidi Roizen is Operating Partner at DFJ.
Watch on YouTube
45:46 
Heidi Roizen is Operating Partner at DFJ. She has spent her life immersed in the Silicon Valley ecosystem as an entrepreneur, corporate executive, venture capitalist, educator and member of the boards of directors of private and public companies, trade associations and nonprofit institutions.
After receiving her undergraduate and MBA degrees from Stanford University, Heidi co-founded T/Maker Company (an early personal computer software company) in 1983, where she served as CEO from inception through its acquisition by Deluxe Corporation in 1994. In 1996, Heidi joined Apple as Vice President of Worldwide Developer Relations. From there, Heidi entered the venture capital world, serving as a Managing Director of Mobius Venture Capital from 1999 to 2007.
Heidi is also a Fenwick and West Entrepreneurship Educator in the Department of Engineering at Stanford University, where she teaches the course Spirit of Entrepreneurship. Heidi is a member of the boards of directors DMGT (LSE:DMGT), ShareThis and XTime, and serves on the advisory boards of Springboard Enterprises and the National Center for Women in Information Technology.
Michael:
(00:04) Welcome to CXOTalk this is number- this is episode number 76. I’m Michael Krigsman and I’m here with my – you know I lie in bed at night –this is really true. I lie in bed at night thinking of superlatives about Vala Afshar, my co-host. Vala, how are you?
Vala:
(00:26) I’m doing well. I was frightened where you were going to go with that story.
Michael:
(00:29) It could go anywhere but I think we do – we need to shake hands
Vala:
(00:33) Hi great to see you.
Michael:
(00:35) Vala I keep wondering like what’s the point of shaking hands because we don’t have a fist bump camera hand-shaking cam.
Vala:
(00:41) Maybe CXOTalk can invest in a fist bump cam.
Michael:
(00:44)I think we need a fist bump camera. But, we’re here today with a really wonderful guest today, Heidi Roizen who is – I was going to say you’re an iconic entrepreneur and investor.
Heidi:
(00:58) Thank you, that’s better than calling me a pioneer.
Michael:
(01:01) I’m sure you have been called…
Heidi:
(01:03) That’s what I always people say, a pioneer.
Michael:
(01:07) Well let’s say an iconic entrepreneur and investor, Heidi Roizen. Heidi how are you?
Heidi:
(01:12) I’m good it’s great to be here.
Michael:
(01:14) Thank you so much for joining us.
Vala:
(01:17) Heidi, would you kindly share with us a little bit about your background and your work.
Heidi:
(01:24) Sure. Well I’m a venture capitalist with DFJ, I teach at Stanford and I am a long time recovering entrepreneur. I don’t think you ever get over it exactly but born and raised here in Silicon Valley went to Stanford undergrad and my Stanford business school started a company with my brother right out of business school back when you didn’t do that. Back when that was the dumbest thing you could possibly do and it ran actually for 14 years, so have lots of war stories from that times.
(01:57) Sold it, went to Apple, and spent a year at Apple as the BP developer worldwide developer relations. That was a time in Apples history that was – well I used to joke, I didn’t need to watch psycho dramas on television I could just go to work every day.
(02:13) So fascinating time, I learned a lot and really interesting and I’m an Apple fan and still, you know spend tons of money on Apple products. Left that in 97 and joined the world of venture, so that’s kind of and been on the dark side ever since I guess so.
Michael:
(02:31)So you’re an operating partner which means you actually do stuff.
Heidi:
(02:36) I do stuff yeah!
Michael:
(02:40) We thought these things, so tell us what it is..
Vala:
(02:43) I love that, you actually do…
Heidi:
(02:45) I did that see, the DFJ Café that was my idea so there we go. I’m the cup innovator here at DFJ.
Michael:
(02:53) So tell us about the things that you do.
Heidi:
(02:57) Well you know I actually have a really fun here. I was a managing director at a different fund for eight years, so I was one of the people on the front lines for deals and now I’m kind of on the backlines of the deals, which is really great.
(03:12) I manage the younger deal team, so the analysts and associates that are out there on the front lines, going to events, meeting startups and hanging out in Soma.
(03:23) And we meet every week and we figure out what we should be doing, and what we should be and working out with their senior partners. I am a partner so I do sit on the partner meetings and the deal teams and that sort of day.
(03:39) So some of my day is spent evaluating entrepreneurs but I am not leading deal here. I sort of more the extra pair of eyes on a deal and look at it and give advice.
(03:51) I worry about things like the DFJ brand. I worry about our marketing, our events on our relationship with our limited partners and you know whether the website is there or not, and I also run a group called DFJ services which is a small team but we try to help our portfolio companies with PR, talent, hiring, business development all that kind of stuff so.
