Sachin Rekhi

What is an Entrepreneur-in-Residence?

After last week's post I got quite a few folks asking me what exactly is an Entrepreneur-in-Residence. Since I didn't describe it in my previous post and there isn't very good information out there about the role, I thought I would provide an overview, it's benefits, and drawbacks.

The reason the definition of an Entrepreneur-in-Residence is so elusive is because the role takes on different meanings at different firms. Even individual firms have hired a variety of different types of EIRs. But you can boil an entrepreneur-in-residence down to these four basic roles. Keep in mind that an individual EIR often works in multiple or all of these roles at once.

1. Successful entrepreneur who is looking to start his next company. This EIR has usually just finished a previous venture and is in between startups. Their time is typically spent vetting various startup ideas, finding a co-founder, doing market research on the space, putting together a pitch deck, and maybe starting early prototypes\mockups. Though full scale development is usually left for after the EIR period is over. For example, Jeff Smith, CEO and Co-Founder of Smule, was an EIR at Bessemer Venture Partners and incubated Smule while there.

2. Serial entrepreneur\senior executive looking to join an existing startup. In this case, the EIR typically looks to join an existing firm as a CEO or senior executive. EIRs typically bring these companies in as potential deals for the VC firm and spends their time doing due diligence and vetting the startup as well as deciding if its a good fit for them. Typically this form of EIR results in both the EIR finding a new company and the VC firm doing an A or follow-on round in the company. Nick Mehta, a prior executive at Symantec, was an EIR at Trinity Ventures, from where he ultimately became the CEO of LiveOffice.

3. EIR serves as an advisor to portfolio companies. This is most useful for the firm when the EIR brings a specific set of skills to bear that would be widely applicable across their portfolio. In this case, you often sit in on board meetings or do one-on-one mentoring\advising for existing portfolio companies leveraging your areas of expertise. Jason Putorti, lead designer at Mint, is serving as a Designer-in-Residence at Bessemer Venture Partners, bringing his design expertise to a variety of portfolio companies.

4. EIR serves as part of the investment team. In this case the EIR is an extension to the investment team, participating in all aspects of deal flow, including deal sourcing, due diligence, and closing deals. This provides an opportunity for an EIR to understand the VC side and decide whether it's a potential career opportunity they wish to pursue long-term. Ashu Garg is an example of an EIR at Trinity Ventures, who eventually went on to join Foundation Capital as a Venture Partner.

While the benefits of the position depend on what role you specifically take on, there are some benefits that apply to all of the potential EIR roles.

An understanding of the VC perspective. As an EIR, you often get the opportunity to sit in on pitches, hear why the firm moved forward with or passed on a deal, and participate in the due diligence process. This is an invaluable experience for any entrepreneur. Not only does it better prepare you for making your own pitch to VCs in the future, but it helps you to refine your own startup evaluation process.

Access to an incredible VC network. VCs are highly connected individuals that have an extensive network of entrepreneurs, professional management, rock-star employees, and investors. Gaining access to this network opens your doors to new relationships that can be fruitful for all aspects of your entrepreneurial endeavor. Take ample advantage of this during your EIR as the VC is often very willing to open up their network to you.

Time to brainstorm and vet your ideas. One of the other benefits of an EIR role is that it gives you the freedom to spend time appropriately brainstorming opportunities and carefully vetting your ideas. Sometimes entrepreneurs are eager to rush into an opportunity and such a role encourages you to fully understand the scope of the opportunity.

Despite the many benefits, there are potential drawbacks to keep in mind and evaluate when considering a position.

VC Potentially Owns Your Round. One of the reasons a VC typically offers an EIR position is to get early access to the next deal from a trusted entrepreneur. This can also be a great opportunity for an entrepreneur to ensure they can have a quick and friendly raise from their favorite VC. But this can also have potential drawbacks. First, it's important to always be an EIR at a firm that you would want to do a deal with. Never take an EIR at a firm that you wouldn't be willing to raise from. Secondly, it's important to understand the expectations from the firm from the beginning. Find out what the situation has been for past EIRs at the firm. At some firms there is an explicit right of first refusal on the round of funding or in other cases there is enough social pressure or expectation to effectively have the same effect. Still other firms leave it completely open and have no such expectation.

