The Secrets of Silicon Valley

By Carlye Adler
November 15, 2007

The door swings open before I have a chance to knock, and I get my first glimpse of the man known to thousands only as Ted. At 6’5″ in socks, he is squeezed into the door frame of his midtown Manhattan loft. He’s got a shaved head, thick-rimmed black Prada glasses, and a small bag of Chips Ahoy! cookies. “Come in,” he says, grinning toothily.

It has taken four weeks to arrange this meeting. Four weeks during which I spoke with Ted, the pseudonymous founder of TheFunded.com, nearly every day. He refused to give me his phone number, calling me — almost always late at night — whenever he decided it was time to talk. If I needed to reach him, I sent a note to his Gmail account. He usually called back from a blocked number within an hour or two. Until now he had rebuffed my suggestions of a face-to-face meeting. First he said he was too busy overseeing the sale of his technology company. Then an unexpected family crisis took all his time and energy. Finally, just as I began to think Ted was avoiding me, I received another email: “4:40 pm, OK?” And about an hour later, here I am, staring at the most mysterious Web celebrity since Fake Steve Jobs.

I get the sense that Ted enjoys this cloak-and-dagger routine. After all, he’s been playing it since the beginning of the year, when he launched TheFunded.com, a community site for startups to anonymously review and rank venture capital firms. In effect, it has given entrepreneurs a peek into the secretive VC industry and a chance to dish about some of the unseemly behavior they’ve witnessed there. “We have seen distinctive pieces of our business plan end up in marketing materials of a competitor,” reads one testimony. “The senior guy was arrogant, rude, and dismissive,” reads another. “He had his feet up on the table the whole time he was telling us how bad our business is.” Visitors to TheFunded can pore over tales of VCs who overwhelm a founder’s influence, who change deal terms at the last minute, and who find out what other VCs offered a company to weaken its bargaining position. TheFunded has also become something of a support group for its 3,150 members; when one recent poster asked whether he should accept a deal that would give a VC the sole right to sell his company, he received 19 responses, including “AVOID” and “Run!”

Ted says that he’s not out to punish venture capitalists. He just wants to refocus them on what should be their goal: “backing savvy entrepreneurs to move the fundamental technologies of humanity forward.” And some of TheFunded’s readers say they get more out of the site than a mere chance to vent. Stephen Bell, founder of a video-shopping site called ShangBy, says he used TheFunded to research VCs before meeting them.

Nevertheless, neither Ted nor TheFunded is exactly beloved by the venture capital community, which is more accustomed to CEOs kissing its butt than kicking its ass. “VCs are taken aback,” says Bill Burnham, a former managing partner at Mobius Venture Capital and now a hedge fund manager. “The peasants have revolted against them.” Mike Brown, a principal at Foundation Capital, says, “People are worried about it. There is the sense that Big Brother is watching.” As a result, according to one venture capitalist who refused to be named, most VCs look at Ted “with disgust.” Or they would if they knew who he was. Ted has refused to disclose his identity, even as it has become one of the tech industry’s most tantalizing secrets.

Until now, that is. After nine months of anonymity, rumors have begun circling — in the pages of Inc. magazine, on the tech-rumor blog Valleywag — and Ted assumes he’ll be unmasked before long. He wants to manage the unveiling, which is why he has invited Wired into his home. Ted is not Kevin Rose of Digg or Nick Denton of Gawker Media or Jason Calacanis of Weblogs, Inc., all of whom have been named as suspects. He’s not Shawn Gold, a vice president at MySpace, although Gold is a good friend of Ted’s and officiated at his wedding. Ted didn’t found Netscape or Twitter, but he is active in the Valley, a serial entrepreneur who has launched and sold three companies.

Ted is Adeo Ressi.

If pushed, Ressi, 35, will admit that he’s not exactly a household name. It must pain him — self-promotion appears to be his default setting (his bio has him “pioneering the early adoption of the World Wide Web,” “investing in the birth of private space exploration,” and “cultivating mass market adoption of casual games”). Ressi always considered himself the type to change the world. While other New York City kids went to summer camp, Ressi begged his parents to send him to Arcosanti, an experimental city being built in the Arizona desert. (He spent four summers as the commune’s youngest working resident, which meant cleaning a lot of sewage pipes.) As an undergraduate at the University of Pennsylvania, he started the Social Revolutionary Club, and today he sits on the board of the X Prize Foundation. Ressi is of the utopian mindset that believes in the wisdom of crowds and the democratizing nature of the Internet to spark change. In other words, he’s the perfect candidate to lead an entrepreneurial uprising.