(04:16) I just try to make entrepreneurs happy that they took DFJ’s money in the way that we can help them to do once they have already taken our money. And I help those other people find those entrepreneurs; you know the ones we want to invest in on the first place.
Vala:
(04:31) So in terms of working with young entrepreneurs and making them feel happy and I know you teach at Stanford business. Can you talk to us about tenants of a happy life or a happy career and how you can achieve fulfilment as an entrepreneur?
Heidi:
(04:49) (laugh) Well that’s an easy question for you and I am going to correct you, I actually teach in the engineering school at Stanford and not in the business school. Although I’m an graduate of the business school, but and I love the business school and I go there, but I love the engineers. I love to get them when they’re raw you know and try to help them understand the world of entrepreneurship.
(05:07)So you know, it’s a super interesting question and we could go on and on forever about it. But I think that the core of being an entrepreneur is to be excited and passionate about what you’re doing.
(05:20) I think people want to be entrepreneur’s because they think it’s a cool lifestyle, or they think they’re going to get rich or they think it helps them you know, pick up dates at the bar at the south of the market.
(05:32) I think those are really dumb ideas. Entrepreneurship is really hard and for most people it takes a really long time and you don’t exactly have the super balanced lifestyle while you’re doing it. And if you’re going to do it, this is an extreme sport and if you are going to do it you better love what you are doing, you better love the people you’re working with, and you had better understand that there is a high chance you’re going to fail.
(05:55) So it’s that interesting balance, I was going to say be at peace with failure, which sounds contradictory. You have to do everything you can to try to not fail. But if you fail you need to learn from what you just did, pick up and move on and not let it keep you down because you know if you stay down after you fail you are going to stay down.
(06:16) Most successful entrepreneurs that I know have had failures and you know you don’t want to say you are proud of your failures. It’s not so much about look at the way that I did a great shity job that I did doing something. It’s more about I this and it didn’t work and here is what I learnt from it.
(06:31) I don’t know any successful entrepreneur that doesn’t have at least a handful of stories about the things they did that went horribly wrong.
Michael:
(06:39) But there is this image of this popular cultural image of entrepreneur as hero today, and you must run into that when you meet some entrepreneurs I would imagine.
Heidi:
(06:52) Well hero is an interesting term I mean I think every entrepreneur believes that they are the hero of something right. Every entrepreneur is trying - you’re trying to solve a problem, hopefully you are trying to solve a problem that people have. Sometimes you’re trying to solve a problem that people don’t they have yet, which is even some of the most interesting deals right. Who knew we needed tablets before there was tablets and things like that.
(07:17) But you know entrepreneurs come in all different shapes and sizes, they come in different ethnicities and they come in different age demographics, and they come in different genders. So far they are all human species but you know never want to rule out anything else.
(07:34)I just think it takes all kinds and there isn’t a – you know we joking I refer to it as sent from central casting right. There isn’t necessarily an entrepreneur that is sent from central casting. There is a spec and you know, there is an argument whether that spec is should you confine yourself to only people who have engineering masters from Stanford. Well I think you are really limiting the world if you do that, but on the other hand there certainly has been a track record of success from people like that.
(08:01) So, I don’t know, you know I think entrepreneurs and heroes come in all shapes and sizes.
Vala:
(08:06) Can you talk to us a little bit about maintaining your right relationship between a VC and an entrepreneur.
Heidi:
(08:14) Sure, you mean once the investment is made, before the investment is made.
Vala:
(08:20) How about before the investment is made.
Heidi:
(08:22) I was going to say, which part of the romantic cycle.
Vala:
(08:25)I’m interested in both but yeah.
Heidi:
(08:29) I think the thing about it is and anyone who reads my – I write a blog post which I know you guys know, and I am super super about relationships right, I’m kind of all about relationships.
(08:42) So to me, the venture capitalist entrepreneur is a relationship and it is not a transaction. I think the mistake that entrepreneurs pitch VC’s and they go and make these when they first meet a VC is that you think that the VC is like a bank, right.
(08:56) I don’t want to write a blog post about this and I’ll try it out on you guys, it’s like when I was an entrepreneur I thought VC’s are banks and they are an infinite amount of money. I go and pitch them and if I don’t screw up they will give me their money and then go away and leave me alone.
Michael:
(09:10) But isn’t that why you are so popular, you as the class of VC’s because no large bank and if entrepreneurs come and pitch you you know you are just going to give the money.
Heidi:
(09:20) Yes of course I’m going to give them the money – no! I mean that’s the problem and you know once I became a VC, I understand as a VC it is actually a limited amount of capital – it sounds like a lot of money, you know.
