Monday, December 22, 2014

The Hobbit and Silicon Valley: Beware of VCs who get Dragon Sickness

I recently watched part 3 of the Hobbit, the final portion of Peter Jackson’s adaptation of Tolkien’s beloved book.  While there are many aspects of the Hobbit I could write about (it's one of my favorite books of all time), I’d like to explore one that caught my eye and applies particularly in Startup-Land:  Dragon Sickness.

I’ve often compared embarking on a startup journey to be a mythical adventure, not unlike those of Bilbo Baggins and his dwarvish companions. Though startup adventures usually last longer than Bilbo’s journey (which was a mere 13 months!), there are a lot of valid comparisons to be made.  
Like many mythical adventures, startup journeys are fraught with peril; each twist and turn can have life-changing implications; they bring out odd traveling companions and bedfellows (not to mention enemies and advisors); and there is often a seemingly unattainable golden treasure somewhere near the end of the quest!  More importantly, startup adventures can push you out of your comfort zone, and as Bilbo so aptly complains in an earlier part of the Hobbit, adventures can “make you late for dinner”! 
In a previous entry, Gandalf the Venture Capitalist, I focused on some of the positive aspects of having an investor/advisor who is wise like Gandalf with you on your journey.  Having the right investors, particularly those who have personal qualities like Gandalf can be very helpful on the startup journey, and get you out of many a scrape.
In this entry, I’d like to explore the opposite: when an investor turns out to be someone who’s extremely selfish, difficult to work with, valuing money above all else, and causes great difficulty on the startup journey.   
While you can easily get rid of an unhelpful advisor or employee, it’s not so easy to get rid of an unhelpful investor, particularly if they are a VC.  Moreover, many investments in Silicon Valley begin with convertible notes, which have their own special characteristics and once you’ve entered into them with an investor, you may be stuck with that investor until the end of the journey.
Believe it or not, I’ve seen investors (VCs) in Silicon Valley contract something that looks a lot like the “Dragon Sickness” in the recent film.  
In the film, the leader of the company of dwarves that Bilbo is traveling with, Thorin Oakenshield, falls prey to this sickness when the company finally achieves the quest they set out on: to reclaim their homeland in the Lonely Mountain, and more importantly the gold and jewels that it contains.  Their main obstacle is of course, the Dragon Smaug, who is a selfish but formidable figure and who has claimed the treasure for his own.
When Thorin finally achieves the Quest, in many ways because of the contributions of others (Bard from Laketown actually kills the dragon, and Bilbo Baggins rescues and saves the life of Thorin and the company more than once!), he starts to see things differently.  He starts to see himself as “entitled” to the gold, and won’t part with any of the treasure, in the process, forgetting every promise he had ever made to people along the way.
It’s called “Dragon Sickness”  because, as Bilbo tells us in the prologue, “…for dragons covet gold with a dark and fierce desire …”   And it leads to a certain kind of self-centered madness.  As the first the dragon say and later Thorin finds himself echoing:  “I will not part with a single gold coin.”   
It's usually typified by someone whose only goal is to “possess as much of the treasure as possible” without any context or caring how their relationship with others are impacted can fall pray to this sickness, just as Thorin does when he finally takes over the gold. In Thorin's case, it was his relationship with his companions, the residents of Lake-town, and even the elves.
Let’s summarize revisit what happened to Thorin and see if this might apply to anyone we know in Silicon Valley:  Achieve a treasure, largely through the efforts of others, claim as much of it for yourself as possible, and refuse to give up any part of it, ignoring previous agreements about sharing.
While some entrepreneurs definitely fall prey to dragon sickness themselves (I may do another entry on this another time), I personally have seen it more with investors in Silicon Valley than in founders.  They often forget whatever agreements were made in the past and decide to find a way to maximize their “take” right at the end.  
Since I moved to Silicon Valley in 2007, I have seen this first-hand several times, usually when a company is about to be sold.  I’ve had VCs say they want more of the gold than they are currently entitled to and want the founders to take less.  Of course, they don’t say it that way, like a sneaky, experienced dragon they speak in sweet tones and make it seem like what they’re proposing is “the right thing to do” even though it benefits just them and hurts others.
Moreover, while a company is not a zero sum game at the beginning, when a purchase price has been negotiated to sell a company, it does suddenly become a zero sum game – i.e. each dollar that goes to someone else, doesn’t go to you.  
They often, though not always, imply that they won’t go along with the sale unless they are "satisfied".  Now, many investors have vetoes over selling the company, and while VCs don’t like to use vetoes explicitly, investors can cause plenty of harm when a sale is happening.  This is doubly true if the company is being sold, or even if the company is not doing well and is about to run out of money, and needs to raise money quickly at whatever valuation it can get.
I had one entrepreneur tell me that he thought that what the VC was doing was basically extortion. While I wouldn’t call it that, I would say that someone whose only desire is “purely financial” or "purely transactional" will do whatever they can to make sure they get “as much gold as possible”, no matter what.
There are of course many ways that a bad investor can be destructive to a startup, but this is one of the most frustrating ways.  It’s like a serpent that you've let into your house, which starts to eat the company and the team from the inside.  This usually happens in two instances: when the company is doing really well financially (and everyone is getting greedy), and when the company is not doing well and the company needs to either do a fire-sale or raise money quickly.
This is why it’s important for entrepreneurs to vet investors in the same way that VCs vet entrepreneurs.  Many entrepreneurs are so happy to be getting “money” that they don’t consider the ramifications of who they’re bringing into their adventure.