Ressi was first radicalized around the time he was seeking a second round of funding for Game Trust, an online gaming platform he founded in 2002. Ressi considered himself a seasoned entrepreneur: He had already launched and sold two successful companies. In 1994, he created an online city guide called Total New York, which was later purchased for an undisclosed amount and eventually redubbed AOL Digital City. And in 2000, he sold methodfive, a Web development firm, to Xceed for $88 million. He had closed a first round of funding for Game Trust during the postbubble downturn in 2003, scoring investments from Intel Capital and Silicon Alley Venture Partners. And at first, his Series B round seemed to be proceeding smoothly, with a promise of $10 million from SoftBank Capital.

Then, Ressi says, in February 2005, on the day the deal was supposed to be finalized, his contact at SoftBank called him to say they were pulling out, citing concerns with Game Trust’s management, model, and market. Because Ressi had signed a standard no-shop provision while negotiating with the fund, his company was left with dwindling cash and no other financing options. (A SoftBank spokesperson confirmed that they had a term sheet but declined to provide details, citing a confidentiality agreement.) Game Trust was forced to take another loan from its investors. By fall it had closed a $9 million round that included $3 million from a smaller firm called TWJ Capital, but that relationship soured in late summer 2006, after an unprofitable development project caused Game Trust to miss its quarterly revenue targets. In response, the board voted off one of Game Trust’s directors, Elon Musk — the PayPal cofounder who was once Ressi’s housemate at the University of Pennsylvania — and replaced him with the son of TWJ founder Thomas Jones. With narrow control of the board, Ressi says, Jones launched a bid to take over the company and sack the management team. (Jones declined to comment, citing confidentiality obligations.)

These efforts by Jones would eventually fail, but at the time, Ressi expected the worst. Shut out from his firm, waiting to get fired, he got mad. Like many entrepreneurs, he had chosen his investors based on reputation and hearsay. Now, instead of concentrating on building his business, Ressi was spending most of his time battling those funders. “You’ve got to hang on for life to maintain control, and all the while VCs are beating you with a stick,” Ressi says. “And then they dispose of you like garbage.” (He’s not wrong about being disposable; nearly two-thirds of venture-backed CEOs are replaced. VCs say it’s done to maximize value and that entrepreneurs are naive not to expect it.)

So, over the 2006 Christmas holiday, Ressi built TheFunded.com. The site was initially intended as a personal project to keep track of his experiences with VCs and for his CEO friends to add their own feedback, in case Ressi needed to raise money again. “I didn’t want to make the same mistake twice,” he says. He unveiled the site during a New Year’s Eve celebration in Puerto Rico, showing it to a close circle of confidants. The response, he says, was overwhelming: “Everyone seemed to have their own difficult trials in dealing with venture capitalists, and many of the stories were worse than my own.”

Michael Diamant, who runs a baby-products company called Skip Hop, recounted the time he flew from New York to Palo Alto, only to be stood up. Another — Ressi won’t divulge his name — spoke of investors who unceremoniously stripped him of his CEO post. Scott Heiferman, cofounder of Meetup, immediately saw value in TheFunded. “It’s hard to deal in the world of VCs,” he says. “We know they are in touch with each other. I’m sure they trade notes on entrepreneurs.” Ressi wanted to give entrepreneurs the same power.

In all, Ressi signed up a dozen or so of his friends, including Calacanis and Gold, to serve as original members of the site, seeding it with its first wave of opinions and rankings. The group, wary of retribution from funders, posted anonymously and pledged never to identify one another. They even voted on Ressi’s pseudonym, the first name of a nemesis. (“They did it to spite me,” Ressi chuckles.) TheFunded started as an invitation-only site, but before long Ressi decided that CEOs outside of his network should be able to apply for access. To protect the integrity of the site’s information, he instituted a four-point vetting system: Successful applicants needed to file their names and titles, email addresses at their company domains, bios on their sites, and a persuasive reason for joining TheFunded. Anyone could visit, but only members could rate or review firms or have access to more-detailed posts flagged as private.

For the first couple of weeks, TheFunded was the online equivalent of an unmarked bar — no one but the truly connected knew it even existed — and membership grew to about 50. But then, on March 14, someone leaked its existence to TechCrunch, the widely read Silicon Valley blog. By the time Ressi awoke and flipped on his BlackBerry, he had already received scores of new applications. Throughout the day, they kept pouring in, about 10 a minute, he says. Ressi rejected most of them, and at the end of March membership was at about 100. But by May, it had grown to 1,000.