(09:31) I mean our current fund we have $325 million, for most entrepreneurs that sounds like a heck of a lot of money. But we are going to invest that across let’s call it 35 companies, so so you have less than 12 million totals to put in their company.
(09:47) We are going to want to be staged diversify, the sector diversify and time diversify and each partner believes whether you believe it as the entrepreneur or not that we are going to come in and add value and we have to pay attention to the deal right.
(10:03) We have to be on the board, we have to help you grow the company and that’s our job and whether sometimes people do it well and some people don’t do it well. So each venture capitalist is going to do one or two deals a year.
(10:15) So if youthink about it from the venture capitalist money and you think I am going to do one or two deals a year, but I am going to meet with a couple of hundred. And you are sitting there going are you the one of two people that I am going to tie myself to for the next seven years or whatever it takes to get liquidity in a normal market. That is a very different thing from going to a bank and applying for a loan.
(10:36) My comment to entrepreneurs is look, 99% of the time you are meeting with a venture capitalist is not going to result in money coming to you. I’m talking about traditional venture, I’m not necessarily talking about start-ups and you know, there are other great models and I don’t know what they’re admin rate or hit rate is.
(10:59) But a place like DFJ 99/100 meetings is going to result in a no. So that is a really dumb waste of time for an entrepreneur, unless what you are really here to do is build a relationship, right. And you know what does that mean, why do you need VC’s in your life. Well, I can give you one good reason is that if you are raising money, you are going to raise money lots of times and we are going to continue to invest money and if we don’t give it to you this time, we might give it to you next time.
(11:27) The other reason is because we look at the pitches all day, it’s kind of what we do. So if you can get a VC to agree to give you feedback, and even if you come in and say hey, I want to pitch you - right after this I have a meeting with an entrepreneur. He is not raising money right now. He said I want to come in and pitch you, he is a repeat entrepreneur, so it’s not just having operators standing by and we can do this for everybody. But you know it is an entrepreneur that I believe in and I think the deal is too early for us. He says I want to come and pitch you, and I want you to tell me where on the pitch you get lost, where do you not like what I’m saying. What turns you off, what turns you on.
(12:06) Because he is going to take that information and he is going to keep honing his pitch but presumably it isn’t just about the pitch it’s about the business. He is going to take what about knowledge I have in my head about that and apply it hopefully to his, and we are going to build a relationship.
(12:21)I’m going to think about how does he think, how does he respond, how can we communicate around those things. In this case I know this entrepreneur quite well, but in other cases I might meet an entrepreneur where it is way too early to do the deal for DFJ to invest.
(12:36) But I want to see if they say they are going to do something in the next 30 days, do they do it. You know, if they say this is the metric theory that they are aiming for, do they hit that metric. If I offered to make an introduction and they get excited about it, do they follow through.
(12:50) You know, these are the things you learn and to me those sorts of things help inform whether this is a person that you believe is going to get over the finish line and you believe you want to back or not.
Michael:
(13:02) So for you the business idea is a component of that investment decision, but fundamentally you are looking at the quality of the person and is this person reliable and so forth.
Heidi:
(13:20) Yeah, I mean here’s the thing, I would much rather have an A person with a B+ idea, than a B person with an A idea and you know, you struggle with this all the time. Because the reality of it is I’m not going to run your company, you’re going to run your company and you have to be kick ass to run your company and you have to be smart and aggressive, and you have to be a good leader and you have to be passionate and get people to come along with you. You have to be able to make decisions, you have to be able to sometimes pivot - often to pivot and get the data and say oh-oh, we were going here and the market is telling us we need to go here, and we need to go here and what do we need to do to go here, and how much money do in need.
(13:58) I mean again, different entrepreneurs have different skill sets and they need to recruit around them, their partners and team members to fill in for that. But at the end of the day, most entrepreneurs I know are pretty dynamic people with lots of cycles and those are the kind of people you want to back.
(14:16) Because the reality is that if you take an average player, even if it’s a great idea - the problem with today is that you know with the cost of what it takes to start a company and the increased amount of capital and services and support available, if you have a great idea about something probably another hundred people have that same great idea. And that’s the scary part.
(14:38) people think that the idea is the thing worth protecting and I often think around more often or not it’s around the team and the execution is what determines who is going to win and who’s not.
(14:50)Again, if you go and look at the success that’s out there, and you go and look at the bigger companies in tech that we can all point at, for every one of them there was something that looked a lot like it that came out before it and it just wasn’t as successful.
Vala:
(15:04) Do entrepreneurs use social media to connect with you and your firm and if so is it successful?
Heidi:
(15:13) Sort of I mean interestingly, I’ve met - we haven’t done a deal yet from someone I have met through response to blogging. But I have taken five or six meetings from people who I have gotten to know because they have responded to my blog and said hey, I thought this was interesting, and I know that you said this or that.