Adverse Signaling. Even if there is no obligation associated with the VC doing the round of funding for your next startup, there is potential for adverse signaling. For example, sometimes other VCs won't look at deals from EIRs at other firms too closely if the sponsoring firm is interested in investing. This is because they assume the sponsoring VC will win the round because of their relationship with the EIR and the other VC may not wish to waste time on a deal they won't close. Of course if you and the sponsoring VC are open to syndication, this won't be an issue. But a larger potential issue is if the sponsoring VC chooses to pass on the deal, then some VCs will shy away from investing because the sponsoring VC with the most information has passed on the deal and therefore think there must be something unattractive about it. This mirrors the issue Chris Dixon blogged about regarding taking seed money from big VCs.

Never Start Something. Some people's perceptions of EIRs is that they don't ever actually start something. While there are countless examples of EIRs going on to found very interesting startups, this is still a perception to keep in mind. Just remember that an EIR is meant to be a stepping stone, with positions typically lasting anywhere from 3 months - 18 months. So you should be diligent in constantly making progress towards whatever your end goal is.

I'll close by saying that a role as an Entrepreneur-in-Residence is not typically a position you apply for. Instead it is most often friends of the VC firm that are in between opportunities. It can provide a great stepping stone for the entrepreneur as well as the VC firm for the right fit.

Additional Resources
I've linked below two older posts that I found helpful on explaining the EIR role as well as two newer posts on modern incarnations.

• On the Inside Track in Venture Capital | Mayfield Fund
• What's an Entrepreneur-in-Residence | Andrew Chen
• Bessemer Snags a "Designer in Residence" from Mint.com | TechCrunch
• What Does An Entrepreneur in Residence Do? | Business Insider

Lessons Learned as an Entrepreneur-in-Residence

As many of you know, I spent the better half of 2009 as an Entrepreneur-in-Residence at Trinity Ventures. It was one of the most rewarding experiences I've ever had and would encourage anyone who gets the opportunity to do it. Working alongside Gus Tai, Ajay Chopra, Jim Tybur, Dan Scholnick, and the rest of the Trinity team provided an inside look into the world of venture capital. Given that I've spent most of my entrepreneurial career in scrappy startup environments, I developed a valuable new perspective on evaluating opportunities.

I thought I would take a moment to share some of the most compelling lessons I learned during my Entrepreneurship-in-Residence.


Why Hasn't it Existed Before. One of the most valuable thought exercises for innovative opportunities is to think about why your solution hasn't existed in the market before. If there are structural changes that have occurred in say the last 5 years that make this opportunity possible today, then you may be on to something. If there are no such changes and you simply think that "no one has thought of this before" then I would urge you to dig deeper, as you may simply not have enough domain expertise to know why it is a bad idea.

Seek Leverage. For every startup opportunity, think about how to get the most leverage in the ecosystem to command the lion's share of the value created, as opposed to being limited to taking a small sliver. This was one of the most important perspectives VCs offered. For example, Trinity helped me think through how to take an end-user product idea and expand my thinking to eventually become a platform for an entire ecosystem.

Human Behavior is Fundamentally Consistent. When looking at introducing new consumer behavior, look for analogies that exist in the offline world or using previous technology that may be applicable to this new behavior. For example, while Twitter is definitely a novel service, it can be fundamentally thought of as an expansion of the the traditional town hall concept.

Disrupt Incumbents. In certain spaces, after the market leaders gain significant market share, they stop innovating and simply focus on servicing and maintaining their existing customers. This creates opportunities to disrupt these spaces with cutting edge technology. For these spaces, think "if I were to re-invent this space from the ground up using present day technology, what would it look like?"

Original Thinking. When you look at some of the biggest innovations in the past decade (Facebook, Twitter, YouTube), they often come from original thinking. The founders of these startups are often young and unlike their older brethren, haven't yet fossilized their world view into the existing paradigms. This thinking creates opportunities for innovation.


Venture Funding is not for Every Startup. Given the economics, VC funding makes sense for startups with high return potential. Right now there is too much money chasing too few good deals and has lead to funding companies that really aren't VC fundable opportunities. We have seen some right-sizing with the economic recession, but the over-funding continues.