Meanwhile, TheFunded’s reputation had spread throughout the VC industry. Investors in venture funds — endowments, pension funds, wealth-management institutions — wanted to tap into the collective wisdom of TheFunded’s members. And consultants, advisers, and attorneys who worked with entrepreneurs also wanted access. (Ressi would later offer paid subscriptions at $250 per year for applicants who didn’t meet his criteria but wanted access to all the site’s features. About 150 have subscribed. “I can’t believe people signed up for it,” he marvels.)

Entrepreneurs and investors weren’t the only ones flocking to the site; so were VCs, and they weren’t happy with what they saw. “You can go on and say something horrible, and there’s no accountability,” says Pascal Levensohn, a managing partner at Levensohn Venture Partners. Josh Kopelman, a partner at First Round Capital, says that many of the people who post on TheFunded may have an ax to grind. “We have looked at 2,000 businesses and said no to 1,980 of them. It’s like having a Zagat guide where 90 percent of the people who are writing reviews can’t get a restaurant reservation.” (Ironically, both Kopelman and Levensohn have garnered mostly positive comments on the site.) Ressi retorts that more than 80 percent of TheFunded’s members have received venture capital, are starting their second or third venture-backed company, and have had at least one liquidity event. He also points out that members are asked, though not required, to disclose their past and present relationships with the funds they review on the site.

Venture capitalists weren’t keeping their gripes to themselves; they were grousing on blogs and even sending angry notes to Ted. To help assuage some of the criticism and prevent the site from erupting into a nonstop flamefest, Ressi invited VCs to post “certified” profiles in which they could tell entrepreneurs about their funds in their own words. More than 200 venture firms, including Benchmark Capital, Sequoia Capital, and Hummer Winblad Venture Partners, have done so. But many VCs weren’t satisfied and began to ask the companies they’d funded — and any entrepreneurs they’d met — to submit reviews, in attempts to boost their profiles. “We’re trying to build up a collection of rankings that (we hope!) will signal to entrepreneurs the quality of our firm and our people,” one VC said to an entrepreneur in an email obtained by Wired. Ressi’s own investors even called him and asked him to post some reviews to the site; of course, they didn’t realize that he was the angry founder who had started it in the first place.

By May, the gaming had gotten out of hand, and Ressi realized he had to launch, as he puts it, a “full-on war.” He locked down the site so a firm could receive only one new comment every 48 hours, and he rejected applications from anyone he suspected of being a shill. The VCs went bonkers over the restrictions. Howard Hartenbaum, a partner at Draper Richards who was particularly offended by some of the posts about him (for instance, that he was “really conceited” and “made me want to vomit”), says a VC friend suggested that they hire an attorney together to “make life miserable” for Ted. “I have no clue who he is, but he wields more power than he realizes,” says Hartenbaum, who professes to have changed the way he delivers feedback to entrepreneurs as a result of what he’s read on Ressi’s site. “He can negatively impact investors and can keep them from getting deals because he has a grudge.”

It may seem odd that venture capitalists should care what a gaggle of lowly entrepreneurs have to say about them. After all, for the past couple of decades VCs have been the kingmakers of Silicon Valley, rendering judgment on an endless stream of CEOs who beg and scrape for their approval. But in recent years, that dynamic has begun to shift. “VCs used to have a lot more of the power,” says William Sahlman, an entrepreneurial management professor at Harvard Business School. “They don’t have complete control anymore.”

For one thing, venture capitalists are not the only source for entrepreneurs seeking funding. Angel investors, individuals who tend to take smaller stakes in early-stage companies, are growing more organized. Fifteen years ago, they began forming organizations to pool revenue and exchange information on deals; today there are more than 200 such groups. Last year, angel investors and venture capitalists each invested about $26 billion in startup companies. But since 2002, the amount that angels have invested has grown three times as fast as the amount from VC firms, according to the Center for Venture Research at the University of New Hampshire. (And angel investments don’t include “friends and family” contributions, an even more viable early-funding source.) Meanwhile, “superangels” — startup godfathers like Ron Conway, Pierre Omidyar, and Peter Thiel — offer some of the same experience and insight as VCs but usually on friendlier terms. Shawn Gold says Weblogs, of which he was president, got bankrolled with $300,000 from billionaire Mark Cuban. “We didn’t need VC money,” he says. “It was profitable in four months and we sold it for $25 million in 16 months.”

