 Building on our previous session, the next session, we will be deliberating the pitfalls for entrepreneurs and red flags for investors. We have with us Matt Marks, who's a successful inventor, has seven patents to his credit. He's also a professor of technology and innovation at MIT Sloan School of Management. And he's also an executive on several board of several startups in the speech recognition industry. Joining him, we have Bijan Sabat, who's like a general partner at Spark Capital. He's led early stage investments in companies such as Force Choir, Tumblr, and Twitter, and many more. I hear he's a very talented photographer as well, and he's also known for investing in startups that he's super passionate about. Join me in welcoming both Bijan and Matt. You want the couch? You can have the couch. I'll take the couch. I could use the couch. Jerry was here, so he knows I like the couch. Very good. Very good. Hi. All right, well, so we were thinking of doing some Q&A. We wanted to kind of tee it up first, talk about a few things. And first thing I want to say is that Bijan's been to my class here at Sloan about five or six different times over the years. And I remember the last time he came, someone asked him a question that people always ask, which is how do you know what to invest in? What do you look for? And at first he talked about some things he looks for, then some of the things that he gets scared of. But then he said, and then there's also things I just don't care about. And that was the most interesting thing he said on the day. You want to take us back in time and talk about a couple of those things? Yeah, I mean, Matt and I were so engrossed in conversation here, so I hope this isn't redundant to what was just talked about. But the thing that I've kind of learned, I've been doing this now for, we started Spark Capital 11 years ago just across the river, and oh wow, this is funny. This is my photograph. Anyway, and we do principally early stage investing. We also raised a growth fund. We're now in our second growth fund, but we tend not to get obsessed about things that I find is almost conventional wisdom in this business. We, I don't really care about patents. I don't care about intellectual property as a differentiator. I don't care about the business plan. I don't even care about the business model. So that's kind of how I started your class, and I think it raised a few eyebrows. It raised some chaos, because most of them just come from new enterprises, which is a business plan class, where we teach people about gross margin and how do you pick your customers. And you were there saying, actually don't worry about the business plan, the business model. And you said you don't worry about patents, but you do worry about the problem the patents are designed to protect it against, right? Because imitation is obviously, in fact, you were just telling me about a startup, we won't name it, where you thought about investing, but then you were worried that, well, can't just somebody else come in and do this same thing. How do you tell, because a lot of, someone would argue that many social media plays are very easily replicable. How do you decide when maybe it's replicable, but I'm like, they've got this first mover, like what do you look forward to think they'll still make it? Well, look, I mean, just to touch on the patent thing lightly, and it's a bigger topic, but I think patents, my understanding is patents were really designed, patent law, especially the Knights who were designed to help the little guy or the entrepreneur. I mean, that was the whole basis around protecting somebody's invention. And that process has really been almost just tortured. And now we have a situation where I think patents are really set up for the big company. You know, you can't legitimately defend yourself from a big company. You know, we are investors in many companies. Some have been sued by patent trolls or even larger companies. And we haven't had a situation yet where we were found guilty of breaching somebody's patents, but yet we've got to defend ourselves. And similarly, you know, the idea of going after somebody for breaching one of your patents, this costs millions, if not tens of millions of dollars to deal with. And an early stage company just doesn't have the ability to do it. So I don't say it to be flip. I say it because I find it's not even practical to sweat it because this is not something a young company can really deal with. It also probably speaks to the types of businesses that I tend to invest in. But ultimately, we have not seen that that's the real thing. I mean, there have been cases where it's helped, but it's the critical thing about this company is not the patents. If I can just add an anecdote to that. So my third start, which wasn't on the screen, it's called Vlingo, it was up in Harvard Square. And it was done by a bunch of people with, this is all speech recognition because that's my background. And we came up with, this was basically trying to do Siri about four years before Siri back in 2004. There's no 4G networks, like 3G is very slow. And no one believed it would work. They were like, really? And so we took out some patents and almost as soon as we got our first patent, we got sued by a certain large speech recognition company about 20 miles north of here. I won't name them, but they know who they are. And they asserted that we had committed a trade secret, that we'd stolen trade secrets and influenced on their patents. And exactly what you said in the resource thing, we'd raised some money, but they had not billions in the bank, but hundreds or tens of millions in the bank. They had plenty of lawyers, but it wasn't just the money. The real problem was that once the lawsuit came on, our CTO, like half of his time was taken with this lawsuit. And they knew that, they knew that they could decimate much more, because we were