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Seedcamp Podcast, Episode 18: Jeff Bussgang of Flybridge Ventures & author of Mastering the VC Game

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In the ‘Seedcamp Podcast Series’ we talk with key people in the tech startup industry to hear their stories and gleam key advice and learnings from their experiences.

We had a chance to sit down with Jeff Bussgang, author of Mastering the VC Game, to get his insights on company development and what he looks for in a founder.

Jeff is a former entrepreneur (Upromise, Open Market) who joined Flybridge Capital Partners in 2002 and focuses on the consumer, marketing services, e-commerce, software, and mobile start-up markets. On the side, he serves as a Senior Lecturer at Harvard Business School where he teaches a class on entrepreneurship and lean startups, called Launching Technology Ventures and has co-authored ten HBS cases. Jeff also currently sits on the board of MITX, the Massachusetts Innovation and Technology Exchange and is a Founding Executive Committee Member of First Growth Venture Network – a network of venture and angel investors supporting entrepreneurs building companies in the New York area.

Jeff holds a BA in Computer Science from Harvard University where he graduated magna cum laude and an MBA from Harvard Business School where he was a Baker Scholar and a Ford Scholar.

If you’d prefer to read this discussion, the full transcript can be found below.

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Transcript

Carlos: Welcome everyone this is Carlos from Seedcamp. I’m in the offices of Jeffery Bussgang, who is the author of Mastering the VC game and who is a general partner at Flybridge Capital Partners based in Boston.

This is an exciting chat to have because it’s rare that I ever have a chance to talk to an author about the thoughts and processes that went behind in coming up with a book. For those of you who have the book you probably already know the structure of it. For those of you that don’t I’m just going to read a little bit of the table of contents so you know what the topics are, and then we’ll hopefully get Jeff to give his views for each one of those.

He starts off with the first section being around the entrepreneurial itch, and in it he really does talk about what has driven him in his years as an entrepreneur before he became a VC and what is his view an entrepreneur is really searching for and some of the challenges that he identifies at the scaling point.

Then he talks a little bit about the VC club in a subsequent chapter about the profiles of how funds work and all the elements of them, and profiles some of the VC’s there.

Then he talks about pitching and talks later in chapter four about making and picking, and choosing the right deal. Then it goes on to how to manage the issues within a company; the board of Directors and evert a fall from grace.

Then there is the whole discussion about exiting, which might be able to explore in light of some of the difficulties that foreign markets have in that sector. Then lastly we talk about the export that is venture capital to the rest of the world.

That’s in summery roughly the structure of the book and I’d love to may be start from the very beginning Jeff if could can give your first-hand views on that journey that you felt in Chinatown, in the top of a smelly restaurant that really made you fall in love with entrepreneurship.

Jeff: Sure, well as I said in the book I was born to be an entrepreneur. My dad was an entrepreneur. He was an immigrant holocaust survivor and came to the US after the end of the war, and armed with a Ph.D. started his own company. Even although he had no background in entrepreneurship, and even although he was an immigrant who spoke English imperfectly, and even although there was no venture capital in the industry at the time when he started his business in the early 1960. That’s the kitchen table MBA that I received and so I’ve been in love with technology and entrepreneurship from the very beginning.

Carlos: Then that transition you to a point where you took your first experience and you narrated it in your book, and maybe you can add a bit more colour of what it was like working in an environment of Chinese food and barking dogs.

Jeff: Sure, the description that you point out is when you’re starting your company you’re in this very humble environment. You’re in your basement and in one case I started that out of my partner’s house. It was in the hallway outside the bathroom. We had the engineering team in one of the spare master bedrooms. The business development team was in the kitchen.

The Chinese food that you gave, as an example was another start-up that I worked in it was right above a Chinese food restaurant. The smell was unbelievable. It was awful and delicious at the same time. It was revolting and strangely attractive, and people brought their dogs to work.

So I’m on the phone with the CIO of a multi-billion dollar financial service industry trying to convince him to buy our software and a six figure contract and there’s a dog barking in the background and there was a frayed rug at my feet and people are in their shorts and flip-flops walking around. So that’s the world of start-ups and the world I love.

