Exploding Term Sheets and Entrepreneurship

A pair of posts on TechCrunch got me to thinking about the concept of an exploding term sheet. Or more broadly, an exploding offer of any kind.

With the recent launch of Capital Factory, TechCrunch notes that the number of Y Combinator style incubators is increasing, and the niche is getting more competitive. So competitive, TechCrunch states, that some of the incubators are resorting to exploding term sheets to lock up good companies. Arrington thinks these term sheets are nasty beasts. I disagree - they're totally irrelevant.

The idea is that the incubator makes an offer with terms that are set to expire, sometimes very quickly. This puts a good deal of pressure on the entrepreneur to take the deal while they have the chance.

But here's the thing about exploding terms: they do absolutely nothing to change the dynamics of the marketplace - they are purely psychological tools and can be safely ignored.

I've seen them in real estate, for example. Such and such company will make an offer to buy a property, but the offer is only good for a week. Lets consider two cases to illustrate my point:

Case 1: It's 2007, and the real estate market is cranking at full throttle. The exploding term sheet is pure bullshit. The property owner has all the cards, and can react to an array of buyers in the time frame of his choosing. The exploding offer does nothing but make the purchaser seem flakey, because when push comes to shove, he'll wait.


Case 2: It's 2009, and nobody wants real estate. The buyer has all the power, because the seller wants out and there are no other buyers. If the seller delays too long, the buyer may find something else to buy. It's in the seller's interest to act as quickly as possible before the deal falls apart. The exploding offer again does nothing, since the market has already provided sufficient motivation to get things done quickly.

So when you get a term sheet with an expiration, ignore it. Act as quickly or as slowly as the realities of the market will allow.

And if you're on the other side of the table, don't make an exploding offer. At best you come off as pushy, and at worst, you'll be embarrassed when you don't follow through with a hollow threat. A better tactic is to simply state that the offer is good until it's not - which is really the truth of the matter.

FiveRuns Dash: Really Flexible Analytics

We just installed Dash on BackupMyMail. Dash is a new product from FiveRuns that collects data from your Rails app and presents it in a form that Google Analytics users should be familiar with - charts, mainly.

Dash is great. The way it works is that you create simple "recipes" which monitor your rails app in real time. Setup is really easy, and the output is understandable by non-coders. You can track any sort of data that is important. It could be technical data (such as memory usage and performace information), or business data (such as signups or payments).

As an example of what you can do with Dash, I'll show a simple, but very helpful piece of data that we collected from BackupMyMail. We wanted to be able to tell when someone signed up, or when they tried to sign up, but failed. Within minutes, we cranked out the following chart, which is visible from our Dash dashboard (the data in this chart is not real - it's just for testing):

The yellow line is signups. The red line is failed signups. As you can see, when we tested our signup page with bad info, we got a red spike. I can just sit back and watch this chart and it will tell me when someone fails at the signup process. If I see a problem, I can go check the logs to get more info. When they implement auto-refresh, a series of these charts will go up on a monitor all day long.

Granted, this is something that could be accomplished with a custom admin section. The value that Dash provides is the painless implementation, which saves your developers a lot of time and headaches. Dash also presents the data so well that it's much easier to track lots of these types of issues at the same time, which saves the business guys a lot of time and headaches. Everyone wins - visibility into your app increases without having to pay a high cost in development time.

I've only scratched the surface of what Dash can do. I highly recommend checking it out.

BackupMyMail is Here!

For the last six weeks or so I've been working on a new startup. The company does exactly what it's name suggests: BackupMyMail backs up your email.

What we do a little differently than others is that we backup your online email account (Gmail or Hotmail, for example) and store it in the cloud, where we keep it available for you to download if you ever need it.

The reason we started the company is simple. More and more of our important data is being used by applications that are hosted on line. We've become used to the idea that we should backup our personal computers, but are just now becoming aware that our online data is also at risk.

We would hope that major email providers would have a good backup scheme. To be sure, Gmail, Yahoo, Hotmail, and the rest all do have reasonably good backup measures. But that doesn't necessarily keep your email safe. Gmail has lost entire accounts. Not many, but it does happen. All of the majors reserve the right to delete your account. (This happened to me with my old Hotmail account. I didn't log in for 30 days, and when I finally did, everything was gone.) But the most compelling reason to manage your own backups is that you control the data. With BackupMyMail, you can go back in time and extract your account as it was then - before you deleted that customer's email.

BackupMyMail is in beta, and will be giving away free 30 day trials for the next few weeks or so. Sign up for one now and let me know what you think!

Note: the beta version of BackupMyMail only works with Gmail (and Google Apps mail), and is limited to 1GB of mail. Both restrictions will eventually be lifted (sooner rather than later, we hope).

You can also follow us on Twitter at @backupmymail.

SXSW is Coming!

Welcome to Austin!

It's that time of year again - SWSX Interactive is nearly upon us. For you out-of-towners in for the week, check out the guide to Austin written by my friend and fellow entrepreneur, Chris Treadaway (aka @ctreada). And be sure to check out his new site Youpons.net for discounts from local merchants during your stay.

Lessons from Y Combinator's AngelConf

Yesterday I had the pleasure of attending AngelConf at Y Combinator. It was a great event - if you couldn't attend, I highly recommend taking the time to watch (or at least listen to) the Justin.TV video. My comments on what I found to be the key points and issues raised at the conference (and how they relate to the startup world in Austin):

• Angel investing is a full time job if done in a financially rational manner.
• Some angels are perfectly content to knowingly act irrationally. Hey, it's their money.
  
• Since angel investing is a hits-based business, deal volume matters. A portfolio approach is a requirement - the more deals the better. Getting great terms is less important than getting into great deals.
• Getting into good angel deals is competitive. Only Angels who provide value - expertise or contacts - get to invest in the hot prospects. Naturally, this takes a lot of work.
• Interestingly, since the most successful and prolific angels approach investing as a numbers game, negotiating terms is not very important. The process boils down to this: Find smart people that you like and trust working on big problems and give them money at fair terms quickly. Help them. Repeat. Repeat. Repeat. Nobody wants to do bad deals, but arguing over details is counterproductive. Again, the idea is not to make every deal a winner, but to make sure that some of your deals make it really big.
  
• Good deals are very hard to recognize - that's why you need to do a lot of them. As soon as they are recognizable, VC's get into the game. You have to place your bets before that happens.
• I don't think this works outside of Silicon Valley. There just aren't enough companies to develop a meaningful portfolio unless you're at ground zero. That doesn't mean angels outside of the Valley are wasting their time, but they are not likely acting in a financially rational way - they could make more money with less risk elsewhere.
• If we want to see the same sort of explosive growth out of Austin companies that we do from Silicon Valley startups, we need more active, risk-tolerant angels looking at the region. That means we need more hyper-growth potential startups. Startups need investors who need startups who... It's a tough feedback cycle to start, which is why I'm keeping my fingers crossed for Capital Factory. Austin will never be Silicon Valley, but I'd sure like to see it get a good shove in that direction.
  

I've purposely not commented on the non-financial motivations for angel investing. That's a personal matter that will be different for every investor. There is a definite pay-it-forward element in the Silicon Valley angel community that was well communicated, even celebrated, at AngelConf. I don't want to discount that, as it's tremendously valuable.

It was a great event. I hope to attend next year as well.

UPDATE: Paul Graham has posted a great article on angel investing.