seven or eight people at the time. And so taking your CTO out for deposition after deposition for doing discovery and all that really slowed us down. And so I don't want to talk more about it, but I totally agree that patents are, I mean, it's not a level playing field by itself. It's not. I mean, the thing, the last point I'll make on a right at this moment is we're investors in this company. I won't name names, because I'm not sure I'm allowed to, but we were sued by a fucking treadmill company. A treadmill company? This company doesn't- Or a treadmill for- A treadmill company sued our portfolio company. That company doesn't make an iPhone app, doesn't make anything internet connected. They make treadmills. And it's a multi-billion dollar company. And they went after this little startup for patent infringement. I mean, your head just wants to explode. Yeah, we got trolled. Yeah, my second startup, we got trolled by some random NPE that was coming after us. It was nuts. So why don't we change gears a little bit? I just wanted to talk about not just early stage, but one of the things that happens as you kind of go down, kind of work through the process is, obviously most companies don't get funded through just one round of financing. I mean, you could just ask for all the money and say, we need $120 million and you get it. But from an investor's perspective, you want to kind of stage it out, see how things go. And so there's this question of when you, you know, the previous speaker said, this person will be on your board for 10 years and that might be true. But there's a question of whether the VC stay involved and also whether the founders stay involved. And one thing I talk about in my class is that many founders get into business, it's not just because they want to change their own, not just because they want to make money, but because they want autonomy. They want to work for themselves. They want to preserve their dream. And what you see, however, is not a small percentage of founders, but in my research, it's about 20% of founders end up getting replaced. That is a certain point in time, either voluntarily or involuntarily, a new person is brought in to run the company. And about half the time that means the founder leaves and does something else, but half the time they stay around and take a different role. And I think it's something that founders are becoming more aware of back when I was starting, it was kind of like, what happens? And what I'm curious is from your perspective, what are some things that a founder can do to not necessarily inoculate themselves against this, but just to be aware of the dynamics that might come up? How do they, you know, the last speaker used this diligence thing, I didn't know that was a verb. He said, please diligence your investors. How do you figure out how loyal and committed the investor's gonna be for the long term? Because you don't have to reinvest. Right, right. Well, look, I think step zero is, before you even think about the investors, just think about your co-founders. You know, I think part of the issue about, you know, a founder, a co-founder running the company forever really depends, I think, on the strength of the co-founders and the stability of the co-founders. I mean, you know, you could see many companies, you know, that, you know, progress, that initial co-founding team has issues where it's very hard for somebody to kind of have the moral authority or the natural inclination to go lead, in which case that creates, you know, I think some opportunity or vulnerability for, you know, professional management to come in. So I think step zero is to make sure that the co-founding team is as robust as possible. And we talked about that a lot in your class of how to pick co-founders and things like that. You know, I think the issue about, you know, founders running this company forever, it really should just be in the best interest of the company, ultimately. You know, you could see some companies set it up where, you know, it's almost contractually they get to run the company forever. You know, you look at Evan Spiegel's taking Snapchat public. You know, I think he gets to run the company six years after he's dead, you know. So, right, we're shareholders in Snapchat. So I'm happy to be a shareholder, but I guess the point is that there's different ways to do this. You can either legislate it, or I think you can just, you know, frankly, just do a great job. And, you know, no VC I've ever met wants to take the founder out of the company when it's going great, you know. So, and I think the real thing here is to just, you know, focus on that and focus on building a great management team and focus on building a great company and be less obsessed about, you know, putting contractual rights to run these companies forever because, you know, you may not want to run these companies forever. I mean, it may be not what you're well suited to do. And then I think all the other things that, you know, came up in the last panel, I think are critical as well of picking great investors, picking great co-investors. I'd also like to see more boards take on independent directors as well. I think too often we see boards that are kind of a couple founders, a couple of venture capitalists, mostly dudes. It's just that dynamic needs to change. We need to get more diversity. We need to get more independence on these boards and have proper governance. Let me key off something you said about co-investors. So, in fact, before we got in here, you said that sometimes you get worried about who the new investors are gonna be. From a, realistically, how much say do you get in that process? So let's say you've got around, and let's say you're planning on reinvesting because if you're not, you don't have any say, right? You're gonna reinvest, how should the founders think about engaging you regarding new investors, or should they just