Carlos: It’s a great anecdote about probably the same feeling that people are having, and in that chapter you talk about that itch, and that itch has a possibility as to why sometimes people don’t stick around when the company starts scaling. Maybe you can give us some of your views as to when does that itch start fading and the desire for something new to come up. When did that happen for you because you made a couple of transitions from open market?

Jeff: Yes, I often think of three lives in the journey of a start-up. The first is when you’re in the jungle and there are no clear paths and you’ve got a machete and hacking your way. It takes a lot of creativity and entrepreneurial skill and really a passion for finding a path.

The second phase is when you’re on the dirt road. The path is relatively clear. Everybody is pointing in the same direction, and now it’s just a question of optimising your speed and making it more and more efficient. There are still plenty of potholes and muddy spots and roots to jump over, but the dirt path is relatively clear.

Then the third phase of the company’s life is the highway. The highway is all about efficiency, speed, and continuing to improve your processes.

There are some people who love to be in the dirt road and who are awesome at it and there are some people who love to be in the jungle and are awesome at it, but people who are awesome at the jungle tend to be awful on the highway.

When you’re in a company, and you find yourself in an environment where the things that they’re focussed on and the things that need to be calibrated for the sake of success and the things that you no longer love doing, it’s a natural time to think about getting off and moving to a new environment.

Carlos: You did that.

Jeff: I did that personally a couple of times. I’ve been an executive team member of three start-ups and at each time, I love company inception. I love strategy, like the jungle. I became an early stage investor, and the dirt road is fun and I have no interest in the highway.

For me, when a company gets to the point is my company, Open Market, we were public for four years and I had been an executive team member. We had scaled about 100 million of revenue and quarterly reports and earnings, and dealing with the things that a public company has to deal with.

Eventually it was interesting, fun, and stimulating and I learned a tremendous amount but eventually I decided it wasn’t what I loved doing and the opportunity to start a new company. In this case You Promise with my partner and out of his house was a very appealing opportunity.

Carlos: It’s given you quite a good insight as to what determines a really awesome jungle and road founder, and I know from the times we’ve visited you, you actually have this list of the attributes that you look for in those kinds of founders at early stage. I have them in front of me but it would be amazing if we can hear them straight from you, in what are those attributes that you really look for.

Jeff: Sure, and these are attributes that my partners and I developed so I can’t take credit for them. We’ve developed them over many years of investing and working with entrepreneurs as well as our own entrepreneurial experience.

When we meet entrepreneurs we think about these things as we’re evaluating the opportunity to invest in them and their chances of success. The first we refer to is the ‘pied piper’. The pied piper skill is the ability to attract people to you, even although you have nothing of substance yet to attract them with. Whether that’s attracting employees, partners, customers, investors, pied pipers are able to be magnetic in their ability to bring people along with their vision.

You don’t necessarily need to be charismatic and promotional, or wildly extroverted. Some very sophisticated pied pipers are very introverted technical people for example, who are just wonderful in substantive and so endearing that people just want to follow them.

The second aspect that we look for is vision and the ability to see around corners, and the ability to see things that other people don’t see in an industry. Entrepreneurship is all about disruption and it’s very hard to be disruptive if you don’t have vision and insight.

The third attribute that we look at is domain experience. We have found over time that outsiders can be very effective in disrupting industries but they have to have some angle, some domain experience that gives them the specific knowledge that allows them to disrupt an existing industry. So we love entrepreneurs who have been living in an industry for many years, and who are then looking to disrupt that industry. You introduce me to an entrepreneur today who is disrupting the trucking industry, and his mother owns a trucking company. So he grew up in the trucking industry literally, and now, as a young technically savvy entrepreneur he’s wanting to disrupt that industry. That’s a fantastic set of characters.

Carlos: I feel obliged to plug the company Truck-Track

Jeff: You bet. The next attribute that we look for is executional skills. There are a lot of people who have wonderful visions, but who have no ability to turn those visions into companies that are valuable. So the ability to actually manifest that vision into a product, to hire a team, to raise capital, to raise sales force, to work with customers, that skill is a very rare skill to find in combination with the other skills, and when you find it, it’s truly magic.

