I was watching Colbert the other night, and caught the very tail end of an interview with author Annie Leonard.  She was promoting her new book, “The Story of Stuff.”  I didn’t catch enough of the interview to know if I wanted to buy it, but did catch enough to grab my Kindle to order up a sample chapter.

The subtitle of the book is: How Our Obsession with Stuff Is Trashing the Planet, Our Communities, and Our Health-and a Vision for Change.  Let’s stop and think about that one for a second.  The author is railing against how the obsession with consuming, ostensibly, atoms is ruining the planet.  OK, I get that.

Imagine my surprise when I could only purchase her book in atom form.  Not available on the Kindle.  Wha?  Look, I get that not everyone has a Kindle, and that reading devices aren’t quite mainstream, but doesn’t this hypocrisy sort of negate her whole message?  Dave Ramsey rails against the use of debt for anything.  He’s a man who stands by his principles.  You cannot use a credit card to purchase wares from his site.

What principles is Ms. Leonard standing by when her book is not available at ship date in any form other than atoms?  The lesson here for entrepreneurs is pretty clear.  Know what you stand for, and why, and stick to it, lest you ruin your credibility.  This is an epic fail.

I have long held that our current system of taxation is a bad one.  It’s oppressive, is changed too often, and encourages cheating.  Further, the more complicated the tax code, the more likely you are to have to spend more time, and in many cases money, sorting out what you do and don’t owe.  It’s onerous and I hate the current system.  I want to hack it.

With that out of the way, it was with some interest that I was reading this article about the multitude of tax programs which are being enacted to help students get out of debt post school.  When thinking about any program, I view it in the same lens as I would a product that I would take to market.  First is who is my customer, but second is how do they become aware of the product.  For the average person, staying on top of all of these government programs is challenging at best.  In times like these, I prefer to opt for simplicity.  With that, let me propose some assertions, and then a potential solution:

1) As a country, we should aspire to have a more educated work force

2) The cost of college, university, and graduate education is rising faster than the rate of inflation, making it more un-affordable with each passing year

3) With the current tax system, a higher paid, and more productive, work force should, ceteris paribus, generate more tax revenues

If we can all agree on those assertions, then I propose this simple tax plan:

If you borrowed money to attend college or graduate school, and are now working full time, you do not pay taxes.  All federal taxes that you would have paid are instead diverted to paying down your student debt.  There are no exemptions allowed to reduce tax burden, and by extension extend the debt repayment schedule.

Simple right?  There needs to be some teeth in this, and fleshed out a bit more, but I am offering this one up to Congress for free.  Why?  Because I don’t have the ability to move the ball forward short of throwing this out there and having the community at large comment on, improve upon, and forward this to someone who might be able to something with it.

Think about who this serves.  As a student, you worry less about debt that you are taking on, because the mountain of debt waiting you at the end of your scholastic journey is now much, much more manageable.  As a body politic, we benefit from having a generally up leveling in the education level of our population because more people will find the prospect of continuing their education more economically feasible.  Unlike these other programs which seek to essentially allow for debt forgiveness, each person is responsible for their debt until it is paid off.

Someone looking at this might say that there would be a huge revenue hole to the government if all of the sudden you removed the tax revenues of debt repaying students.  I see that as an investment by the government in the population.  The notion that the better educated population will generate more tax revenues should be simple enough for them to understand.

Why is this good for business?  First, we have the better educated employees.  Second, you have an employee base that has more carefully considered their options.  No 18 year old really knows what they want to be when they grow up.  If you could go back to school at 25, knowing that the debt you are taking on will get repaid first before tax dollars, you are far more likely to make that decision.  As an older employee, with more work experience, and life experience, you are more likely to know what you want/ought to be doing with your life, and if that requires more education, it’s better for everyone that you remove yourself from a job you didn’t want (opening that position for someone else), and positioning yourself for a job you do want without fear of how you are going to pay for it.

