Author: John Tough

Mike Maples of Floodgate Talks VC & Start-ups on the Origin Podcast

Mike Maples of Floodgate Talks VC & Start-ups on the Origin Podcast

Listen to Mike Maples on the Origin Podcast here

It was one of the better venture-related podcasts in the past few months. Here are my notes:

Risk-Return: Get paid for your risk

  • The reality is that every profession has a top 10%
  • Managers are too reliant on anecdotal wisdom as opposed to first principal or theoretical basis
  • Get paid for the risk you take in two ways
    • Invest before the Series A firms (series +1 firms)
    • Getting ownership at a lower price basis
    • Get pricing power by not competing with big firms at pre-product market fit: get a real chance at ownership here
  • All investing, fundamentally, is how you get paid for the risk you take

Understanding Competitive Advantage: Playing Offense

  • After getting in early, where else is your money competitively advantage?
    • Pro-rata rights
      • If you are Benchmark or Sequoia, you get to see Floodgate and Founders, Baseline and First Round deals. They have more optionality on what deals to do.
      • It’s their specialty to do Series A and Series B deals
    • So, follow-on should primarily be exercising your pro-rata rights and for the most part in Seed deals
      • Index the top tier Series A firms;  and most (seed) funds overestimate their follow-on investing skill and spread too thinly. More often than not should overindex to these deals.
      • And many firms are not applying the same rigor to follow-on investments. When you see (seed) firms doing Seed extensions and Seed 2’s the firms are incorrectly assuming their money is still competitively advantaged.
      • On as theoretical basis what is it that you know that the market doesn’t know? Why is your wisdom greater than the wisdom of the crowd? The exceptions are:
        • Company crushed numbers and is inflecting. In that case the preemptive strategy works and you add-on before going to market
    • Always play offense with your money and when it is competively advantaged
      • Invest before others care (seed)
      • Pro-rata rights that the rest of the world doesn’t have but only I have
      • I know something on the tip of my tongue that the rest of the world doesn’t know yet (the pre-emptive strategy)
        • Hoping for the best is not an example and this is where most firms that do Seed Extensions or Seed-2’s overcommit to resere
Fund Operations Reserve strategy
    • Angle 1: ”Do you have high enough conviction to go super pro-rata? If not then its a no-commit”
    • Angles 2: Follow-on investing is more like index investing, versus picking investing. “Picking” is an infinite range of companies/ options. But follow-on investing is you investing from a fixed pool of companies. So in this case, is my wisdom greater than my wisdom of the crowds? And index investing assumes no unless you know something you are sure you know. “The problem most investors in follow-on scenarios believe they know something that are not so: intangibles of Founders, board insights, etc. But I give the market a ton of credit for figuring out the best performers.”
      • With lack of quality upstream interest, be careful to think you know something the market doesn’t know.
      • Be sure you explicitly know something differentiated.
  • “Your fund size is your strategy”
    • Successful start-up outcomes are a rare event: 10 companies out of 1,500 seed deals create 90% of the returns. Power law distribution
    • Fund portfolios within the Funds themselves also follow a Power Law distribution (more power law oriented with Seed as opposed to Series B/C)
      • So to aim for a 3x Fund and you assume a power law distribution, then the top deal is 1.5x your Fund, your second deal is 0.75x and your third deal is 0.375x, etc. All totaling to 3x.
      • And when the best company has to return 1.5x the Fundf by itself, you do the math: $100M Fund means the best deal returns $150M. And if your average ownership stake is 7% then one company has to be worth $2BN.
      • When your billion dollar exits dont return big for you, you have a problem.
Forecasting as a Strength (Book mentioned: superforecasters)
  • Amateurs can outpredict professionals in forecasting if:
    • Continuous forecasting
    • Intellectually diverse team
    • Process everyone believes in
    • Write down what they believe the truth is to the best of their knowledge at the time; AND revisit and ask the tough questions: what is surprising us and what has changed and what is the new truth with the new facts
    • GOAL: Don’t get too attached to being right individually. More about getting to the right answer for now, cumulatively.
  • As venture investors, they forecast for:
    • Pace of investing (deals, dollars)
    • Average deal size
    • Average price
    • Ownership
    • Expected reserves
  • The more uncertain a future is the more valuable the forecasting process becomes
Buffet and the Strike Zone of Competence
The art and science of hitting (baseball) is to know your “circle of competence” and where you hit best. (If a ball comes within a certain region of the plate for Ted Williams then he hits 0.450 –  And then in another part of the plate, if he took a swing he would bat 0.130) So the art and science of hitting is knowing your circle of competence, and then having the rigor to only swing at balls in that circle of competence.
In investing, there are no called strikes. So in theory you have the opportunity to invest only when a deal is inside of your circle of competence. In order to do that you have to know your circle- and that takes a few Funds.
One observation is to go back in time and ask: what are the best [seed] deals done and if so are we at a Fund size and strategy that matches that adjusting for new truth that we believe?]
Takes a while to get better at follow-on support. Everyone starts overly-optimistic. Need to adjust and temper expectations.
Seed: More of a people flow business than a deal flow business



