How to be half as effective

When I founded Ontela with my friends Charles and Brian, we were all sick of big companies.  There were a lot of things we wanted to do differently, but one of the big ones was to build a company that wasn’t a faceless bureaucracy.  (Hindsight: good goal)

A company where everyone was impactful.  (Absolutely!)

A company where nobody felt disempowered. (Everyone should be empowered to do their job, for sure!)

A company where everyone was a part of the decision making process.  (Wait… everyone should be a part of every decision making process?)

A company where nobody was left out! (Now something has gone dreadfully awry.)

We made one of the classic startup blunders.  We confused individual empowerment, which we all wanted, with its precise inverse: decision by committee.

Read the rest of this entry »

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

Pyramid Pitching

Everyone knows of the mythical elevator pitch. You find yourself in an elevator, rocketing towards the penthouse suite of a downtown office edifice, when you realize that the person standing next to you is a powerful and influential investor. She asks what you do, and you calmly deliver your pitch. Just a sentence or two, properly chosen.  The doors open, the conversation continues, the IPO is near at hand.

I’m here to tell you that the elevator is real. While you may not be trapped in a small ascending room, the potent entrepreneur’s life is full of inflection moments: brief opportunities to shift the destiny of your company. And a proper pitch is essential to take advantage of them. But contrary to what you might have heard, the solution isn’t the 60-second elevator pitch.  In fact, the elevator pitch is only a simple, basic example of a much more powerful tool: the Pyramid Pitch.

The Pyramid Pitch is based off of a simple and fundamental principle: startups are dictated by randomness and chaos.  Sometimes this is obvious, as in the elevator case.  Other times the situation appears controlled, for example when you have 5 minutes allocated to speak at a pitch event.  But minds wander, distractions beckon, bladders fill… if you don’t grab your audience immediately, you may never get them back.

Read the rest of this entry »

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

Why Investors Won’t Talk to Competitors

Whenever I’ve been involved in fundraising, I’ve hit a frustrating rejection: “Sorry, but I have an investment that could be competitive.”

As an entrepreneur, this drives me nuts. I always marshal the same counterarguments:

1. I know what they’re doing, and we’re COMPLETELY DIFFERENT!
2. Let’s have an initial conversation.  I won’t disclose any ‘secret sauce’, and you can be better informed and decide whether or not there’s a real conflict.
3. I don’t mind if you invest in both companies.  I trust you to keep information confidential.

I didn’t actually grok what was going on until I sat on the other side, looking at investments.  Now I understand the problems with each of these, and the real, underlying problem that I missed completely.

Read the rest of this entry »

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

How to Help Startups

It’s been seven years since I started my first company.  My successes over that course have had a great deal to do with the generosity and wisdom of the startup community, particularly in Seattle – countless meetings, meetups, blog posts, backchannels, and a mind boggling number of cups of coffee.  Since the very beginning, I’ve been thinking about the question in the title – what’s the best way for me to pay it forward, and really help the startup community?

I’ve always known that the greatest way to help startups is by building a great startup.  Success breeds success, injecting talent and cash in to the ecosystem.  It rejuvenates the optimism and bank accounts of investors and startup employees alike.  It begets positive press, which begets optimism.  It demonstrates to people that success is possible, and shows them a way to achieve it.

But I wanted to help more.  For karmic reasons – to pay back the people who helped me – and for selfish reasons, in that I love helping companies succeed.  It’s just incredibly, deeply, personally rewarding.  So each week I average about five to ten meetings with startup founders or executives, and usually do one speaking engagement for a large group as well.  But how to make the most of that time?

Here are the principles I’ve found so far when trying to help startups.

Lots of People

Try to find opportunities to help as many companies as possible, at once.  Like mentoring for great organizations (I love Techstars and Founders’ Institute).  There’s an opportunity to help a lot of companies at once.  Further, you get to have a bunch of short conversations to get an idea of what they’re up to, and dive deep with a few companies that are a great fit.

