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Startups Are Not Zero-Sum

Building web service startups is not a zero-sum game.

There isn’t a fixed amount of resources: bandwidth, servers, HR, ad-inventory.  And, there isn’t a fix amount of demand: more people are coming online everyday and the usage of existing internet users is increasing. More money is being spent online every year. It’s all increasing and some metrics are even accelerating. Everyone’s payoffs in this “game” are different… what is a valuable user or interaction to one startup is trivial (or lead-gen) for another.

And yet, so often in the startup scene, the news and the gossip about companies is how they are all brutally competing, as if there can only be one winner.  Almost any article on competition between two companies is titled something along the lines of  “X feature is a Y-Killer”… where X is some tiny product design of a non-revenue generating startup and Y is a Fortune 500 company. I don’t fault bloggers for sensationalism (I’m guilty of it too), but I wish their posts didn’t repeatedly come baked with this zero-sum game mentality.

I know that the market for web services feels very competitive right now, but it’s important to remember that it is definitely not a zero-sum game. There is a set of services for which the market would feel more zero-sum: me-too companies which David Shen wrote extensively and lucidly about. Try to avoid fighting over the exact same slice of the pie as your neighbor… instead, work to build a bigger pie together.

And, if you ever feel like your competing over a fixed amount of user attention, make sure you’re looking at a long enough time horizon.  I’ll close this post with a nice 10-year chart from the Pew Research Center that can help ground your sense of prospective. The pie is getting bigger everyday.

Posted in VC.

The Open Angel Forum & The Changing Face Of The Venture Industry

Last week I had the opportunity to attend the first Colorado Open Angel Forum (OAF). The OAF was born out of the frustration of some well-known investors including Brad Feld (An Angel Investor Group That Makes Me Vomit), David Cohen (An Offer To Funding Universe) and then inculcated and formed by Jason Calcanis (Why Startups Shouldn’t Have To Pay To Pitch Angel Investors) and others. Their frustration was with organized angel groups charging entrepreneurs to “pitch” their ideas, sometimes as much as $10,000 for the privilege.

My purpose here isn’t to debate the issue though I do fall on the side of the fence that believes it’s somewhat perverse for a bunch of angels to charge startup entrepreneurs on a shoestring budget a lot of money to sit around and eat hamburgers and listen to the entrepreneurs’ pitches. The OAF event itself was absolutely terrific. Don’t take my word for it, here’s a post from one of the entrepreneurs who presented and here’s another and another, and yes, another.

entrepreneurs shouldn't have to pay to pitch these guys

Entrepreneurs shouldn't have to pay big money to pitch guys like this

As successful as the event was, what’s even more intriguing to me is the continuation of a theme that I’ve been witnessing over the last year or two. Guys like Brad, David and Jason are part of a groundswell of younger investors who are steadfastly determined to grab the crusty old venture capital industry and shake it to its very core.

You see, these guys didn’t go through a ton of effort recruiting 30 qualified investors from near and far, getting sponsors for the evening, securing a meeting place, and going through about 100 applicants for personal gain. They did it because it was the right thing to do; to set an example for angel organizations everywhere that it’s about the entrepreneur.

The venture industry has been the favorite whipping boy of the media for almost two years now and deservedly so. Dismal returns throughout the last decade have tarnished a once-noble industry. My partner Phil (who raised venture capital from the legends of the venture industry in the 70s & 80s when he was building ComputerLand and BusinessLand) often regales me with tales of VCs like Tommy Davis of Mayfield and Mike Kaufman of Oak, people who built the venture industry on the backs of their genuine passion for helping great people build great businesses.

As we all know, somewhere along the way, the venture industry lost its way. It would be easy to sit here and play the blame game but when vast sums of money become easily available and fortunes can be amassed in short periods of time, human nature takes over and good people act irrationally. That’s not a phenomenon to be placed at the feet of venture capitalists, but at the DNA of any capitalist. I’m not defending the actions of the industry in late 90s, merely trying to look back through a wider lens.

So how does this relate to the OAF last week? Well, guys like Brad and David remind me of those groundbreaking VCs that Phil always talks about. I know Brad and David well. I  admire the hell out of the astonishing amount of energy and passion they pour into their love for entrepreneurs. They’re incredibly accessible and freely give copious amounts of their time, not just to their portfolio companies, but to any entrepreneur trying to build a business. They’re great role models for any young investor, either institutional or angel.

David & Brad in one of their more serious moments...