Hit Refresh, Book Notes

Hit Refresh, Book Notes

Over the holiday I wrapped up a number of books that had been piling up on my bedside table. Hit Refresh was one of those books and I am glad I read it. The main reason I enjoyed the book was the underlying sense of optimism and progress that Satya implies through his vision of the future workforce and broader society. I similarly enjoyed his open willingness to revisit core principles and identify which foundations (people, culture, products) to support to enable the next chapter at Microsoft.

Here are some quotes from the book that I highlighted…

On leadership & vision

“A leader must see the external opportunities and the internal capability and culture – and all of the connections among them – and respond to them before they become parts of the conventional wisdom”

“The view your adopt for yourself profoundly affects the way you lead your life” – Dr. Dweck, Mindset: The New Psychology of Success

“… compete hard, and then equally celebrate the opportunities we create for everyone. It’s not a zero sum game.”

On Trust

“Consistency is better than perfection”

“Consistency over time is trust” – Jeff Wiener

“The key to cultural change is individual empowerment”

“Learning to fly is not pretty, but flying is”

On Societal Change

Engelbart’s Law: “…Our ability to improve upon improvements is a uniquely human endeavor….”

“Economic improvement is centered around the intensity of the adoption, not just the presence or availability of the technology.”

Edward Conard: The Upside of Inequality…. inequality ultimately leads to faster growth and greater prosperity for everyone. Investors wait for good ideas that create their own demand for properly trained talent needed to commercialize ideas successfully. He sees two constraints to growth: an economy’s capacity and willingness to take risk and to find properly trained and motivated talent.

As machines replace labor in some tasks, firms will be incentivized to create new tasks in which humans have a competitive advantage. “Although automation tends to reduce employment and the share of labor in national income, the creation of more complex tasks has the opposite effects.” – Daron Acemoglu, MIT economist

“Business is humanity’s most resilient, iterative, and productive mechanism for creating change in the world.” – John Batelle

2017: Transition & Acceleration

2017: Transition & Acceleration

2017 was a year of change for me. I started out the year as Chief Revenue Officer at Choose Energy, culminating a 4.5 year role with the company that began as the first non-engineer in 2012. With the sale of Choose Energy in Q2 and my responsibility with the company melting away, I experienced a brief, but noticeable emotional lull. I had (re)started my dream job, working in venture capital at the intersection of technology and industry with the Invenergy Future Fund but I was missing the action of day to day operations. Working at Choose Energy with world-class employees and a truly unique entrepreneur was special, and the loss of that continuous engagement affected me. I hope to work with each of them again in some way during my career or personal efforts.

And just when there was a lull in my usual intensity, my new team at the Invenergy Future Fund of Michael, Amy, Juan and Carmeanna got me revved up for the truly unique opportunity we had ahead of us. We are now in the early stages of executing our plan to be a world-class venture firm focused on software companies in the energy & industrial verticals, and the machine is really starting to hum. I am increasingly confident in our unique value add as operators, industry connectors and EQ-aware professionals. The combination will take years to prove out but I like our foundation.

Part of our Fund’s momentum includes two new investments we made in the second half of the year. While the investments have not been formally announced, I can’t wait to share more about each of them. The management teams at both companies are elite, focused on driving industry improvements through products that are already operating in the broader industrial environment. The executives and the problems they are solving motivate me every day to find ways to be helpful to their existing operations and find more companies of equal excellence.

