About Chris Logan

My passion for changing our lives with technology is expressed through the companies I have worked with: Farallon pioneered plug and play networking; Fabrik brought email to a 1000 businesses; Driveway introduced the storage utility of cloud computing to 8 million individuals; Avaya converged the phone into the data network; LiveOps allows tens of thousands to work from home; cc:Sync is changing the way people work and communicate; and SweetSpot is improving the lives of 28M people in the US suffering from diabetes.

Portland Startup Tax – Bad Investor Behavior

I want to wrap up the discussion about the Portland “startup tax” with a focus on Portland investors. My last post outlined mistakes Portland entrepreneurs often make. Now I want to focus on bad investor behavior.

Most investors I’ve met in Portland have a horror story about getting stuck in a company that ends up going nowhere. Or, being in a growing company but getting washed out on a later round.  This has lead to a number of investor behaviors that often prevent good companies from getting access to growth capital.

Early stage Silicon Valley investors have developed entrepreneurial friendly investing behaviors that coupled with lean startup methodologies have proved extremely successful. Many of Portland’s bad investment habits hobble Portland entrepreneurs and add to the Portland startup tax. Here are a few practices Portland investors need to adopt to lower the tax.

Quick Diligence

Too many Portland investors see virtue in time consuming comprehensive diligence. Traditional business diligence looses its relevance with nimble, agile and lean early stage startups. Scouring existing financials and forecasts has limited relevance in a lean startup that depends on speed and agility. Plus the distraction to the founding team is costly.

Investors should invest in areas in which they have knowledge and are comfortable. It’s most productive to limit early diligence to the market space and the team. Most oving quickly and helping founders focus on the business.

Fund Fast

Many Portland investors are drawn to contingent funding. Forcing entrepreneurs to find additional funds is too often viewed as a test that lowers risk. I’ve seen several instances when entrepreneurs tie themselves up for months trying to find additional investment dollars so they can take down contingent investments. Rather than test, this can kill a company by exhausting entrepreneurs and delaying execution. If a company needs more money that an investor can supply than the investors should do their share to syndicate the deal.

Set Reasonable Valuations and Caps

Portland investors often force low valuations because they can. But, this can be counter-productive. Too much early low valuation money crowds a cap table scaring off later stage capital. Later rounds that leave the founders with too little ownership increase the execution risk (by demotivating and distracting the founders), limiting the upside for everyone. In Portland, this often drives early sales of companies even when they have tremendous growth potential.

Forcing low caps on notes is the same as setting too low a valuation. The idea of a note is to avoid pricing a round before there’s enough business to value. Investors should either use a note as intended – a quick lightweight way to bridge a company forward (with discounts and interest as the incentive). Or, they should price a Series Seed round. The cap should merely protect an investor from not appropriately participating in extraordinary appreciation. A note with a low cap can either telegraph a low valuation for a subsequent round or scare off investors with a inappropriate differential in share price.

Keep Terms Simple

Funding terms only get worse in subsequent rounds. Early multiples of participation, ratchets, anti-dilution ratchets and other onerous terms rarely ever go away. And although they may seem to favor investors, they can encumber companies and compromise the ability to raise needed capital and restrict strategic options. Early investors are most successful when they align their interests with the entrepreneur’s.

Portland’s seed and angel investors need to better partner with entrepreneurs. Putting a company in a position to find the best future investors optimizes returns for everyone. All behavior that slows a company, or attempts to protect the early investor from the entrepreneur essentially increases the Portland startup tax and limits everyone’s upside.

The Portland Startup Tax – Bad Entrepreneur Behavior

Last week at Immix Law Group’s PowerUp Event on fund raising we discussed the Portland “startup tax” that local entrepreneurs pay when raising capital. My last post looked at the tax entrepreneurs pay due to lack of local capital. Now I want to look at bad entrepreneurial behavior that makes building well-funded scalable businesses harder. Too often Portlanders get in their own way.

