Feb 1, 2011
PART II of II
MITER: Let’s go to the earliest days of Hot Potato. How did it all get started?
Justin Shaffer, my co-founder, who I used to work for at Major League Baseball, gave me a hard time about leaving baseball when I was leaving for Sloan. And I told him, “If you’re willing to leave baseball, and we’re going to do some interesting stuff, I’ll stay.” The time wasn’t quite right then and I went off to business school. All through business school we continued that dialogue. When I left Sloan, the time wasn’t quite right either. Justin finally left baseball in late 2008 and started working on Hot Potato in earnest in early 2009. And that’s the thing, starting a company with people you know and have worked with in the past takes out a whole lot of risk. There’s still plenty of risk aside from that, but knowing the people you work with are talented, have been tested and will stand beside you when it gets ugly, and it will, makes things a lot more possible.
Hot Potato was an idea that came out of our experiences in baseball around aggregating audiences and facilitating interaction amongst people around sporting events. The notion that hardcore fans of a particular sport and people who are only tangentially interested in that activity may come together – for example, I might not go to a Celtics game, but my friends are hardcore fans are Celtics fans and so I may go to a Celtics game because of them –and that the interaction between people can be as important or more important that the actual event itself is really important.
In the beginning, Hot Potato was Justin working out of a space in Williamsburg. He’d been introduced to an incredible designer, Jace Cooke. Jace was doing design and Justin was writing the best code he could. I started hanging out there and coming after work. After a while I started helping out more by writing code. This can be something of a dilemma for an MBA because there aren’t many pure strategy roles in a startup and not a lot of need for business development early on. There’s a lot more need for people who can actually do stuff. I have a computer science undergrad and I can write code. So I was helping out with that, though in the beginning I couldn’t bite off anything on my own only because I only had the hours after work and on weekends.
MITER: Early dynamics in a startup are a very interesting topic…
Right, working on Hot Potato part-time soon started getting a little frustrating because, given the amount of time it took me time to get up to speed on something, I wasn’t really able to execute on it. If it was anything important, for example, Justin and the guys would have to get it done themselves right away and I would have to be brought up to speed on something else.
There were other disconnects too. I’d show up after work sometimes and they’d be like, “You know what, we’re drained. We were working through the night and need to chill now.” But I, of course, I would be ready to work.
So in late May, I called Justin and told him to talk me out of quitting my job. Otherwise, I was going to go to office the next day, give my notice and quit. He didn’t and I did. My last day at work was a Friday and I started at Hot Potato right away on Saturday. I would joke that I no longer dreaded Mondays in any way. I was doing what I loved. Of course, I also didn’t look forward to Fridays because we worked through the weekend.
I was working without pay, we hadn’t raised any money, Justin wasn’t getting paid. I had a little money saved up, but still have business school loans. Jace was getting paid, but just a small amount to make rent. But it was a startup at its purest.
MITER: What happened next?
We started to look for other engineering talent. We talked to everyone we knew. Oddly enough, our next team members were people we didn’t actually seek out. One guy has always been a good friend of mine and knew what I was up to when I quit my job. I remember him commenting at the time that quitting my job for a gig with no salary in the middle of a recession was “a ballsy move.” He started sniffing around himself. Another guy was a friend of ours who we didn’t court but was told by another mutual friend that he should check out what we were up to. These two guys are better than we could have hoped to have found so when they started showing interest… yeah, we made the best of it.
Intermingled in that process was our attempt to raise money. Raising money never happens as fast as you’d like. The process of raising money is an awful, awful process. It’s such a time-sink and distraction from working on your product. But it’s helpful. It helps you to solidify certain questions about your business, because you have to speak about them coherently to raise money. Things didn’t start coming together for us until we finished the product and had something to show people. Everyone was interested, we had some money that was partially committed, but it didn’t happen until when we had this thing that we could say, “Hey, here’s what we’re talking about”. At the last minute before we were ready to push out the product, things started to come together, and we managed to bring in an excellent group of investors. So we raised our round, we got luxuries like salaries and health care and we were off.
MITER: Who were your investors? And how did you get them to invest?
RRE, First Round Capital, Founder Collective, Betaworks, General Catalyst… a whole bunch of angels… all incredible people. Like everything else, you’ve got to create a relationship and having conversations that aren’t just about money. When you’re talking to these people, yes, you want money from them, but more so, you want their time, you want their energy, you want their interest in what you’re working on. Engage prospective investors in the problems you’re solving, have them make suggestions and introductions, and have them provide value in that way. Introductions carry a lot of weight, which makes it much easier to get to that type of investor that you really want.
MITER: Was your product out before you raised money?
The first version of the product was built, but we didn’t release it after we raised money.
MITER: That runs counter to the conventional logic that in consumer web you need to get traction before you can even begin thinking about raising money…
There are a number of things that are useful for raising money and there is no explicit checklist that’s required. Traction – incredibly useful. An all-star team – incredibly useful. Previous experience – incredibly useful. We happened to find ourselves in the midst of a perfect storm of interest around location and social. Foursquare created an incredible amount of appetite for startups in this area.
I remember having a discussion with our lead investor from RRE, Will Porteous, about this very question. We had just finished building our product, and of course, we were all gung-ho about it and assumed that we’d launch it right away and that it would take off. I asked Will if it wasn’t smarter to launch it and then raise money so that after some success we could get a better valuation. Will teaches at the business school at Columbia University, in addition to being an investor, and he said apparently quoted one of his old HBS professors when he said, “The time for eating shrimp is when they are serving shrimp.” The idea being, there’s money to be had today, you have no idea about tomorrow, so you don’t get to choose. Turn down the money already on the table is a risk.
Also, raising money on the promise is very different than raising money on traction. If we launched the product right away and it got great traction, it wouldn’t have been wise of us to raise money early. However, that would have put us in a position where it just had to take off.
The best position to be in is when you don’t take money just for the sake of money. When you’re evaluating venture capitalists because you need some dollars, that’s a bad situation. A lot of people have money. You need to be evaluative of venture capitalists on the basis of what else they can do for you – their experience and connections. If you company depends on, say, the movie industry and your investors have movie industry connections, that will help you be successful. These are the people you want to take money from. You take money from them in order to incent them to help you. That’s why you’re taking money from them. If it’s just about the money, you’ve lost a tremendous opportunity to create allies.