(15:35) And in fact in particular, something that I am super happy about is some of those have been women and women have some great companies, and by the way these are women who are super qualified, they have actually raised money, and these are people that I’m really happy to know that I may have not known otherwise but because they read my blog and they resonated with some of the things that they’ve said, they have reached out to me.
(16:03) So I’m finding that is the case and I have certainly had some conversations on Twitter with people. I’ve certainly – you know one of the things that is great for me is when I get to meet someone, and if they blog and if they have a presence on Twitter, I can sort of get to know them through that as well.
(16:22)You know, people ask me, why do you blog. Well, one of the reasons I blog is that I’ve got some information I want to share and I hope it’s useful. After teaching at Stanford for five years, I find the same topics, over and over again and I thought that if I put it out there on a blog other people can benefit from that or not.
(16:35) But the other reason is I think that it lets people know who I am and I do think of going back to your VC/entrepreneur relationship is that it’s a relationship. We are going to be together for seven years or whatever time it takes.
(16:51) I am as a VC is going to be judged by your results, by who did it pick and how did that turn out. So we really need to know each other.
(16:59) So for example to me ethics are really important, and I say that in my blog posts that ethics are really important. So I’m hopeful that I’m putting myself out there I’m telling entrepreneur’s, hey, if you’re one of those people who makes up numbers, I’m probably not the right VC for you.
Michael:
(17:22) We have a question from Twitter, and Vala, after 76 shows you would think that you and I would be a little bit less polite with each other. So if you want to say something and I’m talking, just do it!
Vala:
(17:39) Yeah, I try to be polite with you Michael. We do have a question from Twitter.
Michael:
(17:44) But we do have a question from Twitter, that was just a sort of internal public service.
Vala:
(17:51) I’ll interrupt you definitely next time.
Michael:
(17:54) So we have a question from Twitter, and this is from Frank Scavo, who is really one of the best enterprise software analysts and he asks, Heidi, you must get a lot of start-ups that want to pitch you. How do you decide which ones to take time with and talk to?
Heidi:
(18:13) So that is a great question, so they come in from all places and first of all all the referral sources are important and when anyone sends us a deal, we pretty much take the meeting. We are big investors in SpaceXTesta and you know we are big investors in Boxx and Aaron is an angel investor and says you should look at this, then we will pretty much go and look at those.
(18:39) We also get deals that come in that we don’t necessarily know people and we have taken those meetings. You know, I think again back to that thing that entrepreneur think VC’s as banks and every deal, you just apply for the loan and you get it or don’t.
(18:52) But here we have certain theses around some markets that we think are ready for disruption. And one of them for example we have been doing some healthcare IT investing, because we believe in that space.
(19:04) When a deal comes in sometimes it goes to a specific partner because there is a prior relationship and if it’s in that partners sector they look at it and they make their own independent decision.
(19:13) Sometimes a deal comes in and it’s not it doesn’t go to the right partner or it comes to me and they think of me as a little bit of a deal traffic cop, right. I work with our junior team and we might look at the incoming deals and we sort of have a clearing house place, where we have one person who is in charge of everything that comes in that wasn’t specifically owned by a partner to take a look and to understand where it’s coming from, who is the entrepreneur. Take a look and kind of say, hey is this sector, stage, space the kind of thing that we might look at.
(19:45) And everybody is kind of on their own about who takes the meetings, sometimes we will bring them up at Monday partner at meetings and say, hey, here’s one that came in and it sounds interesting. It sounds like a pretty random process but you know, you have to remember we have 10 people on the venture deal team and we probably get let’s call it 100 deals a week that come in that aren’t specifically directed to somebody.
(20:12) So really you know, you look at this and make decisions and you kick it around. We’ve tried more formal processes but I don’t think it really makes sense for us. That’s the kind of process we use and you know, again so much is understanding where this person is coming from, what was their background, where did they work, how did they come up with the idea.
(20:35) It is so much more than send me the one page and I’ll make a decision. Now of course, a lot of deals that come in and I’ll call it unwashed. They come in and its occupant high, I don’t know you, I don’t know anybody there but here’s my pitch. They are just not going to be a fit, because they are going to be outside the sectors and we try to be explicit on our website about here are the sectors that we do.
(20:58) Although DFJ is pretty broad and we do a fair bit, but we are not going to do a new soft ice cream vending machine - I mean now I say that watch, there will be one. But you know that there are certain geographies we don’t cover. We don’t cover really early stage outside the US.
(21:19)We have a sister funds and once in a while I refer someone somewhere else, but we have just found that it can’t when it’s you know, a guy, a girl, a dog and a laptop and they are sitting in the Lithuania, we can’t really do that right.