The next attribute is fundraising skills. We have over the years observed that those that are skilled at fundraising are able to be more successful. It sounds very simple, but when you evaluate an entrepreneur sometimes you think only about their technical skills, their intelligence, and their teambuilding skills. You don’t think, ‘can this person actually raise money? Will they be good and effective at raising the necessary capital to take this company end to end?’

Most of these companies take tens of millions, if not hundreds of millions of dollars of capital. If you’re not effective in meeting with investors, inspiring them and doing all the things you need to do to get through the diligence process; both at the early stage and at the later stage then you probably won’t be a successful leader.

I think those were the main ones. I think I may be missing one or two but I think those are the main ones we look at. We literally – and I’ve told this to you and some people are surprised at this. We literally, a few times a year in our off-sites as a partnership, we sit down and we look at all of the company’s in our portfolio, and all of the CEO’s and entrepreneurs and we rank them across those skills.

This helps clarify for us where we need to compliment them. I think if someone is brilliant at vision, but we’ve gone execution well then we can find them an execution partner, and if someone is brilliant on execution, but we’ve gone domain knowledge well then perhaps we can help them hire someone from the domain. So the mix of skills and the teams are just as important as the individual

b One of the things that you talk about in your book is the job of the VC. You have kind of touched upon it right now in terms of what you do internally, but it sounds also that you perhaps coach founders.

It sounded from the example that you just gave in that case that it was about hiring people to supplement the CEO, but I would love to hear how you go through the process of coaching, and that was actually one of the questions that founders had was, what’s the coaching plan for CEO’s?

How do you train them? Because one thing is to say, look, you’re un-coachable effectively. We’re going to live with your pros and cons and we’re going to bring this other person in to compliment you and that’s fine, and at least most people who are self-aware enough will be, well I get why that’s useful.

Then there’s the second part of it, like actually this person might have the potential, we just need to bring it out in them. How do you guys go about doing that?

Jeff: Well first the principle that I would establish is that start-up success is a very people dependent. It is also the case that when companies grow, the individual grow with those companies. It’s an incredibly intense experience and transformative experience to run a start-up.

I lived through it myself and I’ve worked with many many entrepreneurs that have lived through it themselves, it is incredibly transformative and so it’s not that we are evaluating an individual at a point in time. It is that we are working with individuals over the course of time to help them grow to become the best entrepreneurs they can be, and the best CEO’s and leaders they can be for that company for that moment.

This morning, as an example I was talking to one of my CEO’s who is running a 300 person company, and we were talking about organisational design and structure in anticipation of a 1000 person company. That is the kind of coaching that is relevant today, whereas five years ago he and I were talking about how to get the first customer on-board and how to position the product and be effective on the market from a competitive differentiation standpoint.

So the coaching elements change as the company changes and as the needs change, and yes, from my standpoint and my partners at Five Ridge were very focussed on coaching, nurturing, and supporting the entrepreneur for seed to scale. That’s what we do. Some other firms do it as well, but it’s relatively unusual in my experience as both an entrepreneur and VC, but that’s really what we’re focussed on.

So the coaching, it depends on the priorities at that moment in time. It takes into account the fact that things will change, the individuals will change and grow, and the situations will change. It’s brining the best resources to help that individual at any moment in time. If the need help with go-to-market, then we surround them with people who are experts at sales, operations, and in-bound marketing.

If they need help with product design, then we bring experts on UI/UX design. If they need help with fundraising for the next round of financing, then we try to bring some expertise around that. Then the goal that I have as the partner and board member is to be enough of a generalist as a general practitioner, where I can help them, diagnose the problems, and where necessary bring in specialists to help supplement the conversation.

Carlos: It sounds like you and I have a very similar job! But I think one of the challenges that I’d like to hear how you manage is that relevant X of people. Would you say that in the section in VC’s , how much time do you spend in building a relevant X of product people, HR people and understanding truly the kind of the different stages of those people are best qualified. Because should a founder expect a high values add investor should be able to say, ‘you know what. You’re st this stage and here’s that guy’, and really rely on the investor to do that for them.

Jeff: I think founders should have extremely high expectations of their investors just as investors have extremely high expectations of founders. Every investor walks into a company, writes a cheque, and expects to get 5 X, 10 X, 20 X out of that founder. In turn the founder should expect to get 20X of value from that investor. They should expect that investor to know when and anticipate when they need what help and bring that help to bear, and in an efficient way as possible.