Goals Differ Based on Funding. Often the goals in the initial stages of your company are very different depending on whether you choose the bootstrap or venture funding approach. For bootstrapping, the most important goal is to get to cash flow positive as soon as possible. This is less important for VC funded opportunities since they are more concerned with quickly understanding the overall market potential.

VC Value Add. While VCs aren't great at everything, they do provide incredible value add in a variety of specialties. Seek out investors who can help support you in these endeavors. Their expertise often include recruitment, financial strategy (ie raising future rounds of funding), strategic perspective on large opportunities, business development contacts, and liquidation strategy (ie acquisition\IPO).

Relationships Matter. VC funding is very relationship focused. It's critical to create a strong relationship between a VC and entrepreneur. This is not something you do in a one hour pitch. Try to get to know them over time before closing a round. Given that you'll be stuck with the VC for the entire life of your company, it's also very important for you to develop a personal and trusting relationship with your VC beyond simply to help close the deal.

Addressing Slow Growth Businesses. For existing slow growth businesses looking for funding, it's often difficult for a potential investor to discern whether that slow growth is due to tepid market demand, poor execution, or simply not enough resources to fully penetrate the market. Only the last one is a positive thesis for an investment. So if you are one such startup, make sure you have a great justification for why your growth has been slow to begin with and exactly how that will change in the future.

Fundable Entrepreneurs. VCs spend a lot of time thinking about whether a founder is VC fundable. The key questions they are asking themselves is can he or she build a strong team around them, scale the organization, and relentlessly pursue the larger opportunity? VCs are typically biased towards repeat entrepreneurs. So make sure to pimp yourself and the team as much as possible.

Failed Startups. If you are in a space with a history of failed startups (ie music), you need to have a strong positive thesis on why you will be different, supported by evidence. Don't wait for a VC to bring this up. Address this immediately and with confidence.


Related Posts

• My Muses for Brainstorming Startup Ideas
• The Value of the Y Combinator Experience
• Make Something People Will Buy

Protect Yourself with the Corporate Veil

While I am a big believer that entrepreneurs should spend the majority of their time focusing on getting a quality product to market, one piece of overhead that should never be overlooked is incorporating or forming an LLC prior to product launch. To some this is obvious. Of course you setup your corporate structure before anything else. But to hackers and hobby programmers this may not be their first instinct. Sometimes you have a hobby website that just starts taking off and you never planned on it being a real business. But then it starts to become one and you may not have the protections incorporation affords.

Take a look at this recent case, EMI vs. Seeqpod. This case has received a lot of press lately not only for the fact that EMI has joined Warner in suing Seeqpod, but EMI went so far as to sue Ryan Sit, creator of Favtape, for simply using the Seeqpod API. This case has huge implications for mashups across the web because it then potentially holds all mashup developers liable for potential infringement due to their use of third party APIs.



Many saw this case as particularly nasty of EMI because they sued Ryan Sit, the developer of Favtape, himself. Since Ryan Sit was named directly as a defendant, all his personal assets are now potentially at stake in this law suit. It's an unfortunate turn of events given that Ryan built Favtape simply as a side project outside of his day job. But what isn't evident from the press is whether Ryan ever incorporated or formed an LLC around Favtape in the first place. The site nor the parent company Freestyle Labs show any indication on their sites of being incorporated, which could suggest the company may likely be simply a Sole Proprietorship.

Regardless of what the specifics of the Favtape case end up being, the point is that it is important for every entrepreneur to protect himself by forming either a corporation or an LLC, which affords limited liability protection to the entrepreneur. While sole proprietorships and partnerships are the easiest corporate structures to form, I would highly discourage them since they provide no such protections.

Even among the corporate structures that do provide limited liability protection, one must still decide between forming an LLC, C-Corp, or S-Corp. Out of the three, an LLC is the easiest and cheapest to form. It simply requires an $80 filing fee, a few corporate documents, and paying the annual $800 minimum tax. You can even use services like MyCorporation to come up with and file the documents for you for a nominal fee. So I would suggest that at the very least, you do this.

However, there are many cases where a C-Corp or S-Corp is a much better fit. If you intend to take any outside money at all, you will very likely be required to form a corporation and thus its better to directly incorporate (though you can convert an LLC to a corporation when required). Incorporation is more involved, requires more organizational maintenance, and is more expensive. It can run anywhere from hundreds to upwards of ten thousand dollars to setup everything correctly and maintain it. It is best to work with an experienced corporate lawyer to ensure it is set up appropriately.