I’ve often said that it’s pretty easy to tell if a co-founder that you don’t know well is easy to work with in a place like Silicon Valley.  Because people here usually start multiple companies, you just see if that person’s co-founders started another company with them. If they did, then that person is probably relatively easy to work with (or at least acts reasonably when things get tough).   Of course, if their co-founders didn’t start another company with them, it doesn’t absolutely mean they are hard to work with, but it’s a pretty good indication.
Similarly, you can do the same kind of research on VCs by interviewing founders of companies they have invested in before.  Of course, you have to interview more than one – preferably one whose company was financially successful and one whose company failed – you will probably learn much more about the investor from the failed company than you will from the successful one! Each situation provides a ripe environment for the dragon to come out, even when they seem entirely reasonable and on your side when you’re getting your financing.
So, how can you spot an investor who’s likely to fall prey to “Dragon Sickness” well before you get to these stages?  It’s not easy, but here are things to look for in both your own company and others founders experience with investors.
  •       Look for investors who are looking for an advantage over everyone else.  I’ve seen some investors who not only want to invest, but they want a better deal than the other investors they are investing alongside them.   Now, don’t get me wrong, if an investor is doing services for you beyond just the money, it might make sense to give them more (perhaps warrants or just pay them for their services).  But when an investor, at each juncture, co investing with others, tries to get advantages over the other investors in his round, asking for rights they don’t have, that’s a sure sign that they may turn out to be slimy when push comes to server.
  •      Every discussion is like a zero-sum game.  When startups first get going, they are not a zero sum game.  That's why it makes sense to take investors in the first place, by giving up shares of the company, you are theoretically expanding the pie for everyone. When every part of the negotiation to do a deal feels like they are playing a zero sum game - not willing to give in to anything, you're starting to see their personality seep out.  If they are like this when there's plenty for everyone, what will they act like upon a sale of the company, where it really does start to look like a zero-sum game?
  •  Doing what’s right for them vs. what’s right for the company.  I’ve seen many investors push companies to do deals that are right for them but not right for the company.   On the flipside, I think having board members who are on other boards in the same industry can be extremely helpful, but the key is whether they “insist” on doing things their way even if it doesn’t make sense from the founders and other investors perspective.  It’s more about the way they do this – again speaking in sweet tongues and making it seem like something is “best” for the company when it’s actually “best” for them.
  •  Not Participating.  If a VC Fund puts in money at the beginning, or while the company is doing well, but are unwilling to support the company in any way financially when the company is not doing well, this is a sure sign that they will be a tough investor to work with and will try to manipulate events so that they get “more out” than their fair share by withholding consent.  Like a "fair-weather" friend, the a "fair-weather investor is the worst kind to have.  Now, VCs have obligations to their general and limited partners, so they can't always put in more money when they personally want to without their partners consent.  But any serious VC Fund, which has set aside money for follow ons, should be willing to put in their pro-rata into subsequent rounds, even if  they aren't investing a lot. When VCs don't do this, it scares off new investors and actually hurts the company's chances of raising more money.  The new investors start to think, there must be something seriously wrong with the company.
  •   Beware of well-known investors with big egos.  Sometimes, an investor, because of their firm or reputation is known as a "big wig" and has developed a big ego.  There’s of course nothing wrong with bringing in well-known investors, it is often a benefit to your company, but sometimes their reputation and how much money they’ve made in the past belie the specifics of how they acted behind closed doors.  Most hollywood stars, for example, are nothing like their public personas in private.  Many comedians aren't funny and many super-likable TV stars are not really nice guys behind the scenes.  The same is true with VCs.
In the film the Hobbit, to help break through Thorin’s Dragon Sickness, Bilbo, the "junior member" of the company,  does something to try to get Thorin to do what’s right for the Quest and to others that Thorin had made promises to.  He willfully gives up most of his share of the treasure!
I’ve often had investors ask founders to take less than their percentage of the company so that they could have “more”.  Usually this comes out of pure greed, which is pretty common in Silicon Valley investors (and even in some entrepreneurs).  But it also comes from ego, which is sometimes even more common.
Luckily, I and other entrepreneurs have seen situations where, like Bilbo, some founders are willing to give up a chunk of their piece of the treasure upon a sale, in order to make rogue investor or founder to go along with a sale that the founders wanted to do.   They are doing it not as a reward to the investor, but for the greater good - they want a deal to get done and no longer want to work with the investor inflected with dragon-sickness, so they're willing to give up something to make it happen.  This isn't necessarily a sign of weakness (though dragon-sickness infected people might think so) - it's being practical and thinking of others as much as yourself.
So, when talking to investors, do your own due diligence on them. Find founders of companies that they do not recommend you talk to, you can usually get to them through friends of friends.  
The real question you need to ask yourself is: are you getting a Gandalf, or are you inviting Dragon Sickness into your little startup?  I’ve had both, and it’s much more fun to have Gandalf!