(21:31) So there is a lot that we can rule out fairly quickly but we take a lot of meetings why not, that’s the other thing. We take a lot of meetings.
Vala:
(21:40) Where do you like to invest, I mean you give us a sense of geography and stage but you know we hear today, Michael and I we were at three conferences and Internet of things and wearables and apps and social, mobile, Cloud and big data, all of these you know I think last year big data was the buzz word and this year it’s Internet of things. But is there a particular area that fits your investment thesis sweet spot.
Heidi:
(22:11)me, I’m in the background so I’m actually traffic copping for the whole team. But you know, if you look at some of the more recent successes that DFJ has had, Tesla, Boxx, which we were in super early. Solar City, SpaceX a lot of Elon companies, thank you Elon we love you, Planet labs.
(22:36) I think for example you know, you will see a theme around a lot of those as very disruptive and very disruptive in the space industry and that is the space that Steve Jurvetsongot excited about very early right.
(22:49)If you look at Boxx, we were the first investors and that’s a space and enterprise that Josh got excited about very early.
(22:57) So I think the thing is you know, when you feel like – like I’ll give you an example. Food delivery. We don’t have a food delivery deal and you know what, here is the thing about food, big market. Everyone eats a couple of times a day and we have looked at food deals and it’s like, okay now everyone has their food deal and some of those are going to be successful.
(23:23)But that might be where we say, okay now you know, maybe food creation or maybe artificial labs where they can make meat without animals involved, may be that is where we need to go if we are interested in food.
(23:34) So we like to think that we live out a little bit on the crazy edge of what people are doing. But not with everything. You know, there are other investments that we make and another investment that we made is Doximity it’s not the business that you look at and go, oh those those people are crazy right. I mean it’s a business and I look at it and I say, hey, this is a rational reasonable business and it is the next step. And you know, what happens when people want to socially network around a particular profession and that provides services and it makes sense.
(24:09) So, kind of you know what gets us excited is what I think gets us excited is that revolutionary stuff where you’re like, this person may be crazy, or this might really work. If it works, it’s a multi-billion-dollar, that’s the stuff honestly we really get excited about.
Vala:
(24:25) So you’re investing in the person of the team before the idea is that a fair assessment.
Heidi:
(24:34) I mean it is both, I mean we don’t really invest in people who walk in and say, hi I’m brilliant, back me in whatever I want to do you know, we don’t do that.
(24:42) But I would say that if you were a fly on the wall in our partner meetings, the discussion of the space is the discussion of the person is long or longer than the discussion of the space. Because by the time we take the meeting the space is the space, and the interesting thing about a lot of spaces is that you can analyze them where you can see if they are competitive or not what’s the total available market, what does the business model in that space look like. I mean you can model out and you are not always right. But you can model out different industries and especially stage, right. If you are already talking to a company that is doing some revenue, you know especially our growth fund; we have our sister fund DFJ Growth and you know they are investing in companies where there is more stuff to do diligence, because they have customers and they have revenue.
(25:38) For us, it is so much about the person and sometimes we know people and we’ll invest in them again because we know them, we’ve worked with them and by the way, sometimes we investing people that we don’t necessarily make money with.
(25:54) You can have a great company and be a great person and sometimes you can still fail, so you know on the other hand we love to invest in people that we’ve made money with before. But getting to know that person is really important, and you don’t know everyone you are going to invest in. So then it is always using our network to figure out what can we learn about these folks.
(26:14)But I would definitely say that it’s ultimately the decision is more often than not the decision falls on the ultimate determination of the person and not so much about space.In thinking about it in the last year there was only one we were like, maybe a couple of times where we loved the person but we just don’t have the space so you know it’s not our thing.
Michael:
(26:40) You mentioned Steve Jurvetson, I have to say I am a photographer and he is such an awesome photographer.
Heidi:
(26:46) He is isn’t he.
Michael:
(26:47) So talented.
Heidi:
(26:49) He’s really good. He loves doing it, he’s prolific, he’s hilarious about it too. I mean he’ll come in and take pictures of entrepreneurs and he’s like it’s okay and he used to make sure that we were seeing things or things that were not public yet or publicly acknowledged or publicly available. He’s great.
Michael:
(27:14) I have a question again about the relationship between the entrepreneur and the VC. It seems that in many companies there ends up or they can end up where there is being a contentious relationship, especially around negotiations wherefrom the entrepreneur point of view it seems like the VC’s are just doing everything in their power to shift the balance of power to the VC and to squeeze the entrepreneur to the maximum extent as possible. And that is a cliché, but I talk with entrepreneurs and that’s how they see it.