2017 also marked my first full year back in Chicago. Being closer to family is everything I hoped for, and more. The family connectivity, coupled with my amazing wife enables a balanced approach to personal and professional growth.

Overall, 2017 was a blessing both for the end of one personal chapter as well as the beginning and acceleration of another. I’m thankful for those around me and excited to work with my expanding team and network to enable and support continued success.

Three Industrial IoT Sales Traps to Avoid

Three Industrial IoT Sales Traps to Avoid

With the digitization of traditional industry, software solutions are increasing their focus on the energy and industrial verticals. At the Invenergy Future Fund we are seeing many pitches a week for companies seeking capital to grow their business. As part of our diligence, we like to sit in on a few sales calls – usually to prospective customers that we introduce. Through those calls, we have seen three common mistakes that start-ups make while pitching traditional industrial firms. We list them below to serve as a guide of pitfalls to avoid:   

1) Buzzword blockers: Many sales decks pitching the operations, maintenance and security divisions of traditional industries read the same… some newly formed version of technology (MACHINE LEARNING! ARTIFICIAL INTELLIGENCE!) could dramatically improve business results. The problem is that these buzzwords talk about your company’s solution, and not the customer’s problem. The customer does not necessarily care how the problem is solved, just that the results will improve. To paraphrase a statement I recently heard from an energy executive: “what makes this solution better than the 20 other AI software companies I have been pitched this year?” As a growing start-up you are better served cutting the jargon and delving straight to results and focusing on how you will get to a proof of concept within the customer’s desired timeframe. Remember, your technology is merely a tactic to serve the customer. The real product is the problem you are solving for the customer.

2) Hubris hurts: Energy and industrial firms have been solving maintenance, throughput and security problems for decades. Yes, the technology environment is changing. But within these Fortune 500 companies there are seasoned executives who have developed impressive IT and software systems based on an accumulation of historical technologies that manage billions in assets. No new technology solution is going to completely rip & replace existing software. Start-ups that expect to dramatically replace existing software architectures and make generalizations about weakness of existing solutions simply have not done their homework. Respect the reasons that current solutions are in place by identifying existing strengths and demonstrating new, complementary capabilities. The professionals who made those architecture decisions were operating with then-existing resources and are likely still somewhere in the organization.

3) Deliberate (business) development: In-the-ground or under construction assets have detailed, expected lifetime performance metrics based on the technology and environment for when the asset was implemented. Given those strict performance expectations, a large company will only trial a new, unproven technology on a select number of assets whereby the test will not materially impact overall results. It takes time for the prospective company to identify those sites for your software and it takes time to encourage the internal P&L owner to take on the potential risk. Bake that “discovery period” and longer sales cycle into your revenue projections. The beauty to this structure is that if the software does work as expected, then the concrete data enables implementation across the rest of the asset fleet within a surprisingly abbreviated timeline. As a result, the longer sales cycles of the energy & industrial world can actually be a feature, not a bug of the purchasing decision.

We hope you find these insights helpful. If you are a software company targeting the Industrial IoT segment looking to scale your business, please reach out as we would love to share thoughts, make some introductions and help further optimize the industry.

Joining the Invenergy Future Fund

Joining the Invenergy Future Fund

This post is a bit late but with the whirlwind first few quarters behind me, I finally had time to reflect on joining the Invenergy Future Fund. We had our first close in May and the team has been going full steam since 2016…

When I review potential venture investments, I look for a special team with leading & complementary industry experience that is targeting a big market by addressing a specific, impactful problem. Using those parameters, the Invenergy Future Fund was a personal investment that was too good to pass up.

What is the Future Fund?

The Future Fund is a recently launched venture capital firm focused on making early stage investments in technology companies that address the application layer of the energy & industrial verticals. Our belief is that significant existing and ongoing investments in distributed and modern energy infrastructure enable and require a new host of businesses to maximize, control and secure these assets. These software solutions will be capital light, require domain expertise, and will also be scalable from energy into other industrial verticals. I am especially excited because while our focus is targeting a specific area where the Venn diagram of software & energy overlap,  businesses that succeed in our spectrum will achieve success in other areas of the industrial vertical.