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Wednesday, August 06, 2014

My very first Star Trek convention: It wasn’t what I expected, but it sure was fun!

I recently attended my very first Star Trek convention in Las Vegas. Though I had some professional reasons to be in Vegas, it was a thrill to experience it as a long time Star Trek nerd. 
Not having been to one of these before, I really didn’t know what to expect, expect for the stereotypes I’d gotten from those making fun of Trekkies (or Trekkers, as they prefer to be called), and many of my preconceptions turned out to be wrong! 

Here’s what I found:

Trekkers are nice and polite. 
I personally found it thrilling to be around people who were into Star Trek as much as me (in fact, I’d say most of them were into it way more than me, which is saying a lot). I’d also say that about 70% of the people I talked to had been to a Star Trek con before, and each had advice about what to do and what to take in. The much smaller contingent of first time convention goers like me were a little overwhelmed.
One guy, who had flown up from Austin, remarked how polite people were at the convention, compared to other types of conventions he’d been to. He wondered if it had to do with the Star Trek themes of inclusiveness and respect for others – whether it was other creed or colors or planets or species. Not may non-fans know this, but Star Trek was groundbreaking in the sixties partly because of the diversity of its bridge crew – from a black woman to a Russian (trivia fact: Star Trek featured the very first black/white kiss on TV in history, and as a result was blacked out in many states in the South).
I don’t know if it was related to Star Trek philosophy or not, but everyone was friendly and polite. There just weren’t as many jerks (male or female) or posers as you usually see in Las Vegas (except for when you left the convention center and were back in the casinos and clubs!).

Everyone had their favorite series, but no one was fighting about it!
One of the topics of discussion was always which Star Trek series you preferred. The most popular of course were the original series from the 1960’s and The Next Generation from the late 80’s/ early 90’s. 
Even so, I realized that I brought with me mental images from a classic Simpson’s episode (the one where Homer goes to college) about geeks arguing snottily about why “Captain Picard is better than Captain Kirk!”. OK, I did see one guy wearing a T shirt that had 10 reasons why Kirk was better then Picard, but most of the people who saw it just smiled. As a group, trekkers seemed to way too polite and nice to get into real heated arguments about this. Everyone seemed happy to have a favorite show, and different days of the show focused on a different series. There was more discussion about what our favorite episodes were, since so many people watched more than one show.
Even as a fan of the series, Enterprise, which isn’t very popular among star trek fans (and may be the least popular of all the series), I felt included. 