Growth capital is looking for companies that can scale to a big exit. To attract capital, companies need to structure for investment and scale from the beginning. There are several best practices often missed by Portland Entrepreneurs:

Delaware C Corp

Half the early Portland startups I see who are looking for early funding are Oregon LLCs. Another third are S Corps. When raising money, optics is important. An LLC communicates that you’re not sure what you want to be when you grow up. An S Corp is even worse. Oregon needs to get past a well-deserved reputation for no-growth life style companies. An S Corp tells me the entrepreneur is running the company to maximize their personal tax benefits. A C Corp, in Delaware provides the optimal accommodation and protection for investors. It says from the beginning that you are in it to grow a big company and make money for all involved.

Get Lawyers and Accountants that work with Silicon Valley VCs

There are well established, hard won “rules” for high-growth startups; best practices that have evolved over decades. Some corporate lawyers are fluent in this game. Unlike many legal situations, they know optimizing their client’s position means staying within norms and providing balanced documents; not trying for client advantage in the short term. It means playing for a five to ten year growth curve. I’ve had multiple capital raises where we minimized cost by convincing the investors to go bare and just use company lawyers in drafting and executing documents. This was possible because they trusted the lawyers were operating within comfortable norms.

Entrepreneurs can easily get up to speed on the High Tech Growth game through blogs and sites that lay out best practices and model legal agreements. Portland has several Law firms facile with Silicon Valley Venture investing. If you want access to VC capital use one of these firms. In fact, they generally charge very little (if anything) to get a company set up and on this path because they understand the cost of early money and how large potential fees will be when a company finds scale successfully.

Structure your Cap Table by working backwards from your exit

An entrepreneur building a $100 million plus company should be able to layout what the company cap table looks like at $100 million: founders shares, a couple rounds of financing, employee options, a few shares for advisers, and warrants for banking and other partnerships. An entrepreneur that lets a Seed or Series A valuation be driven solely on a handful of beta customers and a MVP is not setting up for growth. Early validation and traction should be accompanied with a vision for a large addressable market and a credible plan for scale.

More than once I have found myself as an early investor in a Portland startup struggling to find capital because of a cap table messed up with low valuation early financings.

Vesting for all Founders shares

Founders and investors need protection against a founder or early employee leaving and taking too many shares. Four year vesting ensures everyone is in it for the long hall and if there isn’t a fit, the company can recover shares to adjust. Starting a four-year vesting day one protects the founders, communicates the right thing to investors and prevents a painful reset of the vesting clock later.

Intellectual Property discipline from day zero

Track every line of code from day one. Establish proprietary rights agreements with every contributor. Track open source licenses carefully. Getting IP assignments after the fact is always hard and expensive. Take it seriously and behave like your effort is valuable from the beginning. This makes it far easier for an investor (or acquirer) to take it seriously and value it later on.

Too often Portland entrepreneurs don’t do these out of ignorance or neglect. You already have to explain to potential investors why you’re in Portland and how they can make money here. Showing you understand drill can minimize a painful Portland startup tax.

The Portland Startup Tax – Lack of Local Capital

Last week I presented at Immix Law Group’s PowerUp Event on fund raising. It gave me the opportunity to discuss the Portland “startup tax” that local entrepreneurs pay when raising capital.

It’s no secret that raising capital in Portland is harder than in the Silicon Valley or even in Seattle. Portland has so little native investment capital. Check any credible source, like the NVCA Year Book, and you’ll see that Oregon has double digit millions under professional management. These numbers barely register on the same graph as Washington, which has single digit billions. You can’t even get Portland’s amounts to show up on a graph when compared to California’s nearly triple digit billions, even with a log scale; California has over 4 orders of magnitude more capital under management relative to Oregon.

This means Portland entrepreneurs have to raise money from elsewhere and pay a tax in the form of: time, valuation, and lower levels of support. Fund raising outside the area takes more effort than fund raising down the street. And because it’s harder to get investor attention, fewer investors result in lower valuations. This means Portland companies give away more company for less money.

