Angel Investing Rule No1: Communicate First, Broadcast Last – Lessons From Seesmic, Omnidrive

Earlier in the month I wrote a post about the Omnidrive situation in which an angel investor in the company, Clay Cook very publicly denounced the company’s founder Nik Cubrilovic. I’ve since spoken with Nik and heard his side of the story and also delved more deeply. There are definitely two sides to every story and this case is no exception.

As a brief aside, there is an interesting bacskstory at play. In addition to being a founder of Omnidrive, Nik was at the time writing for TechCrunch. This made him a magnet for people wanting to be “in” with the Atherton Web 2.0 camp, as personified by TechCrunch HQ – Michael Arrington’s place in the Silicon Valley suburb.

Sometime after Clay had invested in Omnidrive he moved with his family from Perth to Atherton. They quickly became a part of the scene, Clay bought himself a Hummer and they began to hit the Valley circuit of launches, parties and conferences. He made a follow on investment into Omnidrive, but soon after this things seemed to go pear-shaped.

He was unable to secure a visa to remain in the US and ended up back in Perth a few months later. During this time there was a breakdown of communication between Nik and Clay. In addition Nik fell completely off the TechCrunch radar. He stopped writing for them and Michael Arrington has not mentioned Omnidrive or Nik since then. Michael recently lauded Duncan Riley when he left the TechCrunch stable, and he pointed out that all his former staffers remain TechCrunch friends – Nik’s name was not included on this list.

It would seem that personal and business frustrations reached a boiling point and Clay made his public denouncement. At the time he was still a shareholder of the company.

This gives rise to certain legal and ethical obligations. While the strict black letter set of rights and obligations are crystallized in a company’s Shareholder Agreement, it can be argued that even if that document is silent on the matter there are two duties that emanate from the angel investor relationship.

The first is a synchronous duty of disclosure or communication. As an executive of a company, the CEO has a duty to maintain a regular channel of communication with shareholders. In my view this goes beyond providing regular reporting on the status of the business. Angel investing is largely personal and the communication should match that relationship. This duty also rests on the investor and it is not prudent to close that channel.

The second duty is a duty of care that the investor has, as a shareholder in the business, to not harm the company through their actions. Where that investor has a public channel of communication open to them, this duty suggests that channel should not be used to air grievances between the company, its executives and the investor.

As I said initially, I’m not taking sides in the Omnidrive situation, but looked at as a case study, it is clear that we can derive a key rule for angel investing: Communicate First, Broadcast Last.

This rule is directed at both the investors and investees in an angel transaction – both parties should communicate as much as possible and try not to broadcast their grievances.

Let’s now turn to a more recent case study that again illustrates this rule: Seesmic.

In February Seesmic’s CEO, Loic Le Meur, (seen here outside TechCrunch HQ) announced the company had raised a $6 million investment. The funding came from Atomico, Niklas Zennstrom and Janus Friis’s private investment vehicle, as well as from a line-up of angel investors that included Steve Case, Ron Conway, Reid Hoffman, Michael Parekh and a few others including two people who have been involved with Omnidrive – Jeff Clavier and Michael Arrington.

I spoke with Loic recently and in our conversation we discussed how he was building Seesmic and also explored the nature of the relationship he had formulated with his investors. From this conversation I had the distinct feeling that he got this rule: Communicate First, Broadcast Last.

Loic told me that he is “building Seesmic a lot in the open”. He found his investors through networking around: “if Reid Hoffman invests then you have two more entrepreneurs who want to invest.”

And similarly he made it clear that he talks to his fourteen investors on a daily basis. “There is not a single day when I don’t talk to one of them.”

So it came as a big surprise when I read Michael Arrington’s TechCrunch post: Don’t Screw Your Partners Over A Marketing Promotion. Michael is a minority shareholder in Seesmic and yet here he was very publicly taking Seesmic to task over a lack of communication.