Any actor from any episode of the series is a minor “hero” at the Star Trek con. It was fun seeing them, and even a little sad. Speaking of Enterprise, see some of the images of me with actors from the show below – Connor Tinnear who played Trip, the lead Engineer, Anthony Montgomery, who played Travis, the helmsman, and Dominic Keating, who played Malcolm Reed, the chief tactical officer. The three of them were sitting at tables right next to each other, and there was a panel about Enterprise.
Even for someone like me, who has been involved in independent films, it was fun to be able to go up to people whose faces you’ve been seeing in your living room and actually talk to them. I even spent a few minutes talking to Richard Hatch, famous from the Battlestar Galactica series (the original series, and the more recent one). What does he have to do with Star Trek? He’s in a fan film. More on these later.
There was the guy who played Mark Twain on a classic Next Generation episode, and a panel with guys who had recurring roles on Deep Space Nine, Voyager, and even people who had only appeared in one or two episodes. You could talk to them, get their autographs and pics (for a fee – more on this later).
Someone remarked that it was a little sad that actors that had become so well known were reduced to “hawking pics and autographs” for money at the convention. It was a little sad to see that so many of the actors we loved didn’t seem to have as much on-going success or were in between series, making $20 to $75 per pic as one of their sources of income. But, on the other hand, they got to bask in the adulation of fans of their series, something which every actor probably aspires to and few achieve. That must be fun for them too.

A lot of women like Star Trek. A lot of couples too. And kids. 
When I was growing up, the really big Star Trek fans that I knew were mostly geeks, and mostly males. Maybe this is why I expected the convention to be kind of like my old engineering school – 70+% male. 
But it wasn’t. In fact, I’d say the con was split pretty evenly between male and female. And the girls were hot. Or maybe it was just the sixties version of future outfits (short dresses) on Saturday, cosplay day, which game me this impression. OK maybe not Vegas club hot – OK maybe I just have a thing for smart, geeky girls who like to dress up LOL. But there definitely were plenty of interesting costumes to see and admire. The Klingons and a Cardassians were among the best costumes I saw.
A lot of couples were there too, and these were split half and half between those who were both big star trek fans, and those where one was a big fan and those who dragged the other along to “see what it was like” at their first con. Many of them had matching Star Trek costumes – which was cute. Many of them brought their kids, and it was eye-opening to some of us older fans to realize that a whole new generation of fans existed, even though a real Star Trek series hasn’t been on the air in 10 years!

The Captains were the big thing, especially Shatner. While any actor from the series was a hero, the big draws were definitely the “captains”. William Shatner was there and drew the biggest crowd. I wondered how he would be with this crowd. There was a famous parody on Saturday Night Live of him making fun of Trekkies and telling them at a con to “Get a Life!”.
He certainly didn’t do that, but he was equal parts self-deprecatory, self-congratulatory, and serious. He handled the crowd well, and they seemed to hang on his every word. He made fun of himself and the fans, but in humorous ways that the crowd laughing even when the most embarrassingly adulatory questions were asked such as: “I want you to know that Captain Kirk was my hero and taught me how to be a man, and I aspired to be like him,” Even though he seemed a bit absorbed he went on about some story about breeding horses (he had recently hurt his foot). One fan asked him about Ricardo Montalban, who played Khan, and he had nothing but great things to say about him and Shatner told us how he felt when Ricardo passed away, which made Kirk seem to be a sensitive guy too!
Two other captains made it, Scott Bakula (Captain Archer from Enterprise), and Kate Mulgrew (Captain Janeway from Voyager), and, though they weren’t nearly as big as Shatner, I got a personal kick out of seeing them – and of course I had to stand in line to get a picture with them!

