Chris Dixon

I’ve been trying to set up a “Popular Posts” widget on the sidebar of this blog but somehow repeatedly failed.  So instead I’ll just post them here:

The most important question to ask before taking seed money link

The challenge of creating a new category link

Man and superman link

The new economy link

Why content sites are getting ripped off link

Software patents should be abolished link

Climbing the wrong hill link

Google and newspapers: the false choice of opting out link

New York City is poised for a tech revival link

To make smarter systems, it’s all about the data link

The one number you should know about your equity grant link

Why you shouldn’t keep your startup idea secret link

Ideal first round funding terms link

Every system built by a single institution has points of failure that can bring the entire system down.  Even in organizations that have tried hard for internal redundancy – for example, Google and Amazon have extremely distributed infrastructures – there will always be system-wide shared components, architectures, or assumptions that are flawed.  The only way to guarantee there aren’t is to set up completely separate, competing organizations – in other words, new institutions.

This insight has practical implications when building internet services.  One thing I learned from my Hunch co-founder Tom Pinckney is, if you really care about having a reliable website, always host your servers at two data centers, owned by different companies, on networks owned by different companies, on separate power grids, and so forth.  Our last company, SiteAdvisor, handled billions of requests per hour but never went down when the institutions we depended on went down – which was surprisingly often.  (We did have downtime, but it was due to our own flawed components, assumptions etc.).

The importance of institutional redundancy is profoundly more important when applied to the internet at large. The US government originally designed the internet to be fully decentralized so as to withstand large-scale nuclear attack.  The core services built on top of the internet – the web (HTTP), email (SMTP), subscription messaging (RSS) – were made similarly open and therefore distributible across institutions.  This explains their remarkable system-wide reliability.  It also explains why we should be worried about reliability when core internet services are owned by a single company.

The principle of not depending on single institutions applies beyond technology.  Every institution is opaque to outsiders, with single points of failure, human and otherwise.  For example, one of the primary lessons of the recent financial crisis is that the most important form of diversification is across institutions, not, as the experts have told us for decades, across asset classes.  The Madoff fraud was one extreme, but there were plenty of cases of lesser fraud and countless cases of poor financial management, most of which would have been almost impossible to anticipate by outsiders.

There is a widespread myth that the most important part of building a great company is coming up with a great idea.  This myth is reflected in popular movies and books: someone invents the Post-it note or cocktail umbrellas and becomes an overnight millionaire.  It is also perpetuated by experienced business people who, for the most part, don’t believe it. Venture capitalists often talk about “the best way to pitch your idea” and “honing your elevator pitch.”  Most business schools have business plan contests which are essentially beauty pageants for startup ideas.  All of this reinforces the myth that the idea is primary.

The reality is ideas don’t matter that much.  First of all, in almost all startups, the idea changes – often dramatically – over time. Secondly, ideas are relatively abundant. For every decent idea there are very likely other people who’ve also thought of it, and, surprisingly often, are also actively pitching investors. At an early stage, ideas matter less for their own sake and more insofar as they reflect the creativity and thoughtfulness of the team.

What you should really be focused on when pitching your early stage startup is pitching yourself and your team.  When you do this, remember that a startup is primarily about building something.  Hence the most important aspect of your backgrounds is not the names of the schools you attended or companies you worked at – it’s what you’ve built.  This could mean coding a video game, creating a non-profit organization, designing a website, writing a book, bootstrapping a company – whatever.  The story you should tell is the story of someone who has been building stuff her whole life and now just needs some capital to take it to the next level.

Of course a great way to show you can build stuff is to build a prototype of the product you are raising money for.  This is why so many VCs tell entrepreneurs to “come back when you have a demo.”  They aren’t wondering whether your product can be built – they are wondering whether you can build it.

As readers of this blog know, I’m a huge fan of the startup and venture capital world but also a sometimes critic of how the venture capital industry works. For a long time I’ve wanted to do more than talk about this and actually start a new kind of venture firm, designed the right way from the ground up.

Last year two friends of mine who are both very successful, serial entrepreneurs — Eric Paley and Dave Frankel — were brainstorming ideas for what to do next when the thought occurred: why not make their next startup a new kind of venture firm, the kind we had wished existed back when we started our first companies?

So this is what we, along with a bunch of other serial entrepreneurs, decided to do. We call our new firm Founder Collective. Joining us are Mark Gerson (founder of Gerson Lehrman Group), Zach Klein (co-founder of Vimeo/Connected Ventures), Bill Trenchard (co-founder of LiveOps), and Micah Rosenbloom (co-founder of Brontes). We expect to add more founders over time.

We think of ourselves as part of a new wave venture firms led by Y Combinator, First Round, Maples, Ron Conway/Baseline, and Betaworks, among others, that have adapted to a world where venture capital is abundant but authentic seed capital and, more importantly, mentorship from experienced entrepreneurs, is scarce. We have many similarities to these firms and also some differences:

1) We have a small fund – approximately $40M – and intend to keep it that way. This means seed investments are our entire business — they are not options on future financings. Hence our interests and the founders’ interests are aligned. This also means we are happy with smaller exits if that’s what the entrepreneur wants to do.

2) Each person involved in Founder Collective is an entrepreneur, most of them currently running startups full time (my full-time job is CEO/co-founder of Hunch).

3) We believe the best people to predict the future — and create it — are fellow entrepreneurs, not former bankers drawing graphs and developing abstract theses.

4) We try to be respectful. We’ve all sat in countless meetings where VCs show up late, email while you are presenting, and generally act arrogant and dismissive. We try really hard not to be like that.