I am by no means a lawyer and am not qualified to recommend a specific corporate structure. All I am suggesting though is that you please protect yourself and make sure to incorporate or form an LLC prior to launching your product to ensure that you are not one of the victims in this highly litigious country of ours!

The Value of the Y Combinator Experience

I'm often asked about my Y Combinator experience so I thought I would take the time to blog about it. I did Y Combinator the Summer of 2007 in Boston with two awesome co-founders. We built Anywhere.FM, a web music player that brought an iTunes-like experience to the web, and eventually sold it to imeem.

So what is Y Combinator? Y Combinator is a new kind of seed stage venture firm. While they provide financing and advice like all venture investors, their model for doing so is very different. They give small amounts of cash (<$20,000), take small amounts of equity (<10%), and fund startups in batches twice a year. These summer and winter batches bring all the entrepreneurs in a given batch together in Silicon Valley for 3 months to have each startup build a demo-able product to show off to investors at the culminating Investor Day in hopes or raising a follow-on angel or VC round.

I would break down the value of the Y Combinator experience into four main benefits: jump starting the startup process, access to a fraternity of entrepreneurs, investor day, and funding.

Jump Start the Startup Process
Starting a company is a lot of work and a lot of very important decisions need to be made early on. Who do you pick as co-founders? How should you set up vesting schedules? What corporate structure is best? How do you assign board seats? How much money should you raise? What do you focus on early on?

Y Combinator not only provides a solid battle-tested structure for setting up your startup, but also gives tons of advice on how to succeed at your startup. The advice comes from a variety of speakers that Y Combinator bring ins. This included people like Langley Steinart, founder of TripAdvisor, who shared incredible advice on getting deals with partners and having a strong hand in investor meetings. Greg McAdoo, venture capitalist at Sequoia, also came in to provide us a complete inside look into the VC funding process. And Paul Buchheit, creator of Gmail, provided a ton of valuable lessons learned from the early days at Google and how to build a product to tens of millions of users. It's these kinds of high quality speakers that YC is able to attract that would be difficult to have access to on your own.

Fraternity of Entrepreneurs
One of the most remarkable phenomenons is the bond that is created between fellow entrepreneurs who have gone through a shared experience of trying to make something people want. What results is a fraternity of startup founders. This fraternity extends beyond your own class of YC startups to the entire alumni network of YC startup graduates.

This strong network is accessible each and every day for founders to get advice ranging from who is the best hosting provider, to evaluating deal terms, to making intros, and more. I've never met a group of people more willing to help you out. For those new to the startup community, there is no easier way to get assimilated.

Investor Day
The culminating Investor Day is by far one of the most valuable aspects of the YC program. In one or two days, you get access to an unbelievable number of top notch investors that are eager to hear your pitch. Due to early YC success stories, including Reddit, Loopt, Xobni, and Zenter, YC has been able to attract an incredible line-up of VCs who come out every batch in search of the next big thing. These investors span the entire range of angels to VCs looking to make small to large investments in a variety of tech startups.

Funding
While the funding is an important benefit, I believe it is actually the least important of the above mentioned benefits. YC only invests a very small amount of money, which is really just enough to help you cover basic expenses during the three month project. It's not difficult to scrap this kind of money together on your own. So if you evaluate Y Combinator purely as a funding source, there are many other options out there. But the real value of YC comes from the funding combined with all the other more important benefits.

My overall assessment is that Y Combinator is an amazing program for a young first time entrepreneur who is serious about jump starting the entrepreneurial experience with the advice and guidance of a strong network of fellow entrepreneurs and successful investors.

A whole class of Y Combinator style seed stage venture firms have cropped up due to Y Combinator's success. They typically offer a similar program in a different city. These range anywhere from TechStars in Boulder\Boston, LaunchBox Digital in Washington DC, DreamIt Ventures in Philadelphia, Shotput Ventures in Atlanta, or Seedcamp in Europe. My advice though is if you are serious about starting a company, I would highly encourage you to get to Silicon Valley, as its a night and day difference between starting your company in the heart of technology innovation as compared to the outskirts.

So what are you waiting for? Go ahead and apply. The deadline is March 18 :)