How about looking at this from a numbers stand point.  The average student graduating in the class of 2008 will owe $23,200 for their efforts.  That’s a painful number.  I found this study which claims the range for post-secondary debt levels ranges between $27,000 and $114,000.  Yowsa.

For the sake of this discussion, let’s take a WA state resident, making $40K per year, but deciding that going back to school for a degree which will enable them to make $75k per year.  The difference in annual Federal taxes withheld (filing as single and no exemptions) is $5,268 for the lower income, and $14,164 for the higher.  Now, assume you jump from $75K to a $150K per year job (which is not crazy if you get an MBA).  The annual Federal tax liability jumps from $14,164 to $35,135.

See what I am getting at here?  A smart, thrifty student would pay down their debt the same way they were before this plan was enacted, but get the additional paydown accelerator afforded by this plan.  I am guessing most people would actually just have their taxes pay down the debt, which would free up disposable income, which is likely to be spent on taxable items.

Is my reasoning sound?  Am I missing something?  I am not a tax expert.  This is simply an idea that has been rattling around in my head for a while that I would love to see explored more.  Please, prove me wrong.  Tell me why this won’t work.  More discussion can only lead to more ideas.

This week I have been spending time at a corporate offsite.  It’s been a pretty amazing experience, and I have seen/learned a ton of things about which I cannot speak.  That’s a bummer, because I was blown away by some of the stuff I have seen, but it’s internal only for now.  However, should you want to see some of this stuff, you might want to consider being at our Professional Developers Conference in Los Angeles in a couple of weeks.

That said, one thing I can share is a story from a partner.  The presenter was awesome, and shared some interesting pivots on things that his company was doing with data.  It wasn’t data, but rather how they approached their customer support that really inspired me.  To make his point, he showed us a video of a storm chaser – the implicit statement was that for anyone who has ever been on a call with a Fortune100 customer when the service offering goes down, it was very much like being a storm chaser.  Just about the scariest thing you can do.  I would argue that it’s not the scariest environment imaginable, but that’s just me.

In order to think through how they were going to tackle customer support on a go-forward basis they decided that they would talk to the experts.  They arranged meetings with firefighters and emergency & disaster site workers.  They wanted to get into the heads of the very people who have to manage the crisis, calm the locals, and solve the problem.  How ingenious!

I don’t want to give away too much of what they shared, but I will share this tid-bit.  The best plan of action for learning how to handle support of irate, and expensive-to-lose customers?  Drill often.  Think about that for a minute.  How often do you drill your customer support team?  This reminds me of the movie Apollo 13, when Jack Swigert is getting a run in the simulator and blows it, and Lovell makes a joke along the lines of “if I had a nickel for every time I was killed in the simulator.”  The point here is that if you drill for it, you can solve the crisis when it arises with calm and focused effort.

What are you doing to train and audit your customer support?

One of my favorite VC bloggers, Josh Kopelman, has an interesting piece on the VC math problem as first envisioned by Fred Wilson.  Having gone through the fund raising process, and hearing this nonsense from VCs, I always gnashed my teeth when a VC was setting valuations based on what they needed to own.  Not any intrinsic value of the business, but rather what they felt their ownership percentage needed to be.  This was much more of a problem with the earlier stage VCs, and, interestingly enough, with some of the spray and pray VCs, where you would think they might care less about overall percentage due to the fact that they were investing everywhere.

Josh references a paper by Paul Kedrosky which takes a very detailed research approach to examining this issue.  The paper has been downloaded and will be read tonight.  However, the math that blew my mind was contained in the following section of Josh’s post:

Take a $400M venture fund.  In order to get a 20% return in 6 years, they need to triple the fund — or return $1.2B.  Add in fees/carry and you now have to return $1.5B.  Assuming that the fund owns 20% of their portfolio companies on exit, they need to create $7.5B of market value.  So assume that one VC invested in Skype, Myspace and Youtube in the same fund – they would be just halfway to their goal.