5) We’ll make investments anywhere in the world but tend to favor our home turf – New York City and Cambridge, MA. New York is a hotbed for online media and advertising startups. In Cambridge, there is a constant flow of ideas coming out of places like MIT that just need a little capital and guidance.

We realize the word “Collective” sounds a bit radical, even socialist. This is deliberate. While we have an actual fund — we are not just a group of angel investors — we also have a unique structure where active entrepreneurs lead investments, work hard to help their investments succeed, and share in the profits when they do.

Think of it as peer-to-peer venture capital.

My last startup was an information security company — SiteAdvisor — that was acquired by McAfee, where I then worked for a while. I am no longer working in security, but have many friends that do and I try to stay in touch with what’s going on in the area.

The widespread sense I get is that we are going through a period of unusual calm, especially on the consumer side.   Instead of repeating the historical pattern where new types of threats emerge every few years, we’ve seen the opposite: threat types have actually gone away or been seriously mitigated. Spyware/adware is basically gone, as most of the businesses that were pushing it (yes, it was mostly driven by legal, US-based businesses) have gone bankrupt.  Spam has been mostly controlled, at least if you use Gmail or a good spam filter like Postini.  If you use a Mac you don’t have to worry about viruses or malware.  Mobile security hasn’t ever really become an issue, mostly because the telecom carriers (and now Apple) carefully screen the installation of 3rd party apps.  Identity theft is a real issue but not really something consumers can do anything about – most of it happens offline or through enterprise data center breaches.

On the enterprise and government side, things are more turbulent.   Distributed denial of service attacks using botnets remain almost impossible to defend against. There have been a number of breaches of sensitive consumer information and those will likely only get more common, especially as more information gets centralized in the cloud. Military and terrorist computer attacks also seem to be a likely future threat.

All in all, though, the good guys have been keeping the bad guys down.  This relative calm is generally great news for the computer users, but – let’s be honest – bad news for the computer security industry and venture capital investors.  As an investor, I’ve only made one security investment in the last few years — in a cloud security startup called Vaultive. Everything else I’ve seen seems to be trying to solve non-problems or rehashing solutions that were developed years ago.

Inevitably, the calm will end and new classes of threats will emerge. But for now we should enjoy the relative peace.

If you look at the right sidebar on this blog you’ll see a new Hunch widget.  It’s meant to be both fun and informative for the blogger and also the readers.

1. For the blogger, you can learn a lot of interesting things about your readership (for example, here are stats on cdixon.org readers). Soon, we’ll be adding more features for the blogger, such as inferred stats about your readers, derived by cross referencing their answers against our data set of 40M answers.

2. Blog readers get to learn about how they compare to other readers of the blog, and how readers of the blog compare to the larger population.  They can also play what we call the “prediction game” where Hunch tries to guess how you’d answer new questions you haven’t answered.  In our tests Hunch does a really good job.  It’s meant to be fun and also, frankly, a way for us to show off the power of Hunch’s predictive abilities.   If you want to try it, first answer 25 questions in the widget and then you’ll be be given the option to play the game or look at how you compare to other cdixon.org readers and Hunch users overall.

If you want to embed this widget on your own blog, go to http://www.hunch.com/blogger/ (you’ll need to have a Hunch account and be logged in).

Any and all feedback welcome!

I’ve seen a number of situations recently that are something like the following.  A VC firm signs a term sheet with an early stage company. Let’s say it’s a $2M round.  The VC and entrepreneurs decide to set aside $500K for small investors (individual investors or micro-VCs). Because it’s a “hot” deal, there is way more small investor interest than there is capacity (the round is “oversubscribed”), and the entrepreneur needs to decide which investors are in and which are out.

The most common mistake entrepreneurs make is to base their choice solely on the investors’ “celebrity” value (by “celebrity” I generally mean in the TechCrunch sense, not the People magazine sense).  Picking celebrity angels might help you get a little more buzz when you announce the financing and a few SUL tweets, but that’s about it.  A startup is a long trip — what you should care about is whether, through the ups and downs and after the buzz dies down, the investors will actually roll up their sleeves and help you.

That isn’t to say that being a celebrity and being helpful are mutually exclusive.  Ron Conway is a celebrity (in the startup world) and is one of the hardest working investors I know. But there are other celebrity investors who I’m a co-investor with in a few companies who literally don’t respond to the founder’s emails.  And these are successful companies where the founder sends them only occasional emails about really important issues.

The second biggest mistake is picking angels that benefit the lead VC.  A lot of times when VCs guide entrepreneurs to certain investors what they are really doing is “horse trading” – they want you to let in so and so, because so and so got them into another deal, or will help them get into future deals.

It’s also smart to pick a varied group of people.  If you want a few celebrities to create some buzz, fine.  You should also pick some people who are connectors – who can introduce you to key people when you need it (varying connectors by geography and industry can also be helpful).  Also very important are active entrepreneurs who can (and will) give you practical advice about hiring, product development, financing etc.

Finally, don’t spend too much time agonizing over this.  One particularly silly situation I was involved with was where the CTO had invited me to invest but then the CEO decided he wanted to put me through multiple interviews before he’d let me in.  He probably spent a day of his time deciding whether to give me some tiny fraction of the round. Eventually he dinged me because I wasn’t famous, but at that point I was frankly kind of relieved since the CEO seemed to have such a bad sense of how to prioritize his time.

Disclosure: This post is entirely self serving, as I consider myself a non-celebrity but hard working small investor.