Help Companies That Help Themselves

The greatest impact on the startup ecosystem is helping companies that have already demonstrated commitment and traction.  If someone’s working a day job and wants advice “about startups”, that conversation is less likely to result in a successful company. By comparison, in a conversation with someone who’s committed fulltime and trying to add a cofounder, or negotiating terms with an angel, or stuck on their B-round financing there’s a real opportunity to make a difference at a powerful inflection point.  The further down the funnel the startup is, the lower the chance that good advice will be rendered moot by one of the many random quirks that strike down entrepreneurs, sending them back to the clutches of Big Companies.

Time Management

Being short and blunt sucks.  It’s uncomfortable to skip small talk.  But when a startup needs help and time is constrained, talking about a founders’ kids or hobbies is time that either comes out of their help, or out of helping someone else.  For me, the former is better than the latter, and I schedule most startups for 30 minute meetings.  I personally hate the rushed agenda, but it’s usually enough time for me to be able to try to provide some help.

If You’re Not An Expert, Shut Up

I sat next to a guy on a panel who was pontificating to startup founders about qualities to look for in a cofounder.  The speaker was a former consultant who mostly invests in real estate and restaurants. WTF.  It’s easy to have an opinion, but if there’s no experience behind it, just explain that it’s not an area of expertise and move on to a new topic.  I’ve sometimes had to drive this home. “Why are you asking me how to marketing your social network when I’ve never done it before either?  Let’s focus on questions I’m actually qualified to answer for you.”

Directness

It’s hard to be direct with people you don’t know very well – at least, I find it so.  And being direct is just a thin grey line away from being an asshole.  But nobody wins if the conversation just goose-steps around, and 30 minutes isn’t enough time to be soft and circumspect.  These my three favorite phrases when time is short:

• “How can I help?”  This is my favorite phrase.  If there’s a succinct answer, everyone benefits.
• “Sorry, but I can’t.” At least one of the things a company asks for are probably not possible.  But if the requests are out on the table up front, everyone can focus on the “yes”es instead of the “no”s.
• “Here’s my reaction to what you just said.”  Sharing a quick gut-take reaction is crucial to companies that are trying to polish their presentation – after the 25th pitch, details and nuance get ground down.  The pitch is an art form, and a tight feedback loop is crucial to improvement.

Help People Help Others

This is the last principle, and a new one.  It may not be popular.  We’ll see.

As a part of my effort to make a difference in the broadest way possible, I’ve signed a contract with O’Reilly to publish a book about startups.  I’m ridiculously excited about this because it’s the ultimate application of the “Lots of people” principle. Part of this book is going to be illustrating problems with stories from real startups.  And that’s hard, because most entrepreneurs are pretty tight lipped about what they’re up to.

So from here on out, I’m going to be asking one important thing from companies that want to meet with me to get advice: let me use the contents of our conversations and emails to help other startups by writing about them.  If there’s something that must remain confidential – for example, a trade secret, or the name of a sensitive party in a negotiation – that’s fine.  But I think the startup community suffers from a little too much secrecy, so I’m going to prioritize helping companies that are willing to ‘pay it forward’ over companies that are not.

So that’s my new thing.  Continue to help people, and ask that they allow me to use their situation for my book, so together we can help even more people.

What Do You Think?

I don’t normally solicit comments, but I’d really like to hear reactions to this in the comments below.  Am I asking too much, that startups be willing to share with the world?  Is there a principle missing? Are there better ways to help?

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

Of course this company is for sale

I had recently left Microsoft after five years of slaving away as a program manager on various facets of Windows.  I’d departed to take a job at Wildseed, a company producing an over-the-top funky handset running Linux, targeted at the teenage market.  Yeah, that’s it on the right.

If the bizarre appearance and strange feature set doesn’t sound odd enough to you, I should mention that it was 2002.  The state of the art was the RAZR handset from Motorola, and Andy Rubin wouldn’t found Android for another year.  We were actually forking Red Hat, writing our own drivers, and all sorts of other flavors of insanity.  That was part of the fun.