Again, I don’t want to take sides – I also have Seesmic’s video enabled in the comments on this blog, but it seems that the first part of the rule was not followed by either Loic or Michael – communicate first. Loic should have let all those parties who have the Seesmic plugin know that there was going to be a series of outages, but he should have told his investors about this as a priority.

At the same time, Michael would have been better off taking Loic to task privately and working collectively to ensure that the public issues management aspect was handled more appropriately. He clearly did not adhere to the second part of the rule: Broadcast Last.

In closing, I call on all parties involved in building early stage ventures to communicate more, no matter how busy you may get and when emotions run high try to exercise restraint, especially when you feel compelled to hit the broadcast button.

Omnidrive: Lessons In Angel Investing And Entrepreneurial Tenacity

I’ve quietly followed the swirl of online storage startup Omnidrive down the proverbial gurgler for the past 6-8 months, but it now seems like its finally been flushed. As pointed out by ReadWriteWeb, Omnidrive.com has expired.

This has prompted one of the company’s angel investors, Clay Cook, to (excuse the continued metaphor) open up the sewer. He has written a lengthy post on one of his sites setting out his investment history with Omnidrive and the aftermath. He also provides copies of email correspondence – in which legal action is mentioned (I’m not sure of the wisdom of airing potential legal evidence, but it sure takes “discovery” to a whole new level of openness).

There are a whole array of points for discussion regarding Omnidrive and Nik Cubrilovic and the situation as it currently stands, but I only want to touch on two main ones, firstly the nature of an angel investment and secondly entrepreneurial tenacity.

ANGEL INVESTING

Angel investing is an art.

The hardest parts are the decision to invest and the decision to walk away from a failed investment.

A practised angel should be able to make a completely dispassionate decision to invest or pass. Many novice angels jump in because someone they know, or admire, has invested. Similarly, many novice angels make investments based purely on gut decision and emotion. Both instances usually end in pain.

I agree that angel investing is mostly an investment in people. Note my use of the plural – “people”. How good is the team, not an individual. Note also that by team I mean committed team – lining up the former CxO of Name.com to come on board at some yet to be determined inflection point should be completely discounted – committed, passionate people make a team.

That said, angel investing should not amount to simply throwing money into an unstructured, or yet to be set up entity, on the basis that the team is a good one. Make sure the right structures are in place to minimize risks, even if you have to put those structures in place yourself.

It may seem trite, but it bears repeating: angel investing is that it is by nature very high risk. An angel usually has little chance of getting a return should the venture not pan out. Unless the angel has preference shares (giving a preference over others when the company is wound up for any $ that the liquidator can hand over to creditors), or has some form of security in place there is little likelihood that a call on a convertible note will produce a return of capital.

It is worth noting as well that convertible notes are falling out of favor amongst well seasoned angels at the moment.

ENTREPRENEURIAL TENACITY

In my last post, I pointed to an interview with Y Combinator founder Paul Graham. One of Paul’s points was that entrepreneurial tenacity is a key attribute of a successful company founder:

I think the key quality is determination. The founders who do the best are the type of people who just refuse to fail. Most startups have at least one low point where any reasonable person would give up. That bottleneck is the reason there are so few successful startups. The only people who get through it are the ones who have an unreasonable aversion to failing.

I’m not going to delve into Nik Cubrilovic’s antics over the past few months other than to say that from all accounts he seemed to be tenacious and trying to do everything in his power to keep his business going. In this post I’m interested in exploring the role an angel plays in supporting this tenaciousness.

At what point does an angel investor open up the sewer. In the case of Omnidrive, who is to say how close Nik had come in selling off the company’s IP – for this he would not have needed to renew the domain. Has Clay Cook’s open letter affected any potential sale? Would Clay have been better off seeking closure in a less public fashion?

There are some important lessons here for entrepreneurs and investors alike.

UPDATE: If you are interested in hearing more about this saga check out ReadWriteWeb, where some of the key protagonists, including a customer or two, open things up further.

Hey guys, we’d be happy to host a Metarand Unplugged no holds barred, duke em out session in the interests of teaching entrepreneurs and investor types some tips.

[Picture courtesy of Poofy]