Be Prepared to Bring Your Checkbook. 
Star Trek conventions aren’t cheap. Actually, it is pretty cheap to get in with “Basic Admission” ($40 a day or so), but a good number of the repeat attendees had “Gold” passes and “Captain’s Chair” passes. These cost many hundreds of dollars. On top of that, every single autograph costs money. For example, I wanted to get two autographs from Scott Bakula, one for me and one for a friend, and had to pay $75 for each one. Plus every single picture that they are autographic costs money. Oh, and you want a pic with an actor, well be ready to shell out at least $20 for that (and over $100 for the more pouplar ones). 
I met some couples who spent many thousands of dollars just on the Star Trek con getting artifacts, not to mention travel and lodging in Vegas. Of course, you don’t have to spend money on these “extras”, but the convention is much less fun if you do. For me, this wasn’t a turn off by itself, but I could see how it might be for some folks, especially if you thought you can just show up and mingle with your favorite actors.

Star Trek fan films are all the Rage. 
An interesting recent phenomenon is that fans have started to make Star Trek fan-films and mini-series and post them onto the web. For the most part, these are done without permission from Paramount, and are often funded via kickstarter. The interesting thing is that they star real Star Trek actors, which makes them 
I hadn’t even been aware of these films nor had I taken them seriously. I met with Tim Russ, who played Tuvok on Star Trek Voyager (and whom I had met years ago at, of all things, a SETI convention), and he’s directed two fan films, including Star Trek: Of Gods and Men, and the upcoming Star Trek: Renegades, each of which have many Star Trek actors in there. I also met Richard Hatch, who stars as a Klingon in the upcoming fan film, Star Trek: Axonar. There was also buzz about Star Trek: Continuum which was said to be among the best ,and I met a group that shoots episodes of a fan series in the Star Trek universe in Atlanta each month.
There are of course the big JJ Abrams Star Trek films to keep the franchise alive, but in the absence of a true series, even though these are unauthorized and Paramount/CBS will most likely be clamping down on them, there does seem to be a lot of creativity in this arena! 

Star Trek, the Music, and the Wonder. 
Anyone who’s been to one of these conventions will tell you that they’re a bit overwhelming, with so may different things going on. There was one event that actually stood out – and I almost didn’t go. I decided to go at the last minute – it was a concert of Star Trek music. The Nevada pops orchestra was on stage one evening, and it turns out their conductor was a very big fan of Star Trek, and to prove it — he told all kinds of insider Star Trek jokes and lines that he and his wife quote regularly. 
I gotta say, this event stood out because when they played music from the various pictures, from Star Trek: The Motion Picture from 1979, or The Wrath of Khan from the early 80’s, or Star Trek: The Next Generation, or Voyager, it took me right back to those times in my life. 
I felt like a kid again, watching the TV with wonder in my eyes, and that excitement that maybe, maybe someday, I too would get to go the stars! 

For now, the next Star Trek Con will have to do!

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Friday, February 07, 2014

Knights of Badassdom premiere in San Francisco a great success!

We had a full house at the Knights of Badassdom premiere in San Francisco last night.  Over 200 people attended the sold out showing!

The audience loved it's unique blend of comedy and horror and fantasy. Of course, as an executive producer of the film, I'd seen the final cut before, but there's nothing like seeing this film in a theater full of fantasy and horror fans!  Hearing the audience laugh and cheer was worth the long wait it's taken to bring this film out.

Even those who'd never LARPed or played D&D got alot of the jokes, which was awesome! Of course, for those of us who used to play D&D, some of these were priceless.  Afterwards, I had one of our younger attendees ask me: What was dungeons and dragons? Was it some kind of video game? LOL!

Between Peter Dinklage's over the top old english, Steve Zahn's comedic wizard,  Jimmi Simpson's pretentious Game Master, Brett Gimpson's viking warrior Gunther,  not to mention Margarita Levieva's flesh eating succubus from hell - there were plenty of laughs to go around.  Oh and I didn't even mention Summer Glau and Ryan Kwanten - it was a great experience all around.

Here are some pics:

People starting lining up 2 hours before so they could get a copy of the poster:

Of course I ran out of posters very early!  If you attended last night's screening and want a poster, email me and I will try to get you one.