But I digress. There was a rumor floating around the company, and in my very self-important 26 year old mind, I believed it was up to me to get to the bottom of it.  I took a deep breath and stepped up to the porthole of Eric’s office.

Eric Engstrom was our CEO.  He had a peculiar office.  It was big, but it was in an inner corner of the building, without much of a view.  It was kitted out with tall, spring loaded, bouncy stools for guests.  He told me once that he bought them so guests would get annoyed and not stay long.  He was dismayed when a few of his VPs found them comfortable and ordered them to sit on as their primary chairs.

Eric was (and is) a mad genius. I could fill an article with Eric anecdotes: The fascinating book about his time at Microsoft. The $40,000 bet that I could find an entire sealed barrel of St. Magdalene scotch two decades after the distillery closed (I won; he bought the barrel; I got a bottle).  His desire to create a film in which I would have a cameo as Evil Spock. But I digress, again.

On that day, I marched in to his office to get to the bottom of a strange rumbling I heard, and have him set things straight once and for all.  There was a rumor afoot that we might be looking to sell the company, and I was going to confront him about it.

I sat down, bounced a few times, and met his gaze.  He gave me a trademark Eric smile.  You’ll be familiar with it if you’ve ever seen a Nature channel documentary on alligators.  I steeled my nerve and asked him point blank: “Eric, I heard a rumor.  Is this company for sale?” Eric’s smile disappeared for a second.  He pursed his lips and laced his fingers, staring at the floor.  Then he looked directly at me and said, very slowly: “Dan, we’re a startup.  Of course we’re for sale.  This fucking plant on my desk here is for sale, if the price is right.  What do you think we’re doing here?”

Not everyone thinks about their company this way.  I have a good friend who is running a very successful startup with a fantastic future ahead.  He told me – and I quite believe him – that he would sell the company for a billion dollars over his dead body.  He was extremely clear that anything less than a multibillion dollar IPO was a pathetic failure, and he’d resign before he’d let such an abomination happen.  So his startup is not actually for sale.

But the rest of us startup types, the story is simple: just about every startup is for sale.

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

Vesting is a hack

Vesting in general (and founder vesting in particular) is an oft-misunderstood tool that has a tendency to really screw up young companies.  There are some deep misconceptions at work here that often cause founders all sorts of grief.  Most of it comes from the simple fact that stock grants are, at their heart, a crude hack to avoid taxes.  Vesting is a hack to the hack – and one almost every founder needs.

Let me explain with a hypothetical.

Imagine AcmeCorp, a new startup.  Jack and Jill are the founders.  They incorporate and give themselves each a million shares – in other words, splitting the company fifty-fifty.

The next day, Jack has a change of heart.  Startups are a lot of work!  He quits AcmeCorp and takes a cushy executive gig at a fortune-500 tech firm.  Jill’s left solo.

Years pass.  Jill first works without salary, then pays herself a pittance.  She bootstraps the company, starting with consulting and moving on the develop a highly successful web service.  As she brings on staff, she issues stock to new employees, ultimately handing out a half-million shares of the company.  Eventually she’s the CEO of a 50-person firm, pulling down a respectable $200k per year as the CEO; nearly as much as Jack’s pulling down at his gig (not including his benefits and bonuses).

When the company is finally sold, it’s a great success – $100mm exit.  And here’s what happens.

For her million shares, Jill gets $40mm.
The employees’ half-million shares net them $20mm.
And Jack?  He gets a call one afternoon that, for sitting on his duff for the past five years, he’s worth a cool $40mm, same as Jill.

Obviously something’s wrong with this picture.  The crux of it is that, with stock grants, value is awarded in a big block at the beginning, even though the contribution is (or isn’t) provided over a long period of time.  It would be like if you paid someone four years worth of salary in a lump sum on their hire date.  The obvious solution, of course, is to not issue all the stock at once.  Instead, treat stock like salary – give it out in small chunks over time.

