Industry Leaders of Tech 2.0 Interview Jason Mendelson: "Private investors invest in the team first and the idea second"

Industry Leaders of Tech 2.0:

1. Jason, you have “over a dozen years of experience in the venture capital and technology industries in a multitude of investing, operational and engineering roles. Prior to co-founding Foundry Group, Jason was a Managing Director and General Counsel for Mobius Venture Capital, where he also acted as its chief administrative partner overseeing all operations of the firm…

Prior to his involvement with Mobius Venture Capital, Jason was an attorney with Cooley LLP, where he practiced corporate and securities law with an emphasis on representation of emerging companies in private and public financings, mergers and acquisitions. As an attorney, Jason has consummated over $2 billion of venture capital investments, $5 billion in mergers and has extensive experience in fund formation, employment law and general litigation, serving as an expert witness in these related fields.
Before his legal career, Jason was a senior consultant and software engineer at Accenture where he focused on financial institution re-engineering engagements. While at Accenture, Jason supervised programming teams up to forty people in size and was responsible for managing deliverables in multi-billion dollar engagements.”

Jason, you possess a broad and unique skill set across VC investing, corporate and securities law, private and public financings, engineering, operations, M & A and consulting, etc. Please talk a bit about how these varied perspectives and background experiences infuse the work that you do with Foundry Group (What are some questions and considerations you factor in across each skill set area in your current work)? What types of functions do you perform at Foundry that specifically best leverage your diverse set of skills?

Jason Mendelson:

I think we all four mostly do the same things.  We invest in the same types of deals and we don’t have silos.  I think each of us have particular strengths that help augment our team, however.  In my case, I still can play lawyer when needed, I’ve run a large company before, so I understand finance well and my old days as a software engineer certainly don’t hurt.  And don’t forget, I’m perfect fodder for comic relief having been a drummer in my past life. 

Industry Leaders of Tech 2.0:

From your experience, what are some of the critical factors that determine the level of success of both private and public financings?

Jason Mendelson:

Private financings are all about the team.  Private investors invest in the team first and the idea second.  If you are raising a second or third round, the most successful companies make sure that they and their prior investors have a clear vision of what determines success for the company.

As for public financings, I haven’t a clue. I don’t play the public markets.

Industry Leaders of Tech 2.0:

What are the lessons of the recent Facebook public offering? Is the IPO market for tech startups on life support or do you see signs of increased activity going forward?

Jason Mendelson:

If I were glib (and I am), I’d say the lesson is that if you don’t give Wall Street a bargain, they will punish you.  Facebook was priced correctly and Wall Street didn’t get their “free money” so they punished the company.  The market is fine.  Wall Street is not.

Industry Leaders of Tech 2.0:

How do you evaluate the financial IQ of the entrepreneurs that you work with? How important and in what ways are the founder(s)’ financial intelligence determinants of the startups’ overall success?

Jason Mendelson:

I love product focused entrepreneurs.  The financial stuff we can teach them or we can hire folks.

Industry Leaders of Tech 2.0:

2. You are co-author with Brad Feld of “Venture Deals” (subtitled “Be smarter than your lawyer and venture capitalist). Jason, I purchased the book and it is utterly amazing. I’ve read numerous VC based accounts before but Venture Deals is, by far, the best nuts to bolts account of what a venture deal is comprised of and how to be smart about it from an entrepreneur’s perspective (Note: in the preface you note that the book is geared to entrepreneurs but may also be helpful to lawyers and VC’s as well).

What I’d like to do, is pick out a few passages from the book to have you comment on.

On the first page of Chapter 1 you write “Not all investors realize it, but the entrepreneur is the center of the entrepreneurial universe. Without entrepreneurs there would be no term sheet and no start-up ecosystem.”

What are some of the mindsets of investors, across the spectrum, that you have come across? What are some components of – and contributors to - these?

Jason Mendelson:

I think a lot of VCs think they are the most important part of the startup ecosystem.  It’s utterly wrong.  The entrepreneurs make this all happen.  Without them I don’t have a job.  I think that folks with checkbooks sometimes lose touch with reality.

Industry Leaders of Tech 2.0:

You write: “By now you may be wondering how VC’s really value companies. It is not an exact science regardless of the number of spreadsheets involved. VC’s typically take into account factors when deciding how to value a potential investment – some are quantifiable whereas others are completely qualitative. “ You then discuss the following factors:  Stage of the company, competition with other funding sources; experience of the entrepreneurs and leadership team; the VC’s natural entry point; numbers, numbers, numbers; and current economic climate. Jason, break down if you would for our readers the types of interplay that goes on amongst these factors in the minds of VC’s as you conceptualize it, in regard to what are the essential takeaways regarding valuation determinations.

Jason Mendelson:

Industry Leaders of Tech 2.0:

You write in the chapter entitled “Negotiation tactics”: “One thing to remember: everyone has an advantage over everyone else in all negotiations. There might be a David to the Goliath, but even David knew a few things that the big man didn’t. Life is the same way. Figure out your superpower and your adversary’s kryptonite. If you are a first-time 20-something entrepreneur negotiating a term sheet against a 40-something, well-weathered, and experienced VC, what possible advantage can you have on the VC? …”

Jason, is the above as adversarial as it might sound. Specifically, could you talk about alignment of incentives between VC’s and entrepreneurs and how these influence or even define the nature of the VC/entrepreneur relationship across time.

Jason Mendelson:

It should not be that adversarial, but we wrote the book to the medium case.  Most VC / Entrepreneurial term sheet negotiations are adversarial and heated.  Lately, it’s been a bit better given valuations and the heat in the early stage market, but generally these negotiations are much too difficult.  As for alignment of incentives, I’ve always found that 90% of the terms are easy.  What is good for the company is good for the investors.