David & Brad in one of their more serious moments…

What’s really encouraging is that there’s a whole generation of guys just like Brad and David. Well known guys like Josh Kopleman of First Round Capital, Fred Wilson of Union Square Ventures, Jon Callaghan of True Ventures and Bo Peabody of Village Ventures are leading the way and setting examples for a whole new generation of authentic, high-character venture capitalists who are building right-sized firms filled with “changing-of-the-guard” partners intent on bringing some much needed respect to our industry. Folks like Jeff Clavier of SoftTech VC, Dave McClure of Founders Fund, Trevor Loy of Flywheel Ventures and Bryce Roberts of OATV are just a few examples of younger investors who are quietly building terrific smaller firms that entrepreneurs feel great about working with. Okay, so maybe Dave’s not doing it that quietly…

I’ll wrap this up with a story about Dave from the OAF in Colorado last week. I was sitting next to him and talking to him about a recent blog post he had penned. If you know Dave, you’ll know that he’s nothing if not brash and outspoken. He’s also one of the brightest guys I’ve ever met and has more passion about helping entrepreneurs build great businesses than most people have about anything in their lives. After a successful career in technology, Dave’s been part of the Founder’s Fund and also has been making a bunch of angel investments (with some terrific success) and is now in the process of raising his first venture fund, focused on making seed investments in web-based businesses.

I wouldn't bet against this guy...

Dave McClure: Expect him to drive innovation in the venture industry

When I pressed him on his post in which he challenged some of the core foundations of the venture industry he laughed and then broke into a big grin and said “I’m gonna blow the whole goddamn thing up. VCs have told entrepreneurs for years to innovate; yet they’re too chicken-shit to do it themselves.” I’ll tell you what, not only wouldn’t I bet against him, but I think he’s spot on.

It’s funny. It wasn’t that long ago that when people asked me what I did for a living, I’d mumble something about being involved in “investments.” That’s changed these days. When it means being associated with the likes of the folks above, I’m proud to say that I’m a venture capitalist.

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peHUB First Read

Cofee* Need venture capital for your iPad-related startup? There’s an AppFund for that.

* A private equity firm is majority owner of the Connecticut power plant that exploded yesterday, killing five workers.

* The SEC is rethinking its proposed ban on PE placement agents. As it should. I’m all for rooting out corruption in PE fundraising — hell, I’ve written about little else for the past year — but the SEC’s original language is the regulatory equivalent of using an anvil to swat a fly.

* Morning Call: U.S. futures point higher, London rises early, European shares fall on banks, the Nikkei hits 2-month closing low and both China and Hong Kong shares keep slipping.

* Q&A with Blackstone Group’s Tony James

* Economists, crises & cartoon (h/t Kedrosky)

* James Surowiecki: The perils of economic populism

* New white paper from BCG on how PE firms add operational value, and where LPs believe they still fall short.

* Tweet of the Day: @moorehn Undercover Boss themes: Fairy Godexecutive improves image of high-level executive and common man at expense of middle-management.

* New blog: Trends in Branding

* The Deal began cutting back on its blog activity a few months back, and now has put virtually everything behind the firewall.

* Alastair wrote last week about how VC-backed HomeAway had paid up for a Super Bowl ad. (”Complimentar-e”). Here it is:



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10 Reasons Sherlock Holmes Is The Ideal VC

If you’re in the mood for a really enjoyable film, I recommend Guy Ritchie’s Sherlock Holmes. In it he uses the latest movie-making technologies to animate 19th century London in all its dark immensity and brooding menace- from the elegant halls of parliament to the ornate rooms of masonic temples to the labyrinthine sewers beneath the city. The sets and staging in and of themselves are a masterpiece and are simply breathtaking. I think the production designer should be nominated for yet another Academy Award.

I also came to this film with a sensibility that I did not have when I first encountered Holmes as a young boy reading Conan Doyle. I was of course neither an entrepreneur nor an early-stage investor. Not surprisingly, this time, soon after leaving the theater something I had never considered before really hit me. I was struck by the realization that Sherlock would have made an amazing venture capitalist!

“What a perfectly silly notion my dear Watson!”, he would no doubt have replied. But I would have to insist and say that VC’s and Angel Investors young and old would do well to emulate some of Sherlock’s best qualities. Here they are as I see them:

1. Complete and Utter Attention to his Clients:
When he meets with someone, his total absorption in their presence is legendary. (He would, for example, never dare distractedly glance through his mail when receiving a guest- as many VCs are criticized for doing via their blackberrys). He also is incredibly respectful and courteous to his clients, always responding to their telegrams promptly.

2. Immensely Perceptive and Observant:

LP’s looking for capital efficient managers take heed! Forget about your GP’s spending money to perform diligence on entrepreneurs. With Sherlock as the Managing Director, he can tell you a person’s entire story and background after the first meeting! He takes the meaning of due diligence to another level entirely.