Plus once they get VC money, Portland entrepreneurs receive less benefit than companies local to a venture group’s networks and support. CEOs outside Silicon Valley constantly bitch about VCs only investing in companies in easy driving distance. But this is a real practical consideration. Not only does it require less partner time, but support in the form of mentoring, introductions, and educational sessions are higher return with tight nit groups of local companies. Portland entrepreneurs get fewer opportunities for help at a higher cost than their Silicon Valley based sister companies in the same VC portfolios.

This part of the startup tax will never entirely go away. But it will get better as Portland’s many successes attract more capital at a lower cost, and Portland companies represent a higher density in VC portfolios.

I think the more interesting contributor to the startup tax is our own bad behavior. In my next blog posts I’ll discuss how we need to get out of our own way. Our own bad behavior, by both Portland entrepreneurs and investors, contribute significantly to the tax we pay.

Jim Collins on Startup Communities

I watched this very powerful talk between Jim Collins and Brad Feld. It’s well worth the 45 min. Lots of food for thought. Most interesting to me:

  • “Who-s” drive startup communities not initiatives.
  • Return on luck – everyone get luck, good and bad, what is important is what you do with the luck you get.
  • You approach life as either a series of transactions or a series of relationships.
  • Doer-ocracy vs meritocracy – meritocracy maintains the status quo through an establishment evaluating acts, where a doer-ocracy disrupts the status quo through the networked interactions increasing doer nodes.

Startup Phenomenon | Brad Feld talks with Jim Collins from 23rd Studios on Vimeo.

The 5 Traits of a Born Entrepreneur

Like every investor, I think a lot about how to evaluate opportunities. For me, it’s all about the founder. But what makes someone worthy of an investment? Why should I think an individual can succeed? I look for someone who has an abundance of five traits: intelligence, drive, sense of mission, appetite for risk, and optimism.

Intelligence
He has to be wicked smart. Smart enough to see what others miss. Many successful endeavors just need business school smarts: like tracking demographics and identifying when to open a franchise or new small business. Owners of Dry Cleaners for instance have a higher percentage of millionaires than any other business. But starting a high growth tech startup needs additional smarts. An ability to “see around corners” is required for creating something that hasn’t existed before and represents a large new market. It’s not something that is taught. Predicting the future and developing an intuition for “what can be” is a rare intelligence. An innate ability honed over time.

Drive
He needs fire in his belly: an irrational drive. Creating something out of nothing is fundamentally an irrational act. If it were rational, like the dry cleaner, an existing business or MBA would already have seen it and done it. Doing something fundamentally different in a way that can make a lot of money, involves extraordinary effort: identifying market opportunities; developing offers; executing a plan; convincing people to help; raising capital; attracting partners; and selling early adopter customers. But most importantly it involves hearing “no” over and over again in all its forms. Continuing the effort requires entrepreneurial drive. Plus, success depends on distinguishing the nay saying from meaningful feedback. Someone who merely thinks he has a good idea isn’t showing the drive. They need to be so obsessed with an idea that they can’t sleep at night. Drive is hearing “no” for the n’th time and still not sleeping at night.

Mission
To create something from nothing requires missionary zeal. It requires translating intuition into a positive world changing vision. And the belief that no one else can make it happen. A successful entrepreneur convinces everyone that it’s worth their time and money to join him because it will benefit them and improve the world. Like the Dry Cleaner, there are a lot easier ways to make money than a tech startup. But those on a mission change the world.

Risk
It’s cliché that entrepreneurs are risk takers. Making something from nothing involves taking an unquantifiable risk. Successful entrepreneurs thrive on the risk of a startup. Proving the naysayers wrong gratifies them. It seems to them to be riskier not to pursue their venture and be haunted by “what if”. Quantifying and mitigating risk can be learned. But, I’m convinced an appetite for risk is innate.

Optimism
A startup is built on upside. It has a mission to improve things. Entrepreneurs bet on themselves and bet on the future. They have to be eternal optimists. If they aren’t optimists they may as well go into dry cleaning and hope for spills and stains. The direction for a startup entrepreneur always has to be up and to the right.