say, well, I'm taking money from this party now, and guess what? Like when does that, how does that conversation happen? What do you find, what are the mistakes that founders make about these following rounds, communicating with existing investors? Well, you know, I think some founders and investors have a better dynamic than others. I think we're all just human and things happen. But I think if we do a good job, we get to play a, we earn a role to have a discussion with the founder about the future financing of the company. So, and we tend to just share our experience. We tend to share, hey, we're contemplating bringing in more capital. These are the investors that are interested, and this is our experience working with each of these investors. And I think some investors have real strength in certain areas. Some are known for patience. Some have more reputation for having sharper elbows. Some have different skills that they bring, and so we try to think about what's best for the company. But it's really shaped my career a great deal. I mean, I tend to work with a lot of investors that I respect, and I've seen them in tough times and in good times, and how they conduct themselves really matters. Now, let's go back to the founder replacement question. So, you said some founders might want to do something else. Some founders, maybe if you're Evan Spiegel, you can lock yourself in, but not too many people I would guess can do that. But as an investor, let's say the founder wants to stay. The founder's trying their hardest. They really, really want to keep doing. How do you decide when to pull the plug? Is it just based on the performance of the company? What if the company's doing really well, but you feel like it's in spite of the founder? Yeah, yeah. Have you judged? Well, at that moment, I often look at myself. If I get to the place where I feel like the company's doing, you know, okay, but we can do better, and somehow I've convinced myself that it's the founder's fault, it's kind of a time to take a breath and realize that the board is probably not doing a good job. I mean, at that point, there's a real chance that the board has failed in a number of things. I mean, the board may have failed in helping the founder see that he or she should build the great management team. Maybe the board has done other things to not allow that CEO to really grow as a CEO. So I think the first thing I try to really encourage my fellow board members and myself for that matter is to kind of just like, hey, before we start pointing fingers, let's try to figure out as a board on what's going on here. But presuming, if we've done all those things, if we've brought in a great management team and all these other things, then I think it is a real heart to heart about what do we all want this company to be? I think the hardest challenge I've ever seen in this business is frankly when a co-founder or a management team loses confidence in their CEO, their founding CEO. I think when that happens, it becomes a very stressful situation and those have been not often, but that's the hardest ones. So when a management team says, we love so and so, but it's a vote of no confidence at this point. And it's hard to make it happen, yeah, definitely. Yeah, it's interesting, I'm doing a research paper now looking at this question of founder replacement because it's something that people have looked at kind of in small samples of like 200 surveys or whatever. And some of these papers say that half of founders get replaced and it just seemed like it was too much. And so what we did is we went and got all of the venture-backed companies since 1993, I guess. We have good data and counted all the way forward and checked, how many of these founders get replaced? And it turns out it's about, now it's kind of hard to track because you have to report when you raise a round of financing, you don't always have to report when the founders change. You have to use your judgment. It looks like the rate is not 50%, but it's about 17 to 18%. There's almost one in five founders who does not stay as in an executive role. Now that could be that they left voluntarily, as you said, like in my first startup, one of our founders was kind of a serial person who did it for two years and became the chair and then left to go do a startup. He's now on startup number eight. But often people are kind of pushed out, whether it's the management team or whether it's the board saying, you know, it's been fun, but now's the time. It's hard to tell. Now the interesting question is, does it help or does it hurt? If you just look at all the startups that have been replaced, so it's about 17, 18% of them, those companies do worse in general. And so you might say, aha, the boards, the bichons of the world are making startups worse because they do worse. But the thing about that is when do you replace? You're probably not gonna replace when things are going great. You're gonna replace when things are going badly. So you have a selection problem where if you just look at that, it looks like things are getting worse, but no, things were, it's like you were saying, well, we rearranged the chairs on all these ships that the Titanic sank, what's wrong, right? And so I won't go into all the nitty-gritty, but we found a way to kind of distinguish between replacements that were kind of at the VC's discretion and those that were not. And what you find when you distinguish that way is it actually seems to help performance. And so one thing that I would just say is as someone who's done a few startups is, yeah, be open to what is in the best interest of the company, which is awkward because as a founder, you feel like you're making this Faustian bargain. I'm like, I'll take investment, but now I'm kind of giving away control. And there's this kind of fundamental tension between the control you keep and how fast you can move. And you've probably