3. He’s a World-Travelled, Experienced Entrepreneur Himself:

Worried (as Hoegaerden is) about “sub-prime VC’s”? Holmes is no newly-minted, blue-blazered-stiff-of-an-MBA just off the VC conveyor belt with no life-experience. He’s traveled the world, has enormous wisdom and runs the 19th century equivalent of a garage start-up consultancy with Dr. Watson.

4. Massive Intellectual Curiosity, Great Erudition:

Here’s a VC who doesn’t rest on his laurels and past accomplishments. He is constantly learning, reading, studying and staying abreast of new trends, the news, the latest technologies. He is the first Western martial artist, a naturalist, an amateur chemist par-excellence and an early adopter of the newest technologies and techniques available.

5. Loves the Big Idea, Huge Risk-Taker & Admires Disruption:

Here’s a true innovator not content with following the herd and investing in the latest incremental fad. He himself is disrupting the law enforcement industry with his own super-lean startup! The bungling bureaucracy of Scotland Yard and Inspector Lestrade are no match for Holmes’ home-grown operation with a staff of two, (three if you include his landlady, Mrs. Hudson). He’s confident and capable enough to trust his own vision and therefore is ready to tackle the biggest, toughest, most elusive problems in the marketplace!

6. Great Mentor, Coach and Board Member:

He leads by example, has intelligently advised innumerable clients and has helped Watson hone his now considerable skills as a crime-stopper. He anticipates events, predicts how people will react and has a keen sense of danger. Such a mentor could help any entrepreneur with the sales, marketing and hiring process, not to mention with the design of an effective strategic plan. He would make a great Board Member.

7. Great Ear for the Customer:

When it comes to understanding the views of the man on the street, no one is better than Holmes. He’s as comfortable in the elegant drawing rooms of 221B Baker Street as he is on the vilest lanes of London, has roughed it in disguise many a time and is known to have eyes and ears throughout the city. He has no allegiance to class, no patience for pomposity and judges a person on their individual merits.

8. Driven with Enormous Energy:

Here’s a guy who loves his job, pulls all-nighters regularly and will take almost any meeting. He’s relentless and ultra-determined when trying to solve a problem and this is infectious to the entrepreneurs he funds and advises.

9. High Standards & Innate Sense of What is Right:

Holmes is always very exacting of Watson and those around him, but never more than he is on himself. He takes on each engagement with an enormous sense of purpose and sense of what is inherently right. As many have said, he has his own sense of justice that is at times distinct from the rather blunt and un-nuanced version often displayed by his lemming-like colleagues at Scotland Yard. A loyal teammate with an unfailing moral compass, he is an enormous asset to the companies in which he invests.

10. Sense of Humor:

Lastly, as Robert Downey Jr. exemplifies so well in the film, Sherlock has a terrific sense of fun and playfulness and mischief- rarely taking himself too seriously. It is always disarming and endears him to Watson and many of his clients. He is respectful and yet irreverent all at once.

Dave is a New York-based Serial Entrepreneur, Angel Investor and Board Member of New York Tech Meetup. He is also the Director of the Venture Lab at Columbia University Tech Ventures where he has spun-off 50+ start-ups based on university intellectual property. His personal blog, www.davidblerner.com, explores the worlds of angel/venture investing, startups and university entrepreneurship. He was recently named one of the “top 100 most influential New Yorkers in the digital business community” by Silicon Alley Insider, is an active organizer of entrepreneurship and venture capital events, and is a mentor to entrepreneurs and start-ups in and outside of the university arena.

Follow him on Twitter or visit his blog



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King Of Carrot Flowers Part I - Neutral Milk Hotel Back to back…



King Of Carrot Flowers Part I - Neutral Milk Hotel

Back to back days from the same record. I’ve got to pick this up on vinyl.



Posted in VC.

A reminder on the economics of venture capital

image

Bill Bryant, former entrepreneur and now one of our US venture partners, recently described the maths of venture investing at a conference in Seattle.  This write up is from the Xconomy blog, and in it Bill it explains why VCs need to price in 10x returns:

Bryant explained that “Despite doing extensive diligence that leads to the conclusion that every investment we eventually make is going to succeed—otherwise we wouldn’t make the investment to begin with—for every 10 deals we do, we lose all of our money on 5 to 6, we make a modest multiple on 2 or 3, but we make a lot of money on 1 or 2.” Those two successes need to deliver at least a 10x return to compensate for all the losers.