Industry Leaders of Tech 2.0:

3. Jason, for Foundry Group you currently serve on the boards of Attachments.me, Brightleaf, Next Big Sound, Oblong,Occipital, Openspace, Organic Motion, Sifteo, Singly and Urban Airship .

How, in general terms, do you view your role as a board member?

Jason Mendelson:

It is different for every company.  Some need me to be a mentor and coach.  Some need me to be a networker.  Some just need episodic helps.  My job is to support the CEO and be a good team member in any way he / she sees fit.

Industry Leaders of Tech 2.0:

What are some of the value-added services that board members can and should provide?

Jason Mendelson:

Mentor, psychologist, networker, recruiter, friend, etc.  My job is to fill in the gaps in the management team and help the CEO in any way that he / she wants me to

Industry Leaders of Tech 2.0:

How do you conceptualize the oversight and fiduciary responsibilities of a board, both generally and how it plays out in development across individual companies?

Jason Mendelson:

I think every VC needs to be keenly aware of the fiduciary duties to their fund, their partners and their portfolio companies.  They won’t always be in alignment, but the key is to be transparent when issues occur.

Industry Leaders of Tech 2.0:

4. Let’s drill down a little bit into one sample investment to get a better sense of how you work.

Oblong Industries is a revolutionary expanded computer user interface that reduces friction by tying communications and presentations, to a much greater degree, to human processes (touch, shared control, etc.). “Our technology transforms the way you work, create and collaborate. The era of one human, one mouse, one screen, one machine is giving way to what’s next: multiple participants, working in proximity and remotely, using a groundbreaking spatial interface to control applications and data across every display. This is what Oblong builds.”

Jason, you and Brad sit on the board of Oblong for Foundry. Foundry invests by themes, one of which is Human Computer Interaction (HCI). Foundry participated in Oblong’s Series A round in 2007 in which they raised $8.8 million and then Foundry led the Series B round announced in March of this year.

This video highlights Oblong’s Mezzanine “a remarkable new collaboration, whiteboarding and presentation system whose triptych of high-definition displays forms a shared workspace. Multiple participants simultaneously manipulate elements on Mezzanine’s displays, working via the system’s intuitive spatial wands, via a fluid browser-based client, and via their own portable devices.”

Using a licensing/partnership model, with applications to such fields as financial services, network operations centers, logistics and supply-chain management, military and intelligence, automotive, natural resources exploration, data mining and analytics, bioinformatics, trade shows and theatrical presentations, medical imaging and consumer and electronic interfaces Oblong has already been cash flow positive.

Jason, what characteristics does Foundry use to evaluate companies within the HCI space and how well is Oblong positioned?

Jason Mendelson:

In the HCI space we like things that are next generation ways that will dictate how humans and computers will interact in the coming years.  We don’t like science experiments, though.  We like products that address huge markets.

Oblong is amazing in that they are the only company that we know of that has created a three dimensional operating environment where the data is transportable along with the human gestures that can interact with multiple compute devices.

Industry Leaders of Tech 2.0:

Certainly, moving beyond the “one human, one mouse, one screen, one machine” is a major disruptive and paradigm shift. What are  some of the challenges working with early (or early early) adopters, how do you scale such a business, and how do you utilize a first mover advantage to build a sustainable competitive advantage that builds barriers to entry to thwart large technology company potential competitors?

Jason Mendelson:

In Oblong’s case, the technology is deep and originally created by John Underkoffler who was at the MIT media lab.  John effectively created a new programming language to support the Oblong platform.  This is certainly a sustainable advantage.

Industry Leaders of Tech 2.0:

Mezzanine is very far along the “wow” continuum, but how do you tie a feature reach product environment to essential business processes and results to move beyond the dangers of a “bells and whistles” offering to one that is “smart” or “intelligent” to avoid the “garbage in, garbage out” phenomenon (e.g. collaboratively based processes best-case can leverage collective intelligence while in the worst-case foster regression to the mean in which collective inefficiencies become structuralized or reinforcing). 

Jason Mendelson:

I’m not really sure what the question is here.  Oblong has created a product which allows humans to collaborate over computer devices in a way that has never been seen before.  They’ve taken the best of human / organic collaboration and transferred these abilities to the computer world.

Industry Leaders of Tech 2.0:

Lean start up techniques such as constant iteration and minimally viable product (MVP) are all the rage now (and I think for good reason). Do these same principles apply for disruptive type technologies, extraordinarily feature-rich in nature, solving massive problems in a “go big or go home” type of situation?

Jason Mendelson:

Absolutely.  I don’t think that I’ll ever invest in a company that doesn’t constantly iterate.  Even the big or go home situations, one can constantly release and iterate.

Industry Leaders of Tech 2.0:

5. Jason, you are an Executive Board Member of the National Venture Capital Association “the venture community’s preeminent trade association”. What does that involve? 

Jason Mendelson:

The NVCA represents about 90% of the capital under management in the VC ecosystem.  I’m on the executive board of the board of directors and I’m honored to be a part of it.  The NVCA’s largest task is helping policy makers in Washington aware of the issues that effect our industry.  It’s a very important task, as the startup economy is now responsible for 11% of all jobs in the U.S. 

Industry Leaders of Tech 2.0:

6. Jason, lastly, who is the VC rock star of this group? (Written, produced and directed by:).  Who will play the four of you in the feature film?

Jason Mendelson:

I think we are all rockstars, although Ryan and I are the two guys who spend the most time with music.  Shameless plug, check out our Facebook page for our band Legitimate Front.  We are playing in Boulder on August 25^th.  As for who will play us in the feature film, I’d say Zach Galifinakas (spelling?) for Ryan, Anthony Michael Hall for Seth, Geddy Lee in his acting debut for Brad and Jeremy Piven for me.  

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