seen that over and over in the companies you've dealt with. Yeah, I mean, you have the benefit of the data. I have a smaller set with our portfolio, but I think the, I believe that thing you said, which is that when you do this replacement, it mostly doesn't work. And I think that's a big reason why it's a very painful. When you get to that point, that's not because you want to. Yeah. So should we open up for some questions? Yeah, great. So I hear there's a microphone somewhere. If we have a microphone, that's great. Is there a microphone? If not, you can just, here we are. We have a couple of microphones. And where's the first hand? Right up here in front, right? I want to know, do you guys prefer companies with one founder or two and then what's the best way to attract a VCE? Yeah. Yeah, we really like two founders. Maybe three, no more. I mean, it sounds like a rule and we've just learned that one founder by his or herself is just insufficient. We really like the idea of somebody who's more product-minded and somebody who's more business-minded or somebody who's more technical and somebody more business. I've heard some people describe it as you need a hacker and a hustler. It's a little cute, but I think the sentiment of having people with complementary skills is a good thing to do. I think sometimes we see out of like an academic environment out of undergrad or something or even MBA, sometimes we see people, six people show up at our office and say, hey, we all took this class together, we're starting a company together. Don't do that. And that's our least favorite outcome. So I think two, maybe three, rarely one. Although Tumblr started that way, right? Yeah, I mean, David had Marco from the beginning, but he was the founder. But David Karp is a unique person. I mean, he has this amazing product instinct and a business mind. So it's highly unusual, but he could make something and talk about where it could go within a weekend. I mean, it was just an extraordinary situation. Michelle, I have a question for you. You mentioned that it would be nice if there was more diversity within boards. I'd also like to ask you, what about diversity in terms of VC partners? How as a woman would you become a VC partner? And how as a woman would you go to a VC to actually get investment? There's two sides. What's the second question? I heard the first one, but what's the second question? The first is to be a VC partner as a woman. The second is as a woman entrepreneur trying to get funded. I think there's issues on both sides of that. Yeah, I think they're also related. Right, yeah. We do have a diversity problem. I mean, I think in the VC business, it started out for sure as a clubby business, small number of firms. We now have a situation where the number of investors, angel investors, seed investors in VCs, it's grown quite a bit, but we still have a diversity problem. We've hired our first two women partners in the last two years. So we've been around for 11 years. It took us nine years to get our act together and it was a shame on us, I guess is the right way to deal with that. But it's obvious that we're better for it. We make better decisions. It just feels like way, way overdue, I think we're just constantly trying to improve and I hope we hire more people that have more diversity. We will be better served for it. Women entrepreneurs, I'm more optimistic than ever. I feel like it just feels like there's a lot more momentum. There's just, we're just seeing more women entrepreneurs starting companies that are technical, that are creative, that are going for it. We're backing more and more. I just feel more optimistic. It's definitely an issue, but I'm so optimistic about that. If I were to tell you, am I more optimistic about women partners or women entrepreneurs? Clearly the latter I think is the issue, but I think we're making progress on both, but we can do better on the former for sure. I think a few different ways. I think one way is to start your own firm is certainly one way to do it. Another way to do it is just, I think these men at these venture capital firms need to just figure out that it's a competitive advantage to just hire better people and to have only men on your team is not a better team. So I think that's clearly changing. I don't have like one silver bullet, but I think it's a series of things, but you're seeing progress on all these things, but it's just overdue. It's just really overdue. I have a question. Do you wanna say something? Just to clarify, when you said start your own firm, you meant start your own VC firm? Correct. Okay, yeah. I thought you meant do a startup. You know, forerunner ventures, cowboy ventures. I mean, it's happening. It's happening and it's a better world for it. Great. Hi, question for Matt in particular. Can you walk us through how you built your founding team, whether it was one person, two or three, and then as you raised different amounts of money, how you kept them together, and what was the equity that you felt was fair to give to them at the various points in time? Okay, so I'm gonna skip the equity question, but in terms of the, well actually, no, I'll say something about equity. So half of the, so there's been, we don't have data on every startup because when you get funding, you don't have to say how much equity you have, but there's a couple of professors who've done surveys for the last 10 or 12 years. And at this point, they've asked about kind of 10, 12,000 startups, so we have decent numbers. And here's some things you need to know. First is half of startup companies do an equal split, 50-50. One example is Zipcar. Now Zipcar is founded by the most famous alumna of MIT Sloan, Robin Chase, right? If any of you see her speak here, some of you see her speak here, right? But you probably didn't see your co-founder. No, because actually this was her co-founder's idea. They met on a playground here in