Unfortunately this is a terrible idea.  As time goes on, the stock gets progressively more valuable, and the tax impact to the founders gets worse and worse, plus the strike price (if they’re options) gets higher and higher.

As I’m sure you’ve gathered by now, the solution is – vesting!  The founders get their stock at the beginning in a big whack, but the company has the right to take it back for a negligible amount of money (the “repurchase agreement”).  As time goes on, that right erodes.  So the net is the same – the founders’ stake grows over time – while still letting the founder keep ownership of the stock from a legal standpoint as it appreciates, allowing long-term capital gains treatment, favorable initial tax treatment, voting rights, and all that jazz.

“But wait!” the novice founder cries out.  “If I build lots of value and sell the company, I get the shaft! My stock may not be vested, and I’ll lose out!”  Yes you will, young padawan, unless you include acceleration in your vesting schedule.  Acceleration is the final hack to the hack, which brings the force back in to balance.

Acceleration comes in two flavors.  Acceleration on change of control (aka single-trigger acceleration) means that if the company is sold, some or all your stock vests.  Yay! Double-trigger acceleration means that if the company is sold AND you’re fired, then some or all of your stock vests.  Sort of yay!

The former is obviously better for the acceleratee, but keep in mind that a deal may be hard to get done if the acquirer knows that all the stock incentives to stick around disappear when the deal closes.  Double-trigger, or a mix of single- and double-, is often a nice compromise to keep the company marketable (a few years down the road) while rewarding people for their hard work.  This is often more of an issue for employees (who join later, and will still be vesting when a transaction happens, and who can’t leave en-masse if the transaction is to go through).  For reasons of company lifecycle timing, founders are usually fully vested already by the time a deal happens.

Regardless, the important thing is this: founder vesting is founder friendly, the exact opposite of what most people think.  You want it.  Don’t fight it.  In fact, don’t wait for an investor to tell you that you need it – get it done when you incorporate.  Just remember to pair it with acceleration on change of control!

And now, some suggestions for vesting schedules.

• Use a four-year vesting cycle for founders, the same as you eventually will for employees.
• Put founder vesting in place before you start to raise money.  Investors will be impressed that you know what you’re doing.  If your vesting terms are reasonable, they’ll be accepted without argument.  And when you’re negotiating terms, it’s better to have fewer things that matter to you on the table.
• If there’s a “trial period”, for example people working part-time for a few months, then consider a cliff that expires after the trial.  That means the first vesting doesn’t occur until the trial period is over (and then you vest a lump of however much you would have received anyway).  Stock is best used for people who are totally committed, so the stock accumulation shouldn’t kick in until the commitment does.  The obvious exceptions to this are strategic advisers who will only ever be partially committed, but where that level of commitment is all the company wants and needs.
• If there’s a meaningful commitment of resources in advance of the vesting agreement, it’s reasonable to “fast forward” the agreement by an appropriate amount.  For example, if you’ve been working full time for a year before vesting is in place, it’s not unreasonable to start with 1/4 of your stock vested already and put the rest on a 3-year schedule.
• Stock that’s in payment for resources doesn’t need to vest.  For example, if the company is split 50/50, but then one founder puts in $100k in exchange for 10%, then the 10% that they get should not vest.  Since the value is delivered up front, the stock should be too. (Obvious corollary: investor stock has no vesting terms)
• For founders, accelerate 50% of the remaining unvested stock on change of control (single-trigger), and 100% of the rest double-trigger. This is totally reasonable and fair, and makes it very unlikely that you’ll leave much value on the table.
• It is generous, but not unreasonable, to consider double-trigger acceleration for some or all of your employees.  However, you may cause yourself problems during M&A down the road – check with your lawyer first.
• Try to avoid single-trigger acceleration for non-founders whenever possible.  Not only is it sure to cause issues during M&A (the acquirer will be worried that everyone vests & leaves after the transaction), but an acquirer may make changing these terms a condition of a deal, which just leads to ugly.
• Get the legal paperwork for your stock agreements sooner rather than later, to start the capital gains clock ticking.  This can easily be a seven digit difference if you happen to have an early exit (ask me how I know).
• Edit: File your 83(b) elections the day your incorporation goes through. You have 30 days to do it, and then you’re screwed forever.  If you’re not sure if this applies to you, ask your lawyer.  If they’re not sure, fire them and hire someone else.  This is one of the most common, avoidable, and expensive mistakes founders make (thanks for the reminders about this in the comments!).
• One last thing: the founder vesting arguments assume multiple founders.  If you’re a solo founder, you might skip founder vesting, and hope no one notices…