My head just exploded.  Despite my own please for my co-workers to be more intellectually curious with their jobs, I had never done this math.  I am left absolutely shaking my head at the reality that is facing any VC not in the top 5 (as in top 5 VCs, not 5%).  Good luck.  The tactical play for a fund is to invest early and small.  This is at odds with the 2 and 20 model.  I mean how are VCs going to feed their Cayenne Turbos?

Worse, I worry about the companies that the other VCs are funding.  With such a challenging economic model now staring them in the face (hey, at least before they didn’t have to answer to the data which could refute ridiculous forward looking statements about future “internet” or “new economy” fund performance), are they going to just start swinging for the fences?  Will they just pile on the risk and do whatever they can to justify the fees?  Or will they find a way to raise money and do next to nothing, and simply collect their management fees?  I wonder if LPs will now start wanting to have claw-back mechanisms in place when returns fall below a certain threshold.

The really hard problem facing entrepreneurs is that while it costs less and less money to start a company, VCs have more and more money piling up in the form of capital call commitments due to a dearth of deals over the past couple of years.  They want to deploy more capital, and that leads to capital inefficiency within small companies.

What does a guy have to do to get his StackExhange site set up and running? I put my submission in a while back, but I am probably way down on the list.  So in a creative attempt to convince Joel and Jeff that I am worthy, I figured I would give them something to read.  I spent this past week at the TechCrunch50 conference listening to developers talk about why they don’t use the Microsoft stack.  It was a great set of conversations, but I also spent a good bit of time talking with some of the business guys.  Many similar topics of concern came up over and over again, and I really want to help solve those problems.  Q&A for founder types anyone?  Let’s get this thing started already.  I will be a tireless promoter, and I can bring a pretty powerful ally to the table in making sure the site is funded and gets promoted.  Jeff, Joel, I beg you…please get my site rolled.

I have been waiting to write this post for a long time.  There are a great deal many resources on the web for entrepreneurs looking to learn, such as Hacker News, Andrew Warner’s Mixergy, and Eric Ries’s Lean Startup Blog.  However, I have always felt there was a gap in the the resources that really would help an upstart.  Having a really good base Excel model, fully built, and flexible (think Basecamp but for your financial/ operational model), would be extremely helpful.

Another resource I have always wanted to see were the actual decks which were used to get companies funded.  For obvious reasons, those are pretty hard at which to get a look.  Now that I am three years on from the initial funding of IMSafer, I have decided that I would post the slides that we used when we went out to raise angel funding.  Beyond just throwing the slides over the wall, as part of my community book The Failing Point, I have an entire essay dedicated to the content of the slides, and what it means with regard to putting together a long form business plan.

These are the actual slides, with no edits, save a few names removed for privacy reasons.  Please send questions.  Don’t be afraid to ask.  They biggest take away most of you will have is that there is no magic bullet for content, but there is good form to follow, and more than anything, at this early a stage, investors are backing people first, ideas second, slide content third.

It’s been an interesting week.  I posted the note about the Zappos deal and got quite a few comments and emails about it.  I will readily admit that the use of the word “hate” was a bit pejorative, but I had a point to make and at the time it seemed appropriate.  I don’t think VCs hate entrepreneurs, but I do think that there are things that VCs do that make life for entrepreneurs very hard.

In some of the discourse I have had over the past week on this topic, I felt a bit like George Costanza trying to explain to his co-worker that he has black friends (for the record, I am an African American, on the off chance that this paragraph offends someone’s sensibilities).  I have VC friends.  I have many VC friends.  I’m not sure that my opinion of the trade has improved much over the last handful of years, but I do like some of the people in the trade.  My opinion of the trade itself has more to do with my observations of the value delivered versus the value extracted by VCs.