Cambridge, started the company together and did kind of a handshake deal. And then the co-founder kind of drifted away, didn't stay committed. And so Robin spent 18 months kind of suing her co-founder, trying to get back the 50% of equity. Because if you don't have any vestia or any terms in there, it's not like you have to do something to get your equity. And there's so many companies have dealt with this. Microsoft, when Paul Allen got cancer and had to leave the company, you have that with Pandora when the CEO quit. So equal splits are not always the wrong thing, but when they're done quickly, it can be kind of a questionable decision. The other thing that's worrisome is half of startups don't do any sort of vesting. And this is often founders feel like it's my company. It should be my equity. And so why should I have to work four years to get it? Bad, bad idea. People get sick, people lose interest, people don't get visas, all sorts of things happen. And you don't want someone walking off with 20 or 30% of your company. So that's my thought on the equity. And then a couple of other thoughts on founders. So Bijan said, yeah, usually two or three. I've seen founding teams of seven or eight. And that's very risky because it's hard to get on the same page. And I would say that this getting on the same page thing is something that's also tricky to do. Because often if there's two of you or three of you, you'll sit across from each other and say, I'm gonna be here for the next 50 years. And be like, yeah man, like let's do this for the next, like build the next great American company. But secretly I wanna go to grad school in a couple of years. I'm gonna do a quick flip. And often when we talk about these things, we kind of get into group think. We don't really tell, we lie to each other. We're really good at it. And so a couple things that I've seen founders do is they don't talk about it. Instead, they will split up and they'll write kind of the Wall Street Journal article they wanna see about the startup in a couple of years. Or they'll just take a survey and you'll be shocked at how not on the same page people are because when they don't just sit and talk to each other. Because I remember at Tell Me, we were like, oh, we're gonna be here forever. And we ended up selling to Microsoft after, well, I guess it took seven years, but that's not what anyone said at the beginning. And so you wanna go on the same page about those things. Think you wanna add something? No, that's okay, okay. Other questions? A few more? Yeah. Thanks. What is a responsible way to determine your salary as a founder with limited funding and maybe no revenue? Sounds like zero. No funding or revenue. You just answered your own question. Sorry, with funding, maybe no revenue. Ah, okay. I mean, I think if it's a company that just raised C Capital, it's really a question of, every founder is in a different situation, but I think it's fairly modest is the short answer because every dollar you take for yourself, it's a dollar less runway for the company to kind of get to progress. So I don't have a specific number for you, but I think typically a seed stage company, let's say, without revenue, the founder, depending on the market, it's roughly $100,000 or something like that. Sometimes less, depending on if the seed round's a lot smaller, maybe a little bit more depending on the market, but that's kind of the dynamic range. The last question here. So this is again for Bijan. I'm sure you see kind of a lot of data points on this. I'm curious as to whether you think that a certain founding team background outperforms another. Like, do teams with 10 years of previous friendship work history, work better than teams that assemble over a hackathon? What kind of do you see as like overarching trends? Yeah, I mean, I think the thing that we've seen with co-founders is the hackathon isn't necessarily a negative signal, but because maybe they came up with this idea to hackathon a year ago and inspire them to work together for the past year and they really spend time to get to know each other. So it's fine. I mean, I think blind dates are tough in this business, but I think clearly more time really syncing up on expectations, roles. When we see a company come in and say, hey, all three of us are gonna be CEO, it clearly shows they haven't had the hard question. So I don't think it's really about time. It's more about the quality of the connection is the critical part. Can I jump in on that one? So you asked about data, and this survey I talked about has data on this. So here are the things you wanna watch out for in founding teams. People who all are in the same role, you alluded to this. So all engineers or all consultants or all business people, yikes, watch out. The second thing is people who have been friends, but who have never worked together before. Those founding teams tend to fall apart. The companies tend to stall. And I think the reason for that is that you're gonna have to make a lot of hard decisions, right? Like you wanna fire a co-founder. You are, you know, there's some fraud is developed. You're gonna have to deal with difficult things. When you're working with people who are mainly friends to you, there's now an extra cost to making a hard decision, which is a cost to your friendship. And so you may avoid some of those tough conversations in a way that you wouldn't if you'd actually worked with that person before or even if they were a stranger. And so you're kind of playing with fire when you start with just good buddies or classmates even, or let alone family. Yeah, we have only one portfolio company with this co-CEO structure that's thriving. But it's one, it's one. Do you, I think this is out of time till go on to the next session unless you wanna take more questions? That's great. I see our counter's almost over, so. All right. Thank you, everybody. Thank you. Appreciate it.