Not only did the cheers come for the stars, but Director Joe Lynch got a huge cheer, and even when my name came up as an Executive Producer, there were cheers all around - which was awesome!

We also had a few of the film's investors present, and a few LARPers who were in the film! Overall it was a great time ... if you get the chance, see it on the big screen. If not, then watch it on VOD next week, and for the hardcore fans, Bear McCreary's great soundtrack will be available next week.
And as a bonus, here are some pics of me wearing Ryan Kwanten's armor and, of course holding my favorite prop from the film, the "book"! (guess who the guy fighting the monster in the painting behind me is supposed to be)!

Thanks to everyone who came out in the rain!  Huzzah!

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Saturday, December 21, 2013

Gandalf the Venture Capitalist: The Perfect Advisor for the Startup Journey?

Last weekend, the second part of the Hobbit trilogy of films by Peter Jackson, The Desolation of Smaug, was released and, as usual, I think there's great inspiration for entrepreneurs, venture capitalist and investors in the form of Gandalf the Grey.

I’ve been a big fan of the Hobbit since I was a little kid, and it’s gratifying to see my favorite characters brought to the big screen.  I feel like I’ve been journeying with Bilbo Baggins in my mind for as long as I can remember, from the soft meadows of the Shire to the warmth of the Last Homely House of Rivendell, through the depths of Mirkwood and Laketown, into the Den of the Dragon itself, under the Lonely Mountain.
In the second installment, Peter Jackson introduces a new scene that chronologically takes place before the Hobbit proper story began:  In the village of Bree, Gandalf convinces Thorin Oakenshield that he should try to go on a Quest to reclaim their treasure, setting up the whole adventure in the first place.  
This extra scene, and some of Peter Jackson’s commentary on the extended edition of the first film (The Hobbit: An Unexpected Journey) made me think more deeply about the role that Gandalf plays in this “unexpected journey” to claim the treasure: sometimes as an advisor, sometimes as recruiter, sometimes as a participant, and sometimes as a concerned stakeholder.  Gandalf’s multiple hats (pointy and otherwise) remind me of the roles that a really great investor/mentor or venture capitalist can play in our own startup journey.
For many, the startup journey resembles the Quest of Bilbo and the Dwarves: full of pitfalls, unplanned detours, hair-raising near misses, and unexpected appearances of both friends and foes.  Like the Quest in the Hobbit, while there is potentially a lot of real Gold at Journey’s end, a startup adventure is fraught with the perils of mastering our own emotions: fear and greed, courage and compassion, stubbornness and open-mindedness.
In these films we see Gandalf masterfully guiding the company, sometimes through persuasion, sometimes through sheer force, sometimes through cunning and guile, and sometimes through what seems like magic, through rough roads and challenges that could easily have waylaid the company and marked the premature death of their entrepreneurial journey.
If Gandalf was a VC, he would be the perfect “older and wiser” counselor to a team of adventurers (the startup team), stepping in when he needs to be hands on, and stepping away to let the founders spread their wings, always available to give advice when needed, all the while keeping his eyes on the “bigger picture” even as the founders are down in the weeds of the day-to-day challenges of running a business.
Here are some specific instances from the Hobbit to illustrate what I mean:
  1.      Gandalf sees an opportunity and recruits a CEO. In the new scene, Gandalf meets Thorin in Bree ("this isn’t an unexpected meeting, is it?"), and convinces the Dwarf prince to go on the journey to reclaim his homeland.  Gandalf is seeing a bigger threat to Middle Earth – a broader market if you will, and he sees that Thorin's background would fit nicely, if he could be convinced to run this one adventure.  An effective VC or advisor keeps his or her eyes on the broader market opportunity, and really great ones will actually encourage entrepreneurs to start companies to take care of specific niches in this broad market.
  2.      Gandalf sees something in Bilbo that others don’t.  Gandalf decides that the Company needs a burgler, an everyday sort who can get in and out of the Dragon's Den without raising suspicion and inviting disaster.  The others think that Bilbo doesn’t have the courage or werewithal to go on such a journey (neither does Bilbo himself!).  A good VC or angel investor or advisor can sometimes see things in us (or in team members) that we might not see in ourselves.  I've often thought that that people really knew how difficult running a startup can be (compared to the popular concepts), many would-be entrepreneurs would never start.  But as in Zen, not-knowing is a good thing, as it allows us to come up with fresh solutions to the problems that crop up, which is what happens with Bilbo before the end - all because Gandalf saw something in him that he didn't see in himself.
  3.      Gandalf convinces people to do things that will help the journey, whether they know it or not.   In the movies, it’s clear to Gandalf that they need to go to Rivendell, though Thorin is resistant and doesn’t want help from the elves.  Gandalf also recognizes that if Elrond knew the true purpose of the dwarves journey, he might not help them at all.  Finally Gandalf realizes that if the dwarves ask the White Council for permission to go on the Quest, it will be denied.   In my opinion, this is one of the great ways that we see Gandalf’s age, experience, and knowledge of human (not to mention dwarvish and elvish) nature really shines through in the movies (even if it deviates slightly from the books).  He gets Thorin to go to Rivendell out of need, he withholds enough information from Elrond so that he helps to decipher the map (a moment that Peter Jackson says gets Thorin to “truly” trust the wizard implicitly), and then counsels the dwarves to leave before the Council can tell them no!   Sometimes in startups, people don’t see the whole picture – they just see their little sliver, and it’s necessary for someone (preferably someone older and wiser who can see the big picture) to show them partial views, until they are able to embrace their role and grasp the bigger picture.  
  4.      Gandalf’s prior contacts get the company out of many scrapes and keep the Quest alive.  Without Gandalf’s prior contacts, ranging from Lord Elrond to the Eagles to his knowledge of Beorn, our heroes would have been toast – literally in the scene with the Goblins and Wargs setting the trees on fire.   It turns out that in a past life, Gandalf had helped out the king of the Eagles, and this brings the Eagles in to help the company get out of the frying pan and the fire! Whether it’s making an intro that leads to a big customer or to an acquisition, or bringing in extra cash to keep the company alive, a good VC or advisor utilizes their rolodex and previous relationships to help out the team in ways they couldn’t do themselves. 
  5.      Gandalf steps away to let Bilbo and the company spread their wings.  At certain points in the adventure, Gandalf steps away from Bilbo and Thorin and the Dwarves, off on urgent business.  It’s during his time away that Thorin and the dwarves really develop confidence in themselves and particularly in Bilbo.  Moreover, Bilbo develops confidence in himself and saves the party several times.  It’s important that any startup founder or CEO or leader be able to deal with situations on their own, without always relying on their advisor, mentor.  Sometimes this leads to mistakes, but overall it builds the courage, character, and inventiveness of the team.  A good entrepreneurial team, no matter how they start up, should end up with much more wisdom, self-knowledge, and confidence in themselves by the end of the journey, whether he venture is a financial success or not.  A good advisor or board member knows when to step away, and when to engage more deeply.