A successful entrepreneur needs an abundance of all these traits. Having some but not others can be disastrous. Wicked smart driven people without mission or optimism are competitive assholes who just need to be the smartest in the room. Those without an appetite for risk will never manage to build anything substantial. Mission and optimism without the smarts and drive yields the dreamers that never get anywhere.

These characteristics combine as entrepreneurial passion. Bijan Sabet and Union Square states this well in his litmus test for an investment. “I try to picture myself working at the company. Can I imagine working for the founders every single day.” You know when you see a successful entrepreneur, because you want to be around them. You want to be around the people around them. The combination of these traits is contagious and magnetic. The combination builds successful disruptive companies.

The Overthrow of Successful Portland

Last Friday, 7 new companies launched onto the Portland tech scene. The latest class from PIE (the Portland Incubator Experiment) demoed their wears at the Gerding Theater in a Demo Day. Portland shares the Demo Day ritual with the Silicon Valley and other tech centers across the country, but Portland’s is a bit different. Like the others, Portland’s is the product of smart tech geeks, demonstrating the latest innovations in mobile, social, cloud computing and big data. But as Rene Gleason, Global Director of Interactive Strategy at Wieden+Kennedy, pointed out from the stage these companies are the product of Portland’s creative class. Portland’s tech scene is just one facet of a creative renaissance in Portland. And it’s a harbinger for some great things to come.

Portland’s tech ecosystem has emerged with a mix of creative agencies, sportswear and apparel producers, and specialty manufacturers. In a town filled with inventive restaurants, indie music, artisan foods, boutique beers and spirits and world-class wines. Galleries and studios dot our city’s core streets. Like other tech centers Portland is minting scores of tech startups every year. But Portland’s benefit from a unique cross-pollination. With PIE, an unapologetic “experiment”, they’re crossed with one of the worlds best creative agencies and its brand clients. With the TechStars Nike+ Accelerator, the cross was the world’s leading sports shoe and apparel brand. The Portland Seed Fund and the Portland Startup Challenge are public/private collaborations. These are just a few of the dozen plus accelerators uniquely leveraging Portland’s ecosystem.

Alan Webber, a former Portland city leader and founding editor of Fast Company, recently spoke at TechFestNW and issued the challenge to Portland in a the question “How do you overthrow a successful city?”

Portland is undeniably successful, and we’ve made great strides in the last several years. But if you look at this young creative class and their startups as just the beginning of the “overthrow” the new emerging Portland could be pretty remarkable.

Learning from MJ

This week I stumbled on this quote:

“I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times I have been trusted to take the game winning shot and have missed. I’ve failed over and over and over again in my life. And that is why I succeed.” – Michael Jordan

And this video:

Michael Jordan top 50 plays

I’m old enough to remember seeing a good deal of what is in the video live. Truly inspiring.

Taking Stock

I left my operating position in SweetSpot Diabetes Care a few months ago making this a natural time for reflection. I’m struck by how the arc of SweetSpot mirrors that of the Portland tech scene. We sold the company to Dexcom, Inc. (NASDAQ: DXCM) just over a year ago.  Dexcom has continued to invest in Portland, signing a long term lease and tripling the SweetSpot staff.

This is a great outcome for SweetSpot; its employees, investors and shareholders. We were one of several tech companies to sell in 2012, a sign that the Portland tech ecosystem has reached another level of maturity. We now need to move to the next level – a plethora of growth companies, big exits, IPOs, easier access to capital and, most importantly, local venture capital.

I moved to Portland in late 2005, but it wasn’t until 2008 that I stopped joining the flock flying south for weekdays. In 2008, it was clear Portland had the potential for a great Tech startup environment. Most notably we had an enviable influx of over educated young people. Driven by the quality of life, Portland had a burgeoning creative class, increasing ethnic diversity and growth in multiple industry segments. Most of all, Portland was, and still is, the most affordable West Coast metro. But it hadn’t seen significant Tech success since Techtronics spun out the Silicon Forest companies.