Heidi:
(28:02) Well I mean there is bad behaviour all over and there is bad behaviour in VC land and there is always multiple perspectives on things. So I would say in general, and again sitting here as a person who was an entrepreneur, I raised two grounds of venture and actually one was from DFJ and the other one from (Ann Win web) Fantastic, Ann Win web is a fantastic venture capitalist and one of my closest friends. But I was an investment of hers before we came close friends. So lots of history on both side of the fence and what I would say is that it is a two-way street and that’s why you have to get to know the venture capitalist and you have to decide, have these people a reputation for squeezing when the chips are down, for trying to eke that last little percentage out and you know, what is in it for them.
(28:54) Do you understand like where they are in their funds or is that partner in the higher priority and what are they trying to prove. You know, this is totally outside of the entrepreneurs control, but if you are in a fund and one of the other deals in the fund is going to return the funder more than that partner was also going to fund that, they are not going to worry as much about your deal.
(29:16) If you are in a fund that didn’t return capital and your the deal that looks that it might be promising or not, that partner is going to care a lot about you. So this is one thing that I tell all entrepreneurs and there is a fantastic book by Brad Feld and Jason Mendelson called, venture deals and how to be smarter than your lawyer or venture capitalist. It’s on Amazon and every entrepreneur that is going to raise money from a venture capitalist should read that book. Because if you don’t understand.
(29:41) Because if you don’t understand how the venture business works you’re not going to understand those dynamics. So point one is that, point one is understand the business and understand the person you are doing business with to the extent that you can.
(29:52) The second thing is, terms are really important. And somebody said this to me one time, actually a VC said this to me once when he once presented a term sheet, that I ultimately turned down. He said, the problem with raising money is valuation is the grade at the top of the paper.
(30:10)That’s the thing to, when you go to a cocktail party and you say at the cocktail party, I raised it at 23, oh I raised it at 33 and you know, people talk about that. The problem with that is how deals are going to sort out terms are way more important and I’ll give you the classic example and I’m going to use an extreme case, but I think this is a good way to put it.
(30:34) Let’s say you have a company and you want to raise $3 million, and I say okay, I’ll give you $3 million and I want a third of the company for that, because your start-up and that is a reasonable value for that. Then he is saying no, my company is already worth $25 million. Well all right, I’ll give you my 3 million but I want a liquidity preference, participating preferred and I want a 3X on my money. So right, if you think your company is so damn valuable, I’ll give you the 3 million. But if you sell the company I want a 3X.
(31:11) But what does that mean, well that means you are going to only $9 million if you sell your company right, my money comes off the top and that’s why we call it preferred, it’s got a preference over the common.
(31:22) So now you run your company for a while and it goes okay, but it doesn’t go super well. But it goes okay, but it didn’t work out and so a year later and then Google comes along and they say we’ll by your company for $10 million.
(31:38) If you had taken my money and a third of the company 3 million, you would be getting six-ish million and I would be getting three-ish million back right. If it’s simple enough.
(31:51) Again, extreme examples in simple terms I a third of the company and I get a third of the money. Under the other terms with the preference structure because you wanted to tell your friends that you raised $20 million in evaluation. When you sell that the company for 10 million I get 9 million and you get 1 million.
(32:08) And the problem here is some deals explode into nothing and who cares right. Some deals become rocket ships to the moon and that is super awesome and you are going to be rich. But most deals settle in the middle. Most deals are sold for small amounts of money and small amounts of money to an entrepreneur can be meaningfully life changing. If you didn’t screw yourself up by taking too much money and wasting it or by screwing up your cap table by having these screened preferences. So you know, no entrepreneur wants to believe that there is going to be this sort of mediocre outcome. They all want to believe there is going to be these really dramatic outcomes.
(32:50) So I think a lot of the behaviour happens when you set up – my feeling is the more you closely align the investor and the entrepreneur to want the same outcomes, the less you are going to have this problem of ending up in situations where you don’t want the same outcome.
(33:06)And the worst is if you pile preference on top of preferences right. So, you raise some money and then you want another up valuation and the VC says I’m not taking it unless it is way up and then the new guy comes in and he says I’m going to give you the money but I want even more senior, and before you know it you’ve got what we call an overhang.
(33:37) If you are the entrepreneur and you are sitting there and saying I’ve got to sell this company for $50 million before it even see a dime. Because I layered on these preferences, and again we see that over and over and over again.
(33:40) So I would just encourage entrepreneurs to really look at this stuff and don’t go to your uncle, who is a divorce attorney to negotiate your term sheet. You know, go to Fenwick, Wilson, Coolie and Jurvetson – we work with them all. Go to somebody who does this for a living because this stuff is really super important.