These are only some of the ways that I think Gandalf brings wisdom, experience, contacts, perspective, and compassion to work in what might otherwise be seen as a purely selfish journey that ended in failure.  Even Bilbo, who doesn’t like “adventures” because they “make you late for dinner” ends up better off because of Gandalf’s role as an advisor and mentor to the company.  
Venture Capitalists, investors and advisors to startups would do well to watch these films again and pay attention to Gandalf the Grey!

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Thursday, November 28, 2013

Got Bitcoin? How not to lose them (updated!)

UPDATE: The day after I posted this, the news broke that the well known bitcoin site coindesk was hacked and hackers stole over $1m of bitcoin. Chief executive Kris Henriksen wrote on the Bitcoin Forum: ‘Please be advised that attacks are not isolated to us and if you are storing larger amounts of coins with any third party you may want to find alternative storage solutions as soon as possible.”

A few months ago, I wrote a bit about the difficulties I had buying bitcoin.  Well, eventually, as a result of establishing a bunch of wallets and setting up accounts (some verified, some unverified) in a dozen different bitcoin exchanges and sites, I was finally able to start buying bitcoin, although in small quantities.

As a result, I ended up with small amounts of bitcoin in different wallets spread between my hard drive(s), and various online places or web wallets.

The next question I faced was: once you’ve got some bitcoin, where should you store it? 