“Unfortunately I have to penalize the winners because of all the losers—we basically price them all the same at the start since we don’t really know which one will end up in the winner category. I don’t plan for this. I make every investment fully believing that it will be a winner, otherwise I would not invest, but the reality is 5 to 6 out of every 10 will lose all the money we invest,” he reiterated. “When an entrepreneur tells me they are trying to raise $2 million for 15 percent of their company, the way I translate that request is that I now need to believe they have a reasonable chance of reaching at least a $90-$100 million exit, otherwise it doesn’t pencil out.”

Our model here at DFJ Esprit is more a third make good money, a third return the investment (plus maybe a little bit) and a third return pennies on the pound than the half-quarter-quarter model that Bill describes, but the story is still the same.  The difference comes because in the US DFJ makes more very early stage investments than we do in Europe.

Bill also talked about the relationship between VCs and the investors who put money into our funds:

Entrepreneurs should realize that VCs have investors too and must produce results. VCs raise money from institutional investors such as pensions, foundations, and endowments for whom the VC investment is just a tiny part of their portfolio. “We are to these very large institutional investors what art collections, luxury boats, and sports teams are to super high-net-worth individuals,” said Bryant. “We need to produce competitive returns to maintain our place in the asset allocation of these investors.”

Having been closely involved with a successful VC fundraising process for the first time recently I can tell you that a) fundraising is a really important part of our business, and b) the parallels between the startup fundraising process and the VC fundraising process are legion.

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Domain Experience Gives Entrepreneurs an Unfair Advantage

usain boltThis is the final part of my series on Entrepreneurial DNA that was originally published on VentureHacks.  OK, it’s not really my final part.

I started with a Top 10 list for Nivi (at VentureHacks), but I couldn’t cram it into 10 so it became a Top 11 list.  I originally conceived it as the Top 11 things that I believe “all entrepreneurs need to succeed.”  If it stuck to this theme then I would stand by my top 11.  But Nivi envisioned it being the “Top 10 things I needed to see before I wrote a check.”  I think the title sounded better to him ;-)

This became comical as I published my “attention to detail” post because some people noticed that the Top 10 list had 11 items.  Made ME laugh, anyways.  So sticking to my definition of “attributes for success” it had to be my  Top 11 +1 rather than a Top 12.  There’s one attribute (coming soon) that I need to have in order to write a check but I don’t believe is vital for success.  It will be controversial – I know.

I’ll publish the final post in this series this week and then move on to my next series – sales & marketing.  I’ll be covering my PUCCKA sales methodology.  But I’ll probably wander around a bit before then as I tend to do.

11. Domain Experience – “Domain experience” means that the founders have worked in the industry before.  It isn’t a “must” for me but it’s certainly a huge positive when entrepreneurs have it.  When you’re researching a market you can spend a year putting your hypotheses on paper but you somehow never really have a handle on the minute details of the industry until you’ve lived in it.  It’s not an absolute requirement for me that you have domain experience but if you do it’s a HUGE plus.

Are you launching a mobile application?  If your last company was Apple, Blackberry, AdMob or JAMDAT and you have some experience in the sector then I know that your product will have your experiences baked into it.  When Evan Rifkin of .App/Ads launched a new ad network for iPhone (and soon to be other devices) applications I knew he would have a very strong offering out of the box.  He’s built two ad network companies – he knows what he’s doing.  I’ve now validated with 3 independent sources that he’s really on to something so if you have an iPhone app that you’re looking to better monetize you should check it out (no, I’m not currently an investor.  I’ll always point out when I am.).

I learned the domain lesson myself.  My first company launched in 1999 and we were offering a SaaS document management in the cloud (we were called ASPs back then).  I didn’t have first-hand experience in document management systems other than as a user and nobody had SaaS experience – the market was too new.  We made lots of assertions about what features we thought people would want, how to price them and how to overcome the objections that people have to managing data in the cloud.

When I began to hire product managers, sales reps and implementation staff from existing document management companies like Documentum and OpenText is when I got first-hand input into what lessons they had learned in their companies over the previous decade.  I know this stuff cold now.  So when I launched my second company which was also a SaaS Document Management company we already had a vision for what would do well in the marketplace.

Domain experience also brings relationships.  I have a good friend who spent years building relationships with senior executives at media companies.  He’s a star.  He wanted to launch his next venture in financial services because it was a bigger industry.  Fine.  But I pointed out that he would be up against competitors that had spend years building relationships with the big financial services companies (as well as channel partners) and he was going to have to start from scratch.  I’m not sure why you’d do that unless you had to.

Examples: There is a company called GreenLink Networks based in San Diego and Philadelphia.  Their first company was called Traffic.com, which they sold in March  2007 to Navteq for $180 million (not too shabby).  I met the CEO Brian Malewicz several times.  He’s a classic entrepreneur and exactly the kind of person I look to work with.  Traffic.com sold 10-second in-content advertising spots to local TV broadcasters.