Many of us were frustrated with how hard it was to get a Tech company started, let alone built to scale. Everyone seemed to have a side project and limitless enthusiasm. Un-conferences and Legion-of-Tech events filled the calendar, but real startups were rare and funding was non-existant. SweetSpot was Adam Greene’s side project in 2009. When I joined Adam, we converted to a C Corp. But, beyond friends and family, we had to go to the Bay Area for Seed funding. We pushed hard to change things in Portland.

We pressured then Mayor Sam Adams to make money available for startups, an effort that lead to the Portland Seed Fund. Wieden and Kennedy took advantage of the excess tech talent by starting The Portland Incubator Experiment (PIE).  This provided a catalyst for startups, accelerators, incubators, and angel funding.

We now have a dozen active accelerators and incubators. These, plus independent entrepreneurs, are minting scores of viable startups every year. SweetSpot was part of over $400m in tech exits in 2012, up from less than $100m only two years earlier. We sold SweetSpot because Dexcom was a perfect match for us. Partly though, we sold because of the difficulty in raising venture capital.

There has been over $200m in venture capital invested in a half dozen Portland growth companies that are achieving significant scale. Silicon Valley is the source of virtually all this money. These investors (including Foundry, First Round, True, Sequoia, Kleiner Perkins, among others) are confident they can make significant money in Portland.

Now we’re poised to take the ecosystem to the next level. Some of these growth companies will see big exits and perhaps an IPO. It’s getting easier to get venture money, but 503 still doesn’t even show up in the nations top 25 venture capital area codes. Portland is the poster child for the Series A crunch with more than a 100 startups chasing virtually nonexistant early stage VC. Portland Tech companies will create massive amounts of wealth in the next 10 years. It’s an opportunity which needs better access to capital and that should include local money.

 

The Smart Phone is the Truly Personal Computer

The inherent identity of a mobile phone is the most important aspect the emerging mobile centric world. Unlike the desktop world, the phone is truly one user-one device. It’s always been tied to a person’s phone number…the way you get in touch with them. The PC, whether a laptop or a desktop, has never been personal like a smart phone; it’s just single user.

For smartphone apps, this is a subtle but vital difference. PCs are often only used by one person, but that’s not the central use paradigm. Browser based applications always require a login. Apps on your smart phone only require a set up. From then on the apps know it’s you. Windows and Macs do have log-ins and key-rings and other conveniences for filling-in passwords, but this subtle shift in UX is important. For app developers, mobile allows much more intimate engagement.

I most appreciate the importance of this one-person, one-phone paradigm when using our shared kitchen iPad. Pads and Tablets have yet to work this through. The apps assume only one person is using it, easier on the apps, harder on the iPad users.

We are only just beginning to appreciate the power in mobile. It’s an extension, an enhancement, an augmentation of the person. This is already changing communication. It is only just beginning to change how we find things, find out about things, interact with things, and buy things. It’s what makes the cloud meaningfully interactive. It’s what will make the Internet of things useful.

Bill Girly’s recent post, Transitioning to a Mobile Centric World, does a great job of articulating the importance and power of mobile identity and engagement.

When I was in High School, I heard Alan Kay make the absurd and provocative statement, “a computer wont truly be personal until we are wearing it.” We are now living in Alan’s world.

The Mother of Invention

Our future is Urban. Urban centers are growing and rural areas are shrinking. It‘s an amazing opportunity to reinvent how we live when we add 2.5 billion people to cities in the next 25 years.

It’s mind boggling how fast China is urbanizing – 21 million people per year are moving to cities. That’s the population of the 9 largest US cities. Imagine creating the equivalent housing, infrastructure and services that exist in New York, Los Angeles, Chicago, Houston, Philadelphia, Phoenix, San Antonio, San Diego and Dallas every year for the next ten years.

If necessity is the mother of invention, China is faced with the mother-of-all invention. I doubt their future cities will be developed on historic western models. I suspect we’ll see very interesting invention coming out China in the next few years.