Founder vesting may sound terrible , but when paired with reasonable acceleration, it’s a good thing for everyone.

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

The most awesome startup I have ever seen

I just got a very nice email from Danielle Fong, the 25 year old middle school-dropout, cofounder and chief scientist of Lightsail Energy.

That’s not the amazing part.

Lightsail makes regenerative brakes for the power grid.  You know how your* Prius takes the power from the brakes when you don’t need it, and dumps it back in to the engine when you do need it?  Lightsail does the same thing for energy plants that can’t scale their production quickly with the needs of consumers, not to mention greentech like wind and solar that creates power when Willard Scott says so.

Still not the amazing part.

So where are the startups you know headquartered?  Someplace cool and funky, right?  We put Ontela in the Smith Tower, the tallest building west of the Mississippi (until the disrespectful hooligans in the midwest built the Kansas City Power & Light Building in 1931).  It was fantastic!  But Lightsail?  Forget that.  Check out where they call home.

The Lightsail Firehouse

Oh yeah.  Remind you of anything?

The Ghostbusters Firehouse

And you know what?  We’re still not at the mind blowingly awesome part yet.  Because you know what they have in the basement?

Oh yes.

Bravo, Lightsail.  Bravo.

Urgent Addendum:

Danielle informed me after publication of this article that they have vacated the Ghostbusters firehouse and moved to a chocolate factory.

I rest my case.

*(I’m assuming you have one, because everyone else seems to.  Personally, I drive a 2004 Scion Xb, in which the only thing regenerating is the dirt on the floor mats.)

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

Startup dudes: Cut the sexist crap

Last week I was speaking on what would have otherwise been a terrific panel.  It was Frank Artale from Ignition, Tom Duterme from Groupon M&A, Andy Sack from Lighter Capital & Founder’s Co-op, and me talking about funding & exiting.  The only thing that spoiled it was yet another guy in the tech scene putting forth yet another objectifying/patronizing treatment of someone with two X chromosomes.

In this case, the recipient of the bogus intro was the panel moderator, Rebecca Lovell. Just in case anyone out there in startupland has not  met Rebecca, she’s one of the best-connected people in the Seattle tech scene, with a resume that includes leadership roles at the Alliance of Angels, NWEN, and now Geekwire.  These would all be appropriate topics to use when introducing someone, man or woman. Here’s what the man introducing Rebecca chose to say instead (you can listen to the full audio of the introduction for context):

Rebecca’s one of the smartest ladies I know, and I thought that she was a perfect pick for the role of moderator.  When we selected Rebecca and she said yes, she was a sexy single woman. And since that time, she’s become a sexy married woman, and so I wanted her lucky new spouse to stand up.  So we’ve got not only a very talented, but a happy moderator.

Come on, people.  Really?

This has been bugging me for a while.  I was coaching one team for Techstars Demo Day, and they had a photo of scantily clad women (that had nothing to do with their pitch) that I convinced them to strike.  Two months ago, a company I was coaching showed up for a meeting with me at Google and made a comment about the receptionist’s appearance.  Within earshot of her.

Everyone has a reason.  One person was older.  One person was from another country.  It just doesn’t matter.  If we keep this bullshit up, we’re going to crap all over another generation of women tech entrepreneurs.  And it’s just a rotten thing to do. Think before you open your mouth.