I was asked if there were any VCs that I do like, and while I won’t generalize and say that there are firms that I like, there are a handful of VCs I have met in my travels who seem to have good heads on their shoulders, want to do the right thing, are willing to tell you “no” (instead of stringing you along because it costs them nothing), and are people whom I would go to with a deal if someone was looking to raise money and needed an introduction.  These are folks at firms that invest along the entire spectrum of deals, but these 10 are some of the “good guys”:

1. Aaron Bendikson – Oaktree Capital Management
2. Mike Brown – Foundation Capital
3. Pete Higgins – Second Avenue Partners
4. Alex Lloyd – Accelerator Venture Partners
5. Greg Martin – Redpoint Ventures
6. Matt McIlwain – Madrona Ventures
7. Chris Michalik – Kinderhook Industries
8. Patricia Nakache – Trinity Ventures
9. Rakesh Sood – NTT DoCoMo Ventures
10. David Wassong – Soros Private Equity Ventures
11. BONUS 2 for 1: Charles Beeler & Ray Schuder – El Dorado Ventures

When and if you are considering raising money from venture investors, make sure you understand what you are getting in return.  There are many investors who will wow you with stories of great exits, or about the “value” they bring to the table, but in reality, many of these VCs have never actually run a business.  They have never had payroll responsibility.  They don’t know what pressure you are feeling from first-hand experience.  That turns out to be very important when your back is against the wall.

The title here might be a bit sesationalistic, but the deal certainly shows how VCs can act in a way that is counter to the wants and needs of the entrepreneurs and management teams.  The news yesterday that Zappos sold to Amazon has been circulating with many emotions.  CEO Tony Hsieh wrote an amazing letter to his employees, which laid out the deal and what it would mean for the company.  Read it if you haven’t already.

Unfortunately, when the press and journos report on a sale, they focus on the topline number, and it is rare that they report much beyond that.  As most of my readers are in the tech industry workers or entrepreneurs, the topic that is of more importance to them is “what did the shareholders who weren’t VCs get?”  That’s a great question, and one that is usually difficult to answer without access to the funding docs of the various rounds.

In the interview that I did with Andrew Warner of Mixergy, I touch on this topic of trying to create a structure that has the interests of both the entrepreneur and the investors aligned.  This morning I was reading the peHUB account of the Zappos deal, and there are a couple of things which pop out at me:

1. Zappos management didn’t want the deal – the management team wanted to remain independent.  It’s a well reported meme that Zappos has a culture which is very unique, but has generated a booming repeat customer business, and one that has grown quite nicely, even in these tougher economic times.  Being part of Amazon will certainly change that.
2. The sale was forced – it appears from the reporting that the investors were able to force the sale of the business.  That’s their right if they own more than 50% of the business, but it could also be their right if they had what’s called a protection right in the security in which they invested.  These provisions allow for a great many things, including the ability to force a sale at a valuation of X times the value of the round invested.  That takes the decision out of management’s hands, and clearly not always in their best interest.
3. Not all liquidity events are created equal – the total investment in Zappos, according to peHUB, was $49.1 million.  Most casual observers would think that this is all that must get repaid before the employees/entrepreneurs start seeing money.  This is not the case, as it would depend on whether or not the different rounds of investment were made as common stock, convertible preferred stock, or, worse, participating preferred.
4. VCs will screw you – the most interesting line of the whole article is the peHUB quote attributed to a shareholder about Sequoia: “…came in at a high valuation, but he countered that with a very high liquidation preference.”  The high valuation is meant to give the entrepreneur the sense of relief associated with keeping more of their baby, but that liquidation preference (3 or 3.5X!!) is meant to ensure that no matter what, Sequoia actually gets a guaranteed return.  I would love the opportunity to invest is a repeat successful entrepreneur with a 300% return guarantee.

The liquidation preference issue is moot depending on if the security was a convertible preferred and if the valuation of the round at which the money was invested would be low enough such that the shares converted.  Regardless, this serves as a great example point of how investors can create situations where the entrepreneurs are not being looked after, nor are the interests of management and investors aligned.