Who are the People?

Succeeding in venture capital in the energy & industrials verticals is not easy. You need experience as an investor through multiple cycles, operating experience, and a deep industry appreciation. With Amy Francetic, Juan Muldoon and myself I humbly believe we have a strong core to execute our plan. Amy is a rockstar with both energy investing experience through the CET and operating experience in high growth technology companies and I am excited to learn from her. Juan – who first found me late last summer- is brilliant, and tireless and has a special way of digging into key company drivers… and risks.  Cameanna Eberly is also a core asset to our team keeping the ship running smoothly. And, alongside us we are fortunate to have Michael Polsky (CEO, Founder of Invenergy) and Jim Murphy (President of Invenergy) to guide us and ensure we see the forest through the trees. I was lucky to have Michael as an investor in Choose Energy and know that his perspectives on the future tend to be accurate. Finally, our team is lucky to have access to Invenergy resources and engineers and operators to help us evaluate and understand opportunities in the increasingly high pace energy and industrials environment. The people and our close resources are undoubtedly are the greatest edge.

What’s next?
We have made one investment in Aquilon Inc. and are continuing to review investment opportunities. If you know of early stage companies with software solutions that have an application in the energy and industrial verticals, please let me know. My email is or you can find me on Twitter @JohnJTough


Becoming dispensable

Becoming dispensable

On a recent RECODE/DECODE podcast where Kara Swisher interviews Frances Frei, the SVP of Leadership & Strategy at Uber. Frances is a renowned leadership coach with a special skill at turnarounds and an unparalleled optimism and belief in an individual’s redemption potential and trajectory.

In the podcast Kara and Frances cover Frances’ 3 key to modern leadership:

1) Making others better as a result of your presence. This is usually a “catch-all” line, but the impact needs to be internalized: are you as a leader actively focused on improving those around you?

2) Having strong performance outlast your presence. Replace yourselves as quickly as possible. Leadership is about a leader serving their team and creating a condition for them to thrive with a goal to become replaceable as soon as possible. Having this leadership goal implies the leader is confident there is another role for them in this organization or another one.

3) People feel your high standards and your devotion to them. Communicate this through asking questions and digging deep.

The one that stood out to me the most is item #2:. Younger professionals that rise to the executive ranks earlier than they expected tend to have a problem with becoming dispensable. A natural tendency is to retain information, become important to many stages of the company and not lose the opportunity to give input for what each group is doing.

I fell for this mind trap when Choose Energy was growing but I was lucky in that Kerry Cooper was my CEO giving me strong advice how to combat the problem. Similar to what Frances Frei says, Kerry’s coaching was persistent in that successful leadership was creating a structure that would thrive beyond my presence. It took me a while but ultimately through improved corporate communications, better delegating and transparent KPIs, we created a structure that was successful independent of our cumulative influence.

VC Operating experience 

VC Operating experience 

I like to joke that if I could, I might just go back to a younger “me” and punch him in the face.

I had a dream job as an associate at Kleiner Perkins. I was working at a storied firm, had access to world class mentors and investors, and had premier investment opportunities literally walking through the door.

One of the main problems I faced? Saying no. Saying no in venture capital is hard. I saw hopeful, brilliant and dedicated individuals dedicating their lives efforts to potentially transformative ideas. And as a VC, you have to say no to most individuals and companies you meet with. But saying no when I had not been on the other side of the table as an operator myself felt disingenuous. I was giving advice to entrepreneurs, and passing on investments, without having my own personal start-up peaks and troughs. In the words of Teddy Roosevelt, “the credit belongs to the man actually in the arena”. And while I was respectful to each entrepreneur, I believed that to give better feedback and to better earn the entrepreneur’s confidence, trust, and counsel, I too needed to have my own experience(s) in the arena.

There is an ongoing debate about whether you need operating experience to be a great VC. There is no correct answer to that question. What I do know is that I personally needed the start-up experience. I felt I needed to earn the entrepreneur’s respect and that my advice and feedback would carry more weight if the start-up management team knew I had been in their shoes. I want my entrepreneurs to know that I have experienced those growth problems… been told no before (many times) and have personally felt the rush of success and the dreary despair of failure.