And if you see someone doing this, call them on it. I didn’t… that was my nervous laughter in the background of the recording.

Better late then never.

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

500 Startups demo day

I crashed my first demo day today at 500 Startups.  As with all good things, it came about via a stupid coincidence.  I’m an investor in 500 Startups, but hadn’t yet managed to get myself on the official LP mailing list so I had no idea an investor day was coming up.  I plopped down in seat 10A on the Alaska bus to San Jose, and of all the damn coincidences, my good friend and cofounder from Ontela, Brian Schultz, had the seat next to me.  I asked him what he was up to and he told me he was headed down for 500 Startups demo day.  I zipped off an email before the flight attended shut me down and had an invite by the time we hit 10k feet.

500 Startups is an interesting beast.  The fund has $29MM under management with over 250 investments, only half of which are in the valley.  Companies came from as far as Japan (cloud data processing) to Brazil (educational test coaching).  Here’s some of the companies that stood out to me:

TinyReview was super cool – like instagram + twitter + yelp.  You go somewhere, take a picture, and put 3 extremely short lines of text on it – two or three words per line, tops.  Looks like fun, good traction, and the service just feels like something people will enjoy playing with.  But I’m skeptical of the positioning as a review site.  My top use for a review site is to recommend stuff – not actually clear to me how you use microhaikus to find a great restaurant, unless you’re just reading a lot. It looks like a great creative palette but not like a great reviews site.

The concept behind Spinnakr is great.  They do lots of crazy analysis on a per-user basis and help you customize your content for the actual human being doing the visiting.  Bit creepy.  But the pitch is golden – a job site can highlight jobs that are relevant to you.  A news site can bubble up information that’s relevant to you.  They make a strong claim that the big sites are doing this already, so they can bring the same tools to the little guys.  The founders have a cool background too – fundraisers from politics who are experienced with targeting and what it does.

Switchcam is, in their own words, “blowing people’s faces off”.  These guys scoop up a bunch of online videos of events and stitch them together.  Imagine watching a video of a concert, as filmed through a dozen camera phones – complete with pans, cuts, and even the ability to grab the director’s chair and pick your “camera angle”.  Love the technology.   Not so in love with knowingly hosting large quantities of pirated content, and automatically categorizing it for easy takedown notices.

MeMeTales has a special place in my heart because they’re an ex-Seattle company that I mentored in the first Seattle Founders’ Institute class.  Maya is awesome, and she moved the company down to the valley (boo, hiss) to take 500s funding and really grow the business.  They’re doing online and mobile storybooks for kids – great growth, and spectacular stickiness with an average session length of 29 minutes.  The books look great; I was particularly partial to “Richard was a Picker”, about boogers.

Postrocket says they’re like SEOmoz for Facebook.  In English, they optimize facebook posts to make it more likely that a given post on Facebook gets seen and “like”‘d.  I didn’t catch quite how they do this, but they have a great story that includes dropping out of college to go on a 46 hour Boston-to-Palo Alto pilgrimage to the valley to start the company.

Fitocracy gets marketing: they’re about fitness, so they showed photos of the founders, before/after, chubby/sleek, XXL-t-shirted and… yes, shirtless.  The only thing they left off their pitch (and I can’t believe they did) was their own XKCD comic (http://xkcd.com/940/).  Nice way to game-ify fitness.

GoVoluntr has the distinction of being the only startup pitched by an actual Got Milk ad model.  But they had a great pitch: former Starbucks guy has hard numbers that community involvement drives growth and revenues.  So they get businesses to donate products and services to people who are volunteering, and provide tools to help volunteers track their engagement and pick up perks from participating companies.

All in all, a solid showing – 32 companies, plenty of which show loads of promise.  Great work to Dave and team!

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)

Companies that would do best without venture capital

I just got the following email.

Subject: Small taxi company looking to expand

Hello,

I run a small taxi company outside of Boston Massachusetts. My community has been targeted for casino development and I am looking to expand my business. Could you possibly provide some advice on how to find venture capital?