Hedge funds — unregulated investment funds available only to the very wealthy — have also entered the startup arena. Russell Tencer, CEO of Parker Boston, a company-and-financing matchmaking firm in New York, says that hedge funds are less meddlesome than VCs; of the six hedge-fund deals he brokered last year, none of the investors requested board seats. And hedge funds don’t impose the same bureaucracy as VCs. When Seth Lippert and Sergio Fernández de Córdova wanted to raise upwards of $70 million for Fuel Outdoor, their national outdoor advertising company, they spoke with hundreds of investors before settling on a hedge fund. “These guys move on a dime,” Fernández de Córdova says. “We closed an acquisition of more than $6 million in five days. They are a sophisticated group that gets it, and that gives us a competitive edge.”

Meanwhile, venture capitalists are finding themselves with more money to spend. As institutional investors like pension funds have looked to ride the startup wave, they’ve poured money into venture funds. In 2006, the average established fund raised $218 million, almost double the $113.5 million average raised in 2002. That’s a lot of scratch burning holes in VCs’ pockets, and they’ve got to find ways to spend it — a task that is growing increasingly difficult. Some venture funds usually won’t invest less than $5 million in a young company, and they prefer to invest more than $10 million. But thanks to overseas coders, on-demand services, and the falling cost of software and hardware, fewer startups need that much — or want to dilute their ownership by accepting such a large sum. Former entrepreneur Josh Kopelman’s startup experience illustrates the trend: In 1991, he needed $5 million for his first company to launch its product; in 1999, he started another company with $2.5 million; and in 2003, he took just $750,000 for a third business. (Today, as a VC, Kopelman specializes in small, early-stage investments.)

None of this is to say that the venture capital model is dead. “Get real,” says digital media luminary Esther Dyson. “It’s still the VCs that have the money, and they don’t forget that, and neither have the entrepreneurs.” And John Taylor, vice president of research at the National Venture Capital Association, says VCs offer more than other investors: “They help with everything from hiring to developing products to getting them tested.” But if anyone understands the laws of supply and demand, it’s VCs — and now fundable businesses, not capital, are in short supply and high demand. That’s why many VCs have begun to refer to entrepreneurs as “customers.” That’s why TheFunded, which has the power to destroy a firm’s reputation, is seen as such a threat. And that’s why many firms have begun posting crow-eating mea culpas on the site. “I am really disappointed and embarrassed you had such a crappy experience,” one VC wrote in response to a scathing review. “Do me a favor and give me a call on my cell phone or shoot me an email and we’ll make sure you get some good feedback on your business and that you feel more positive… Give us a chance to make amends.”

To hear Ressi tell it, it’s too late for him to make his own amends. We’re in his apartment, which has exploded into activity. His wife has returned from the hospital, where her father is in critical condition. His 20-month-old daughter, Kali, named for the Indian goddess of destruction, is scampering around wearing his wife’s jewelry. And his BlackBerry won’t stop ringing. Today the news leaked that he has agreed to sell Game Trust to RealNetworks. Soon, he’ll no longer be a CEO.

And thanks to TheFunded, Ressi claims, he may never be one again. He says he expects to be blackballed by the venture world. “There will be a thousand and one requests from people wanting me to take down different features,” he says. “There will be lawsuits and bribes. It’s going to suck.”

In fact, Ressi’s woe-is-me routine may be a bit overdone. When I spoke with David Stern, a partner at Clearstone Venture Partners, he said he didn’t know Ted’s identity but considered him “a pretty savvy Web entrepreneur who would be an interesting talent to back in his next endeavor.” Even Hartenbaum, the disgruntled VC at Draper Richards, says he has spoken to Ted — without knowing his identity — and found him to be “a pretty smart guy” (although Hartenbaum also says that Ted “doesn’t listen well”).

Toward the end of my visit, Ressi tells me that he is moving in a few months; he has scheduled a pack date and has already picked out a new preschool for Kali. He’s been so cagey that I don’t expect an answer, but I ask him where he’s headed. His eyes go big and bright, and I realize Ressi, the scourge of Sand Hill Road, has been gaming this all along.

“We’ll be in Palo Alto,” he says, smiling.

Carlye Adler (carlye.adler@gmail.com) is a writer based in Brooklyn.