And now, with over 5 years of experiencing managing the growth of a start-up I am both proud of and humbled by the lessons I learned along the way.  I’m thrilled to deliver those lessons (and new ones!) to the firms I will meet with and invest in going forward.

Saying thanks

Saying thanks

Over the course of 4-5 years with a start-up, I got a first-row seat into the ups and downs of scaling a company. One of my main takeaways was that you have to enjoy the journey. If you only seek the destination you won’t last the trip.

And to enjoy the trip you have to work with people who make the miles a bit more enjoyable. You don’t have to like them and hang out on the weekends, but you have to respect them. Respect their perspective, their experience, and their contribution. Respect enables trust and trust is a prerequisite for a healthy and long-standing relationship.

During my tenure I worked with some world-class professionals. In some cases our trust was more or less immediate (out of necessity!) and in others, it took a few crucible events to crystallize our bond. While there are too many names to write down, I do want to acknowledge the significant positive impact a few individuals had on me during the process:

Kevin Stevens & Jonathan Crowder: My “go-to” team from Dallas. No job was too complex or big for these men. They taught themselves operational finance, product management and the essential of programming. Whenever we were busy I knew they could pick up the slack. And when times were tough, they knew how to strategically engage and re-position the argument to identify channels for growth. Big things ahead for them as they take on the Texas market.

Kerry Cooper: Kerry brought institutional leadership when we needed it most. She brought excellence in hiring, in thinking about the customer, and in establishing operational procedures & OKRs. At the respective moments, most of those traditional managerial were relatively new to me. In addition to management lessons, I also learned from Kerry how to engage a mentor network, voice my opinion more effectively and to be willing to have an open and honest debate and feedback. I was lucky that her experience from Levi’s, Walmart, and ModCloth brought valuable lessons to my career.

Jay Webster: Early on Jay gave me the flexibility to explore growth, taught me how to simplify strategy and most importantly how to execute.  Within my first few weeks I was stunned at how much accomplished rolling out to new markets and testing new partnerships. I also appreciate his lessons from many start-ups on how to better pitch VCs and how to engage a board room. Finally, I still marvel at how he could perfectly match interpersonal strength with candid feedback – truly an exceptional leader.

Ethan Wais: My first hire who was always the smartest guy in the room. He saw the future faster than most and worked on timelines faster than most. His insatiable appetite for knowledge and identifying alpha showed me the true ethos of the Bay Area and how the area truly does attract the best talent.

Simona Golebiowska, Leo vonP, Lindsay Hoffman: The can-do team that executed within every role the company needed – and those needs changed quickly! We moved quickly, tried everything and enjoyed the failures and successes. Each brought curiosity and can-do attitude to every growth and operations problem and I loved those days knowing that no mater what came up, this team could handle the attempt. Most individuals cannot match a start-ups fluid needs and this team (and others) handled every turn and speed.

Sai, Jake & Jeff & other eng team: The evolving engineering team had great leaders throughout (Paul Butler, Chris Hanson) and at the end Sai, Jeff & Jake brought all of our various projects and products together. If the first few years were about getting the infrastructure in place, the final 12 months were about increasing monetization. The team’s need in the final 12 months to understand the infrastructure while building applications and products to accentuate growth was stunning. One of my biggest regrets will be not knowing what else this engineering team could have done with another 12-24 months of runway.

Mike Rudolph & Erica Hennes: The marketing team that got it. Over budgets weren’t huge but Mike’s experience and Erica’s hustle seemed to accomplish every task. With Mike and Erica running the marketing group, we had immediate transparency, clear product requirements and a strong backbone to ensure the company was being truthful on expectations. Mike’s direct method of communication and ability to orchestrate multiple campaigns while still diving into the numbers and understand data analytics (with thanks to Michael Michonski!) was exceptional.

David Yi: Epic part time CFO. David taught me a lot about business economics, how to better understand the LTV / CAC trade-offs, how to manage capital raises and how to better manage both being acquired and getting acquired. Every start-up needs a David and we were lucky to have him.