Tony is a super succesful entrepreneur, with one exit in the late 90s for almost $300 million, as well as successful investments out of his own fund.  If Sequoia took him to the woodshed like this with the liquidation preference, and the forced sale, imagine what they would do to the unseasoned entrepreneur.  As an entrepreneur today, you can do so much more with so much less.  See what you can get done before taking money from the large fund investors who “need liquidity” rather than what’s best for you.  If you take money from a VC, caveat emptor.

UPDATE: I got an email from Dianne at Kel & Partners (presumably Zappos’s PR firm) explaining to me that the story is false and that she cannot say anything else for legal reasons (which is true).  Unfortunately she called me Brian, which is not going to endear me to you.  The email was pretty impersonal (probably a form letter) and leads me to believe that this meme has upset someone and the PR firm is in damage control mode.  Whatever the actual reason for selling, I am happy for the Zappos management team if this is the exit they indeed wanted.

Mini-MSFT is back, with a post about Microsoft turning The Corner.  It’s interesting to contrast his point of view with that of MG Siegler over at ParisLemon.  Given my own perception of  Valley bias on the part of Siegler (he is one of the new voices of Techcrunch after all), it’s great to see that we’re making progress which is being met with receptivity and not suspicion.  Further, everyone is focused on the most important beneficiaries – customers.

I have to admit, since returning to the company a little over a year ago, I have had this sense that things are looking up.  Don’t get me wrong, there’s no shortage of frustrations for me, but that’s to be expected when you come from a tiny company where you were the founder and CEO to a large company where you a cog in a wheel.

With the new fiscal year, I have a new role and a new team, and I plan on making liberal use of my training and experiences in constrained resource environments to do some things that will harken back to the mojo days of the late 90s and IE/Netscape goodness.

I know I posted a joke leaked screenshot of Chrome OS, and many people found it funny, but I firmly believe that this pre-announcement was the absolute dumbest thing that Google could have done.  First, they are starting to show a trend of pre-announcing products, with ever increasing time between announce and availability.  You could see this with Java support in App Engine, but then Wave, and now Chrome.  What are they thinking?  FUD worked 10 years ago, but not anymore.

Second, operating systems are our thing.  We have *YEARS* of experience building and delivering operating systems to market.  If it we so simple as to slap a pretty face on a Linux distro, someone would  have taken us out a long time ago.  There’s a long road of tattered carcasses that have tried to be “the next great OS.”  I use a Macbook at home for personal work, and enjoy OS X, and generally regard it as a great operating system.  Even with the Apple Fan Boy magic, they are marginally high single digit market share.  Ouch.

Third, and this is the important one, Google has given us a rally cry.  Whereas you could make the case that legions within the company felt that Ballmer’s quest to topple Google in search was Quixotic at best, no one, and I mean no one, comes into our house and pushes us around.  Expect to see the company galvanize around this new encroachment.  Expect a wave of pride, and something akin to, dare I say, nationalism, sweep through the company.  To pre-announce a thing a scant few months before Win7 goes out the door is going to bite them in the rear.  Win7 hasn’t had a bad review yet, and people are very excited to get it.  I have been running it on all my personal and work machines (other than the Macbook) for months, and it’s awesome.

We’ve rounded the corner, for sure.  We’ve rounded it and rejoined the race.  We were off in the woods for a while, but we’re back in the race and have a lot of power in the engine.  The next few years are going to be incredible.  I’m excited to work at the company, but more excited as a consumer who is going to benefit from Google, Apple and Microsoft all going at it hammer and tongs for phones, search and operating systems.

UPDATE: Looks like the original post is top spot at Techmeme…this week is going to be interesting.  That’s all I can say out loud.

Apparently (apparently!), I have said something that hit a nerve.  When I posted my thoughts on the whole issues as to whether or not the VC model was broken, I had no idea that it would be the most popular post I have ever written (and it’s not even noon on day 2).  Crazy.