When we survey the entrepreneurs that we work with, we run our business like a business. We evaluate the brand, we evaluate the Flybridge values, we talk about the services that we provide to our portfolio companies because we’re in a business for providing a service – an unusual service because it comes from money, but effectively we’re service providers.

When we do those things we try to figure out, think, and listen very carefully, what do the founders need? One of the things they need most is access to people, partners, customers, and experts. So yes, we worked very hard to build our network as a partnership to provide that access.

They also need help with prioritisation, and the other thing that is very important about our job is to help the founders focus. Many founders is that there is way too much to do when you start a company. The world is an incredibility defocussing world, very interrupt driven, a barrage of information, and social media.

For a founder in those earliest days, the power of focus in an incredibly important power, and as investors we should be not distracting our entrepreneurs, but we should be helping the focus and helping them clarify about what are the few things they need to do really well at that moment in time.

Carlos: The next question is a bit controversial, but still in that same spirit. Controversial because sometimes you hit a wall, as an investor talking or a founder talking to an investor, both ways you can hit a wall. I want to pick on a specific wall, and the wall of you as an experienced investor. Being a founder where that founder may or may not necessarily be aware of the limitations that they’ve hit, and you’ve tried your best with putting them with the right people.

Maybe those people came back with feedback saying, hey look this person is just really struggling with this particular issue of management. Perhaps it’s conversations you’ve had that have hit a wall and you realise that the founder is beyond their depth and it could really use bringing somebody more senior on-board. How do you mange those conversations or are you of the philosophical view that it’s impossible to have those kinds of conversations, just curious if you have any interesting anecdotes to share there.

Jeff: Those are conversations we have all the time, and as I said earlier because companies change, founders change, people change, and the demands may not match the skills at certain points in time. The thing that is most critical for me in those situations is to establish upfront before you get into trouble.

When you’re still in the honeymoon period, when you’re deciding to work together, how are we going to work together? How are we going to have those conversations? Let’s give each other permission to be very direct with each other, and let’s think through the solutions will be before we get to that point.

For an example, I had an entrepreneur that I invested in, where I said to him I think you’re going to be awesome from now to the foreseeable future. At some point when you get to say 10 million in revenue, I don’t know if you’re still going to be an awesome CEO. You’ve never been at that scale company. You’ve never led that scale of a company, and so at some point we may have that conversation where it’s clear you’re no longer the best person to run a $10 million company to take it to 100 million.

When we have that conversation I’ll do it directly, honestly. I’m not going to go behind your back. I’m not going to do it in a way that erodes trust, but we’ll have that conversation and we’ll decide together what’s the right thing to do. If you have that when there’s no tension, before you begin to work together, when you’re in the honeymoon period it’s a much easier conversation.

When you’re in the thick of the problem and you can refer back to that foundational element, it’s a much easier path to the solution.

Carlos: But does that just trigger alarms for the founder though, because although the way that was phrased it was very much the most open and transparent ways in phrasing it. Is it intrinsically that kind of founder, the one who is good at the jungle, good at the road is going to come back to you and say, ‘hey wait a second. You’re already questioning my ability to get there. I actually don’t like that.’ Has anybody ever reacted in a negative way that creates a downward spiral during that honeymoon period?

Jeff: It’s definitely the case that some founders can be very defensive or protective, or even how hungry or controlled focussed, and if we find that I’d rather learn that before investing than after.

Any founder that’s not open minded and open to have a mature conversation around that topic and around any topic, boy, it’s going to get only worse. I mean, when you’re a founder and you’re running these companies you get a lot of good news, you get a lot of bad news. People quit on you, you miss quarters, you miss numbers, deals fall through, and those are very very sensitive emotional situations.

If I can’t have a direct conversation with the founder about those situations when I’m in the thick of it, it’s not going to be a good relationship for the long term. So what I typically find is again, I’m not going to invest in someone if I don’t believe in them, but what I typically find is that if I lay the groundwork for how the relationship will play out and what our mutual expectations should be, then it’s a good foundation for the future.