Robin Swanson: The backbone of the Dallas office and a constant reminder to place the customer first. Robin was tireless in her work ensuring our day to day operations remained strong and was the big smile we all needed.

5 M&A Insights from the Choose Energy sale

5 M&A Insights from the Choose Energy sale

As I wrote about last week, Choose Energy was sold earlier this year. Beginning in 2015, Choose Energy had multiple casual M&A discussions. But, we did not formally engage until we knew we were ready as a company.

With a few months delay giving me a bit of clarity, I wanted to share some advice / insights that stand out to me about the process and how to prepare for our own deal:

  1. M&A is hard. Very, very hard. Finding the right buyer, at the right price at the perfect time in their strategic initiative game plan is rare. Choose was lucky in that the company had inbound interest. And even then, not easy. (Jason Lemkin at SAASTR has documented just how hard this can be for companies with ARR type revenue and how they should aim to sell at local maximums.)
  2. A clear internal deal champion at the acquirer is required. And you need that individual and their team to have a clear path to continued success after the deal.
  3. Deal fatigue is real. – for both sides. I have raised Series B & Series C capital from a combination of strategic and VCs. Those processes are time consuming. M&A is double or triple that. Have a great team in place, hire great advisors and have an experienced CFO. (We were lucky to have David Yi, a serial KPCB CFO) The amount of work is unexpected, even for someone like me that expected it. To get through it you really do need to create a bond with the acquiring team and “gang up” on the advisers. Part of their job is to be fall guy so the buyer & seller can rally around a common enemy 🙂
  4. Be prepared for regulatory requirements. For companies in the energy & industrials space that capture proprietary data and engage with federal and state level regulatory bodies, be prepared! Good process as you grow the company saves you from some major headaches down the line as lawyers dig through diligence and process documentation. Again, hire a great CFO, even part-time.
  5. Enjoy the ride. There is something very odd about the completion of a sale. You go from being independent and controlling the asset to suddenly having a disbanded board and an entirely new organization structure, reporting structure and incentive structure. Even if your acquirer provides barely any oversight post acquisition, there is still a mental change. For me, this was one of the oddest feelings… and I liked our acquiring team! Enjoy those last few months of corporate independence.

Once a deal is complete there is an entirely new set of issues to address around corporate communications for employees, customers, service providers, and regulatory agencies. I will write about that experience in the coming weeks.

If you enjoy this, please share!

Choose Energy is acquired, hat tip to Jerry Dyess

Choose Energy is acquired, hat tip to Jerry Dyess

Last month Choose Energy was sold to RedVentures.

I joined Choose Energy as the Director of BD in June 2012 in coordination with the Series A investment from Kleiner Perkins. I was the third employee and first non-engineer. The range of highs and lows we experienced as we grew the company from under half a million in annual revenue to over $10M in ARR were dramatic. There were many unique components to the CE growth that I am look forward to diving into over the next few months. But now that the deal is done and public and was successful from both a financial and educational perspective, there is one major thank you I need to give:

Thanks you, Jerry. Jerry Dyess is the Founder & CEO of Choose Energy. At first glance Jerry doesn’t “match” the Silicon Valley CEO fit. And frankly, early on in his tenure at Choose, he didn’t. Based in Plano, Texas with Louisiana heritage Jerry (admittedly) never felt totally comfortable in a San Francisco board room. Instead of board discussions he preferred customer conversations, employee engagement and products that drove immediate revenue and feedback. Jerry never explicitly stated this but if I had to summarize four of his main mantras, they would be:

  1. A small company grows into a big company through many small steps
  2. Revenue follows value provided. (A relationship that many SV firms tend to believe is the inverse)
  3. Hire the best people and get out of their way
  4. Stay lean. Excess cash causes problems. See point 1!

With the deal now in the rear-view mirror, what I am most proud about and thankful for is working with Jerry from the first days after the Series A to final day of the sale. Jerry is the consummate entrepreneur and I have no doubt that the ultimate success of Choose Energy was driven primarily by his product vision, his employee and customer empathy, and his market understanding. He transformed as a leader and I am proud to say I worked alongside him as his Chief Revenue Officer in our final year. In today’s transient workforce, I would like to believe that our enduring run at Choose Energy was pretty special.

And I can’t wait to see what he does next.