I recently began writing as a guest blogger on Seattle 2.0. What I'm finding is, not surprisingly, that property has much broader readership than the OVP blog does, and so elicits more comments when I say something provocative. 

So, for the benefit of readers of this column, here's a link to my most recent post there.  It seemed to be useful, or irritating, or controversial depending on one's frame of reference. The title was "How to avoid a no from a VC - part 1, People" .

What is a CEO-a-thon?

Portfolio companies of OVP know (and perhaps dread) this annual event.  However, we look forward to it eagerly.  It comprises three days in the first quarter every year where we have every CEO of ours stand up and deliver a one hour summary of where they've been, where they are going, and why we should still feel great about our decision to invest. Every hour, on the hour, another one steps up to the podium. On one hand, there is nothing quite as exhilarating as seeing all these bright, motivated leaders wax passionately about their companies.  On the other, there may be no more high stakes event for these folks, post our initial investment.  

We know this is the most popular page on the OVP web site: Deals Missed

So, therefore rather than post this new information assuming loyal readers will stumble upon it, we figured we might as well put it up here on the blog, too - and let you enjoy watching us wring our hands, yet again.

Last week, OVP hosted what has become one of my favorite annual events – our 7th Annual OVP CEO Night.  It was great to be invited as a CEO in the early Accelerator days, and now great to host as the newbie partner at OVP.  This year, we had the added bonus of welcoming Adrian Hanauer, General Manager of the Sounders FC, as our special guest.

An interesting and unexpected speaker from a seemingly unrelated industry is one of the hallmarks of CEO Night.  Past speakers have included cycling legend Greg Lemond and famed restaurateur Tom Douglas.  Combined with creative themes for the food and beverages, this is what differentiates CEO Night from just any other networking event.

The University of Washington’s Computer Science and Engineering (CSE) department’s Affiliates Day is one of the most fun and rewarding days of the year for me as venture investor and geek.  It involves a showcase of projects and research areas by professors and students and is a festival of creativity, new ideas, and engaged smart people. It is a day my colleagues and I look forward to every year.

Last Thursday's meeting concluded with a panel on "The Changing Face of Venture Capital," moderated by UW's Ed Lazowska, who prompted us with a series of provocative questions. On the panel with me were Greg Gottesman of Madrona Venture Group, Ron Howell of WRF Capital, Bill McAleer of Voyager Capital, and Cam Myhrvold of Ignition Partners.

Many of us of a certain age can remember the game "20 Questions" - used largely by our parents to pass the time on long car rides.  One person thought of an object, and the others could ask up to 20 "yes or no" questions to guess what it was.  (You'll recall, the first question - not counted in the 20 - was "animal, vegetable or mineral?")

In figuring out what companies to invest in, venture capitalists are caught in their own game of 20 questions - usually built around the fundamental issue of, "If you build it, will they come?"  It turns out a key to playing this game successfully is not the number of questions you ask but how many potential customers you ask, and then the nature of the questions themselves.  For some reason, perhaps known to marketing gurus and/or statisticians, 20 is a magic number.  Once you've called and spoken with about 20 potential customers, especially if that list includes at least half not given to you by the prospective portfolio company, you've reached the point of diminishing returns.  Whatever you are going to learn from that process, you now know.

Now for one of the really tragic whispers emanating from an OVP partners meeting...

"Right team, wrong idea." 

We really agonize over this one. It doesn't happen all that often, but every once in a while we get this absolutely killer team in to present, with deep domain expertise in an exciting market.  And then, after they explain their business concept we say...

"Is that the best they can come up with?  What a shame!" (and then we shed a collective tear)

OK - for those regular readers of the G-B-U feature, as promised here is a "G" story.  Actually, it's two stories rolled into one.  Most of the time, the entrepreneurs we back act responsibly, ethically, and professionally.  So, it can be hard to decide where to draw the line, since there are too many "Good" stories to tell.

But, over the last six to nine months we've seen two CEOs do something very similar that strikes us as exceptionally "Good."  In both cases, she and he (one of each gender) came off a very successful quarter - yes, even in these turbulent times.  Both came to their respective Board meetings with the happy news that the company had grown nicely and had finally achieved that wonder of wonders - cash-flow breakeven!

So, what did they ask the Board for at that moment of happiness around the table?  More stock options?  Bigger bonuses? Perhaps a relaxation of the expense plan so they could hire more employees?

Ever wonder where those strange or seemingly onerous terms in a venture financing come from?  Well, you are about to find out, as part of our on-going series "entrepreneurs behaving badly." (For those who missed G-B-U part 1, feel free to go back and review the rationale of this series for context - and know that there are "Good" stories yet to come).

As with most lessons in life, the ones we learn the hard way stick with us the best.  And you would think that after over 25 years in the venture business, we must have seen it all and learned it all.  Not so!  What follows is an example in recent times of what we consider a "U" on the G-B-U scale - and one that actually caused a change in the agreements we strike with entrepreneurs going forward.

Stories of entrepreneurs behaving well, and badly

We’ve all heard the horrific tales of venture capitalists behaving badly. And while all of us who practice the profession would like to brush them off as sour grapes, we have to admit that sometimes they do hit close to home. See: VC Non-Admissions

However, so far, we haven’t seen any venture capitalists brave enough to point out that there is a corollary issue that only gets aired behind closed doors.

"Right idea, wrong team."

This is a tough one.  If you were listening in to our partner meeting after presenting your startup, what would you do? Well, the first thing might be to think hard about why we were feeling that way.

Does your team have deep domain expertise in the business you are starting?  If not, then we worry a great deal about what you don't know you don't know. (Or to paraphrase Will Rogers, "It ain't what you know that hurts you.  It's what you know that ain't so.")  

OK - so you've passed the test of "What do they do?" (see: Behind Closed Doors - PT 1).  Now comes the next set of words you don't want to hear with your ear pressed to the OVP conference room door...

 "Who cares?"

So, you think we're just being rude?  (Well, maybe)  But, in reality those words level a verdict on the startup as falling into one of two traps...   

"Invested in Venture Capital? You would have been better off in T-bills for the last 7-8 years."

"The technology advances we've seen in the last decade or two just won't be repeated in the next."

So, when were those quotes (or some just like them) put forth?

Do you ever wonder what REALLY happens around the venture capital  partners table once you, the entrepreneur, leave the room?  Well, it's time someone told you.  Hopefully, out of this you'll become more skilled at getting to "yes," or getting to "no" - but faster, or getting some value out of the experience.

The most dreaded words you can hear (if you had an ear pressed to the conference room door) are: "What do they do?"