Vala:
(34:08) I want to shift the conversation a little bit back to the topic of relationships, because I think it’s important for the entrepreneurs who are watching our show to understand you know, how they can establish relationships with VC’s.
(34:22) You’ve written about building relationships based on giving, and you’ve also written about the importance of integrity. Can you talk a little bit about integrity and the importance of how you can establish meaningful relationships?
Heidi:
(34:36) Well I think to me, integrity is the core of the a lot of things in life, you know how you go to sleep at night and everybody has their own lines about what do they do and what they not do. In fact one of the funniest conversations we have with my class, is that I throw out scenarios that entrepreneurs have done and I say, is this integrity or not.
(34:57) You know, for example, values the example that there is a lying and sort of lying and then there is the sort of you didn’t say anything, but - so for example, if you’re an entrepreneurial and you’re doing your pitch and the screen is up, but you forget to close your email. But actually, you may be have left it open on purpose and all of a sudden there is a thing up there and it looks likeMark Zuckerberg emails to you. I’ve seen people do that, right. I’ve seen them spoof emails and I’ve seen people write on a white board like, pros and cons, Sequoia, DFJ and then we come into take a meeting and they are like, oh my God and go to a raised the white board.
Michael:
(35:45) Silly stuff, transparently silly stuff.
Heidi:
(35:48) It’s kind of silly stuff, but you know sometimes people –
(35:55) But the thing about that stuff is that the truth will come out, and so don’t tell us customers that you don’t really have. Don’t tell us you have investors that you don’t really have. Don’t tell us that someone has signed on to come on full-time if they haven’t. Don’t tell us that you have an adviser and we call them and they go who? You know, I mean a lot of that stuff I just think that’s bad behaviour, bad ethical behaviour.
(36:19) On the other hand, I think that being an entrepreneur you have a a lot of unknowns right. And I think when an entrepreneur comes in and says we are going to do $100,000 in revenue in the next quarter, and I say how, and the go well, here is the stuff we know that is going to happen and he is the stuff that we don’t know that’s going to happen.
(36:42)Then at the end of the quarter I come in and say, hey what happened. They go well, you know what here is what happened to what we said. This one worked this one worked, this one, totally blew up and we learnt our lesson. Right. That’s okay. It’s the wild West, I mean, we don’t expect everything to be perfect, but we don’t want people to tell us the deals are in the bag when the deal is not in the bag. Right, I think it is that kind of stuff.
Michael:
(37:07) So you are a kind of very very straight forward kind of conversation without either too much optimism or too much negative or whitewashing.
Heidi:
(37:11) Well you know, here’s the problem, entrepreneurs are always super optimistic and if they weren’t they wouldn’t be entrepreneurs. And I think the thing I tell entrepreneurs is look, you have a big vision and in fact I tell entrepreneurs this a lot of times. You look at their plans and they always overestimate the early years. Right, they always want to show you how well they are going to do and how profitable they are going to be how quickly and it almost never works.
(37:47) Andwhen I tell entrepreneurs is that actually, we don’t care what happens in the first year. We care about helping you make it to year five and we care about the exit. We care about surviving to the exit and the size of the exit and the delusions we have to take along the way to feel too that exit. But we actually don’t overpromise in your early months, because the reality is that usually not everything falls in your direction, and I would much rather have someone come in and say we’re not sure we can make revenue for the first six months. We are going to try, but let’s not count on that because we may learn something along that allows us to create a better product, but it means that we are not going to make that revenue in the beginning.
(38:26)So it is that fine line, you have to be optimistic, you have to be able to paint a bright future, you have to be a visionary. But you have to be pragmatic and realistic about what’s really going to happen. Then the other things you have to know what elements drives your business model.
(38:41) Right there are certain elements that you get along by half or double or whatever, it’s okay, the business will still work. There are other things that if you get it wrong by half or double, if they are in the wrong direction you’re toast. Your business doesn’t work.
(38:56) Being an entrepreneur who understands the connection from a business perspective on all of those elements even if you don’t know the answer. If you don’t know the answer, but you know the assumption and the effect the assumptions have, then, as you actually start playing the game we can actually assess the data that is coming in and figure out where to turn the dials.
Vala:
(39:22) You’ve written about and you said like I believe – and I’m paraphrasing that life is really really random and expect things to be messy. As you are evaluating a company or an entrepreneur, are you not intimidated by messiness?
Heidi:
(39:38) If we didn’t like messy we’d never make an investment.
Vala:
(39:41)Okay.
Heidi:
(39:42) There is no such thing as an un-messy investment. You know, it is just like when you go out to buy a house, there is no such thing as a perfect house right. Every house has its issue, every start-up has its issue, and every person, there is no such thing as a perfect hirer, there is no such thing as a perfect spouse – is there, I don’t know, I shouldn’t say that. I’m divorced.