For someone who lives in the startup world, this looks pretty silly.  But I’m sure I’d say a lot of silly things if I were getting in to the taxi business, too.  So I figured I’d point him to a simple explanation of why taxi companies (actually, services companies in general) aren’t appropriate for VC.  I did the Google thing for a bit to find a good article.  And no luck.

Well, you know what they say: when the internet fails you, make more internet.  Here, then, are a very good set of reasons not to take venture capital (or – why venture capital won’t take you).

1.  You want to build a profitable company

First day of Founder’s Institute I ask how many people want to raise venture capital.  Most of the hands go up.  I then ask who wants to build a profitable company.  Again, most hands go up.

The funny thing about this is – VCs don’t actually like their companies to be profitable.  Someday, sure, but not on their watch.  You see, profitability means that the company wont grow any faster.

This seems odd, but think about this for a minute. At the early stages, a company may be making money, but it’s almost certainly investing every penny it makes back in to the business.  If it has access to outside capital (e.g. a VCs), it’s investing more than it makes.  And that’s exactly what VCs like: companies that can grow at amazing speed, and never slow down their burn rate to amass cash.

They like this for two reasons.  First, VCs want to invest in companies that can grow explosively.  That means huge markets, executives who can scale up a business fast, and a willingness on the part of management to double down on a winning bet – over, and over, and over again.  Second, because it means the company keeps coming back to the VC for more money on positive terms.  That means the VC keeps getting to buy more and more of the growing concern.

Of course, this is something of an over-broad generalization.  I’m required to include one per post or I lose my startup blogging license.  In fact many venture backed companies are profitable, it’s very impressive to bootstrap your company to profitability in a few months before raising outside investment, etc.   But if you are excited about a profitable business that can cut you giant dividend checks (not that most VCs can even accept divided checks  - long story), realize that VCs will not be pleased with that approach to running the business.  They will want you to plow those earnings back in to the business.  And when the day comes that a VC-backed business generates cash faster than it can effectively spend it?  They sell the company, or IPO (which is technically also selling the company), or replace the CEO with someone who can spend faster.

A taxi business should be run for profits.  That’s not VC style.

2. Your business has reasonable margins

As a general rule, VCs don’t like reasonable margins.  They are exclusively interested in outrageous margins.  Ludicrous margins.  We’re talking about sneering at 50%, and hoping for 80%, 90%, crazy astronomy stuff.  Venture capital is all about investing a little bit of money to create a business with massive scale and huge multiples – investing tens of millions to build software that then can be duplicated or served up for virtually nothing extra per-person with a total market size of billions.

In particular, VCs don’t like businesses that are people-powered.  Software businesses are awesome, but their evil twin – software consultancies – are near-pariah to VCs.  If adding revenue means adding bodies, they don’t like it.  In fact, enterprise software companies, which can tread a fine line between software consulting & software development, sometimes get really creative to come down on the right side of the line.

So the rule of thumb is that VCs like product companies: software, drugs, cleantech, and so on.  And they don’t like the manufacturing, service industry, and consulting businesses that often are just a tiny shift of business model away.

Every new taxi requires a… well, a new taxi.  And a new taxi driver.  Not the right business for VC.

3. You are going to double your investors’ money

I’ve covered this before, but VCs really don’t want to double their money.  Strange though it sounds, their economics make that look like a failure.  They need to target a 10x return on their investment, and that means – depending on stage and fund size – that you company has to grow to somewhere in the hundreds-of-millions to billions range to be interesting.

That means taking your taxi business from $20MM in annual revenue to $40MM just doesn’t do it for them.  Particularly because the valuation multiples on the aforementioned lower-margin businesses are smaller.

4. VCs probably don’t want to invest in you

Here are the people VCs really love to invest in:

• Entrepreneurs who’ve already made them lots of money
• Their closest buddies

(You might want to subscribe or follow me on Twitter so you don’t miss new articles)