Carlos: If we follow that train of thought, how about cases where you have successfully brought into someone to be above the founder at some point in the growth of the company. What’s that played out like? I mean obviously it sounds like you’ve already had a pre-buy in so at least that wasn’t a surprise, but what are the key factors that you have found whenever you have had to supplement somebody either at the peer level or somebody who helped grow the company while the founder was still involved. What are the attributes that you’ve seen guaranteeing the success of that outcome?

Jeff: The best outcome is when the founder is involved in that process and where they own that process where they – as I like to put it, where they’re ahead of me or ahead of the board on that process. The founder will come to me and say, ‘Hey Jeff, I feel like it’s time. Let’s work together to find someone who will run the company, and here’s what I want to do. I want to focus on product. I want to focus on technology. I want to focus on this particular strategic area.’ That’s the best situation, and then we together go and find someone who they would respect and appreciate as their boss.

Hiring your boss is a very difficult thing to do. Turning your baby over to someone else is a very difficult thing to do. I’m in the middle of that right now. We just brought on a new CEO into one of my companies, where the founder said to me, ‘it’s time’. I know that we’re at a complexity and this is a company that’s 400/500 people, and he started this company from scratch with his partner in their apartment.

He said, it’s time and I know I’m not optimising the operational excellence of this company, and at first you would think, well can you bring a COO in place. Can you bring a head of operations or president or what not, but at some point in time the founder has to realise this is what I’m good at and this is what the business needs and where’s the match. That is an outcome again that is very common.

The best outcome is if the founder can go end to end. It’s very unusual for a founder to go end to end, but that’s always the best outcome if they can grow as rapidly and evolve with the business.

Carlos: The founders asked another question, and it was actually ironic that the last chapter in your book has to do with the international scene in Europe. One of the things that came up was, what is it going to take for more US investors, and maybe you want to speak on a broad capacity or around a very specific capacity. What is it going to take for more investments in European founders, so that you feel that the communication challenges of being in different time zones, and different distances is no longer an issue. What’s it going to take?

Jeff: Well there are two things I would observe on that. One is that early stage venture capitalists like to be near their founders. As I described earlier, it is a very people intensive business and coaching intense business, and I’m going to be a more effective coach if I’m near you than 3000 miles away. So you need to be close to your source of early stage capital.

If you’re a European founder it means that you need to find European investors that you love and can help you scale that can lay the groundwork for a very successful company, or you need to come to the US.

The best early stage investors – I won’t say the only great early stage investors, but some of the best early stage investors are in the US and it’s a big market, and so if you want to come to peruse the big market and work with those investors you need to come to the US. You can leave your R&D team behind but you need to come to the US.

Or find great investors in Europe and scale, and get to the point where your metrics are so good, your leadership is so obvious, you can fly to the US, get the money and go home.

The relationship with later stage investors is very different than with early stage investors. You don’t need to have the same intensity and proximity. I’ll give you one example, in our portfolio is Aperio, which you know is a Czech founded company out of Prague. The founder came to the US and sought us out after he initially raised some seed capital in the Czech Republic, and we said to him, Jacob, you need to come to the US. You can pick New York, Boston, San Francisco but you need to pick one and if you are able to do that leave the R&D team behind and we’ll back you.

We did, and I think Jacob has learned over time and he’s made the company transition and becoming a very successful company, but over time it’s harder to do that that people think. It takes longer, your hiring effectiveness is slower, your ability to connect with partners takes time.

Every transition we’ve made, and we’ve made some from Israel, and we’ve made some from Europe, the founders find it takes longer to make those transitions and adjustments than they thought. Therefore do it sooner. Do it as soon as you can because it’s only harder later on.

Carlos: Fair point. Well I want to give you the opportunity to wrap up with our traditional method of wrapping up, which is you get to shamelessly get to plug anything you want.

Jeff: Well if you’re a fantastic founder, then Flybridge Capital wants to hear about you. If you’re interested more about venture capital you can read my book, Mastering the VC Game and I also have a blog that’s quite active on the topic of start-ups and venture capital which is www.seeingbothsides.com

Carlos: Excellent, thanks Jeff, until next time guys’ bye.

Jeff: Thank you.

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