(40:07) So I think this is the thing you know, where do you want your mess. And like, I don’t want to take integrity mess. To me, it is someone I can’t trust is someone I don’t want to work with. And I will tell you right now, well there are some people who don’t have a lot of integrity who have made a lot of money, right. I can say the same thing about – can we swear?
Vala:
(40:28) Absolutely, yes.
Heidi:
(40:30) Okay, we used to have this little rule and it was called, don’t do business with ass holes. And you know what, there are some people who are real ass holes who have made a lot of money and aren’t great entrepreneurs. In my own opinion is, life’s too short for me, to work with those people. I just don’t like working with people who are mean and nasty and who their voice and throw things at you, and hang up the phone or whatever, throw their iPhone at you, whatever they do. I’ve dealt with some people like that before and just thought, life’s too short.
(41:02) I like to work with people that I actually would like to hang out with to. And that doesn’t mean that everyone has to be like me, look like me, or act like me or whatever. And it doesn’t necessarily mean that everyone is an extrovert and wants to go I don’t know, you know, go on a walk with me or go and hang out at a pub or something. I’m not saying that.
(41:21) But at the end of the day I don’t really like to work with people that I don’t like. So you know, those are the decisions we have to make. Just like some entrepreneurs may not want to pick working with me. I have my style and I have my skills and I have my blank spots where I am not as skilled. And an entrepreneur might say, well she’s okay but I would really rather work with that person over there, because I just feel that I am going to get more out of that person or whatever. That’s okay.
Michael:
(41:49) So we have literally three minutes left, so let’s do some very quick questions with very short answers. So, in 30 seconds top and advice for an entrepreneur in order to recognise whether the VC is an ass hole or not or a good guy or a good person if you want, in 30 seconds.
Heidi:
(42:13) Ask around. Ask around and judged by how they treat you. It only gets better for it only gets worse.
Vala:
(42:22) Would you give different advice to a female entrepreneur looking to invest versus a male? And if so what would it be? In 30 seconds.
Heidi:
(42:32) No I would give the same advice.
Michael:
(42:35) How do you create the right culture, I know you feel culture is important, how do you create a culture?
Heidi:
(42:41) Culture is action, it’s about your actions. It’s not about what you write on the wall. It’s not about your mission statement. It’s your behaviour, it’s how you lead. It’s the bullshit that you call. There’s really nothing different between culture and leadership and parenting. They are kind of all the same.
Michael:
(43:01) Culture leadership and parenting, okay we are going to have to unpack that one later.
Vala:
(43:07)Is there a particular technology that really excites you as you look at the landscape today?
Heidi:
(43:11) Sorry?
Vala:
(43:12) Any particular technology that excites you that has potential.
Heidi:
(43:19) Too many to talk about this one and if they really excite me and if they are that new, then I’m not telling my competition!
(43:29) How can somebody become a VC?
Heidi:
(43:33) You know, I think that there are some people who are great financial analytical wizards and they become VC’s and they come up through the ranks, but you know they do management consulting or they may be i-bankers or junior, they may be work for private equity and they worked their way up through the ranks. Then there is other people like me, who spends a lot of time trying and failing, and sometimes succeeding in being an operating person. Ventures are really small business, and I would say that just like we tend to invest in people we know, we also tend to hire people we know. So, if you want to be a venture capitalist you will find you will have to get to know some venture capitalists.
Michael:
(44:12) Because that’s relationships.
Heidi:
(44:14) Relationships.
Vala:
(44:17) Can you recommend a good book and it doesn’t have to be business related..
Michael:
(44:21) Besides the one that you recommended earlier.
Heidi:
(44:24) Ohh gosh, besides the one I…
Vala:
(44:28) Or a blog other than yours and you know, where do you go everyday.
Heidi:
(44:32)I think I read about Hofmann’s books are really good and I also think the book, Give and Take, about relationships is a really good book, and I think Adam Grant. Try those.
Michael:
(44:44) Okay, well it’s 3:44 and I believe we are done. This could go on for a long time. We have been talking the truly awesome Heidi Roizen, who is an investor and entrepreneur and Heidi, thank you so much for coming to talk with us today.
Heidi:
Thank you so much this was a lot of fun.
Michael:
(45:11) and I hope you’ll come back another time.
Heidi:
(45:13) I’d love to.
Michael:
(45:15) I am Michael Krigsman with my co-host Vala Afshar, and since – how about we do a high five so people can hear.
Vala:
(45:21) No.
Michael:
(45:26) Let me get this down one day. Thank you so much, this has been episode number 76 at CXOTalk and we’ll see you next time. There’s no show next week because of the Labor Day holiday, so see you after the next time. Bye bye.