With the expanded coverage of bitcoin due to its dramatic rise recently, this is becoming an even more important question.

There was a well publicized account recently of an IT professional in the UK who got quite a few bitcoins from mining a few years ago (until his girlfriend told him to shut down the computer at night because it was making too much noise).  Earlier this year, he inadvertently threw away the hard-drive that had the bitcoin on it.  Today the bitcoin are worth $7.5 million!

So, having all your bitcoin in one wallet on one hard drive may not be the best place to keep them.  Of course, you should backup your hard-drive, that should help, but it’s not failsafe.  What if your house burns down? What if you lose the backup?  There are some bitcoin clients let you print out your private key (or a way to re-generate your private key) – but what if you lose that piece of paper?

And both of those don’t protect you from someone stealing your hard drive (or making a copy of the piece of paper with the private key on there) and then spending those bitcoin for you.

So what’s a bitcoin owner to do?

In the real world of what’s called fiat currency – i.e. USD and the like -- we don’t store cash (or even gold or securities) at home for these very reasons – they could get stolen, burned down or otherwise destroyed.  Rather we use the banking system to keep track of our money.  Can we learn anything from the traditional banking system?

Well that would be funny, because the whole point of bitcoin is to get around the traditional banking system. 

Well, the equivalent of banks would be online wallets or exchanges where you buy and sell bitcoin, like coinbase and bitstamp and localbitcoins or mt gox.  This seems like a good idea as well since they have servers (multiple servers, I’m sure) and back up their data regularly. 

But there are non-trivial drawbacks to storing your bitcoin on these sites as well:

  1.  Security.  There have been a number of well publicized break-ins and thefts of bitcoin from servers.  There was one in Australia where a well known site literally lost millions of dollars in bitcoin through a breakin – and the best they could offer their clients as an apology.  Also, all someone needs is your password and they could break into your account, perhaps this is even easier than breaking into your house. 
  2. Web accounts vs web wallets.  Most of these sites don’t actually store your bitcoin separately from others.  Instead, they keep track of the bitcoin you have in your account, and store them in central pools.  Try it – go to one of these sites and look for the single bitcoin address that holds all of the bitcoin you have in that address.  If they are holding your currency in a pool, again the possibility exists of something going wrong.
  3. Solvency.  These sites are run by companies which may or may not be well funded, and it’s possible they could go out of business. What happens to your bitcoin then? They’re locked in some address that’s owned by the business.  Are you technically a creditor of a company that holds your bitcoin and goes bankrupt? I don’t think this is really clear.
  4. Regulation.  At one point, the US government made it difficult for people to get their money out of exchanges like Mt. Gox, so it could be a tricky situation when you use these sites to store your bitcoin, then you sell some of it.
  5. Scams. In another well known example, there was a website in China where people deposited bitcoin in web wallets, and the people who setup the site decided to just take the bitcoin and run with it. 

Unfortunately, there is no FDIC (Federal Deposit Insurance Corporation) for bitcoin. At least not yet. After all we didn’t have FDIC until so many banks went belly up in the Great Depression.

So, having bitcoin on your hard-drive is kind of like having cash under your mattress.  And storing bitcoin in online accounts is kind of like putting your money in banks before the Great Depression.

So, again I ask, where should you store your bitcoin?

The right answer, for now anyways, is nowhere.  Or rather, everywhere. 

To be more specific, don’t store it in just one place or one type of wallet/account.  

In a fault tolerant system, one part of the system can go down, but the others can keep going. An old trick used by those with lots of money when FDIC only insured up to $100K per account was to have different accounts in different banks, each with $100k in them.

I came upon this solution of spreading out my bitcoin by chance, since I ended up buying bitcoin on different sites.  My plan was to transfer all the bitcoin to my hard-drive, but then as I thought about it I realized having a significant amount of bitcoin on one hard-drive, even with a backup, is probably not the best idea, so I left small amounts on various sites and even transferred from my hard drive to some web wallets.

As more and more people see bitcoin as an asset class to store your savings, just like stocks and bonds, it’s bound to be regulated in some ways (maybe even with something along the lines of an FDIC).   But today, it’s still the wild wild west, and my advice is, don’t put all your bitcoin eggs in one basket!

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