Predictably, some of my VC friends showed up to the conversation to point out that 1) am angry, and 2) that the “good” VCs don’t have associates.  First, I am not angry.  It’s easy for the VCs and their ilk to cast those aspersions, but the reality is that they have a fantastic business model, and they are going to fight to the death to protect it.  Second, the venture firm that completely blew me up at my last company has no associates.  One day I will tell that story, but even firms with only partners can behave badly.

I certainly don’t want to over-generalize an entire industry, but I can say that the vast majority of VCs are either neutral to the value of your business or in fact do actual harm.  I would go so far as to say that 10% of VCs are net positive, 70% are neutral, and 20% actively destroy value in the firms in which the invest.  As I quipped on Hacker News, partners in VC firms tend to practice what I call seagull management: the fly in, make a lot of noise, crap all over everything, and leave.

While the title of my first post included the associates, the bulk of the content was around what was wrong with the incentive structure and funding process.  The information asymmetry which has existed between those seeking capital and those who have it make it so that those seeking it are at an extreme disadvantage.  Further, those people funding the VCs (the pension funds, fund of funds, family offices, etc), have no incentive to hold these guys accountable so long as they continue to produce out-sized returns.  With sites like The Funded and pervasiveness of blogs, it’s now easier than ever for people to share their information about their funding processes.  Interestingly, I am hoping more and more information begins to find its way to the net as to how much money VC firms are actually making, how that persists over time, and the stacking effect which comes from raising multiple funds.  Many, many, many entrepreneurs simply don’t understand this, and if they did, they would have a far different perspective on where the interests of venture firms lay, and the likelihood that their interests and the VC firm’s interests are aligned.  The more time I spend thinking about Paul Graham’s model with Y!Combinator, the more I like it – very entrepreneur friendly.

Someone asked me in a direct message on twitter “how VCs add value?”  I think first and foremost they help you make your job easier.  If that means making connections to potential business partners, or identifying and recruiting talent, or thinking through potential stumbling blocks of your model – those are all good things.  Where the VCs break down is when they start taking their hammer and smacking everything with it.  There are many VCs who are afraid to say “I don’t know.”  They want to prove to you how smart they are or justify their existence.  Worse is when they prevent you from taking an action (I don’t know, say like the sale of your company which would net the founding team lots of cash) because it doesn’t help them hit the returns they need to justify their fees to their investors.  The scale of what “lots of cash” means to a first time entrepreneur and an seasoned VC are orders of magnitude different, and that has a direct impact on what would be meaningful in your life versus what’s meaningful in theirs.

I actually speak on the topic of getting bullied by investors and board members in an interview I did with Andrew at Mixergy.  I spent an hour speaking with him about my experiences at my last funded business, and he should have it up later this week.  There are a lot of lessons in that interview which I hope will be invaluable for entrepreneurs looking to raise money, get started, or even if you have already raised money.  I made a lot of mistakes, and I would love for others to learn from them.

In an effort to share those mistakes, I am going to be launching my community book project.  The working title is “The Failing Point: Hard Earned Lessons About What Not To Do” and I will be posting an essay a week from the book that I am writing.  Each essay will be titled in such way as to finish the sentence “Under no circumstances should you…”  Here’s the first essay from the Getting Started chapter.

The book is meant as the anti – “do this and you will be a millionaire” book.  It’s a set of essays on topics related to getting started, creating a product, building your team, starting the business, raising money, driving revenue and operating the business.  They say you learn the most from your mistakes.  I hope to take the mistakes I have made (a lot of them), and those I have seen made at companies for which I worked, and put them into digestible format for the entrepreneurial community.  I don’t have all the answers or a formula for success, but I hope I can help people looking to succeed with their business.

What I am hoping to get from the community is feedback, and for people to share their own stories in the comments.  If the content resonates with you, fantastic.  If you think I am full of it, tell me.  That’s the only way it will get better.  The content will be online, free of charge, and when the book is done, I will make a hard copy available for sale.  For now, I will have a category link here to “The Failing Point", but very soon I will have a separate site built out for the content.