They had built significant relationships with the local broadcasters and a knowledge of how to sell non-standard ad units.  So when it came time to start their next company the starting questions was, “OK, what big problem could we solve for local TV broadcasters?”  They’re taking on the declining revenue streams of local TV and creating new, measurable ad activities.  In no time after they had researched their market they were up with pilots with local TV stations in 3 key DMAs.  They had relationships – trust – that couldn’t easily be replicated.  I’ll be they’ll build a successful business.

This is exactly the reason I like people who present to me to start with their personal bios.  Before they’re presenting I want to know “what unique experiences you bring to the table that are going to give your business a faster time to market, a better designed product, more knowledge of your customers problems – a higher likelihood of success.”  It’s what many VC’s call, “An unfair advantage.”

Another example.  We recently met the management team of Assistly – CEO Alex Bard and COO Gary Benitt.  When I first met the team in San Diego they had only been working on their software for 5 months.  I was ASTONISHED (yes, it was worthy of all caps) by how good their V0.9 version of their product was.

Assistly is a customer support product designed to meet the needs of the current era of multi-channel touch points (think Twitter, email, chat, forum in addition to phone calls).  The exact same team had worked on 2 previous customer service startups (and 1 non-CS product).  So the whole customer development cycle is very streamlined.  I absolutely love their product, team and vision.  And the progress since my first product review is also great.

I normally don’t talk about specific companies we’re in the process of looking at but I guess when teams Twitter that they met your or check in on FourSquare it’s pretty hard to hide it ;-)  Note: every time I use CoTweet to find old Tweets (as I did with Alex’s Tweet that he met with GRP) I feel compelled to plug them.  I’m not an investor but the ability to so easily go back and pull up old Tweets is vital.

So summarizing my message to you – I know that not every entrepreneur has deep domain experience when they launch their ventures.  That’s OK.  Bill Gates, Steve Jobs and Mark Zuckerberg didn’t really either.  Some people claim that too much domain experience can actually harm you because you become cynical of all the things that can’t be done – you’ve got the scars to prove it.  There IS some truth to this argument.

But if you have it – use it.  If you don’t have it – see if you can pick up team members that do.  There is no doubt in my mind that on balance it offers you a huge Unfair Advantage.

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Open Angel Forum Is Off To A Great Start

When I wrote my post titled An Angel Investor Group Move That Makes Me Vomit I expected to write my little rant and be done with it.  A month or so later Jason Calacanis picked up the mantle and started a Jihad against the idea of angel groups charging entrepreneurs to pitch to them.

The result is the Open Angel Forum.  I participated in the second event last week in Boulder.  I thought it was spectacular and the twitter stream from #OAFCO reflected this sentiment.  About 20 active (at least four investments in the past year) early stage investors (angels and seed stage VCs) attended.  Six entrepreneurs presented their companies in short seven minute pitches.  Five sponsors underwrote the food and drink at the event.  There was plenty of networking before and after.  That was it – small, intimate, and highly relevant to all.

Most of the presenters wrote blog posts about the event which will give you a great feel for what they experienced.

The events continue with Open Angel Forum San Francisco on March 4th and Open Angel Forum New York City on April 8th.  If you are an entrepreneur or an angel investor in either city, check them out.



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Open Angel Forum Is Off To A Great Start

When I wrote my post titled An Angel Investor Group Move That Makes Me Vomit I expected to write my little rant and be done with it.  A month or so later Jason Calacanis picked up the mantle and started a Jihad against the idea of angel groups charging entrepreneurs to pitch to them.

The result is the Open Angel Forum.  I participated in the second event last week in Boulder.  I thought it was spectacular and the twitter stream from #OAFCO reflected this sentiment.  About 20 active (at least four investments in the past year) early stage investors (angels and seed stage VCs) attended.  Six entrepreneurs presented their companies in short seven minute pitches.  Five sponsors underwrote the food and drink at the event.  There was plenty of networking before and after.  That was it – small, intimate, and highly relevant to all.

Most of the presenters wrote blog posts about the event which will give you a great feel for what they experienced.

The events continue with Open Angel Forum San Francisco on March 4th and Open Angel Forum New York City on April 8th.  If you are an entrepreneur or an angel investor in either city, check them out.



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Organic Motion is Looking for Engineers

One of our portfolio companies, Organic Motion is hiring.  They are a really exciting company right in the middle of our Human Computer Interaction Theme.  In the company’s own words:

“Organic Motion is a global leader in the development of breakthrough markerless motion capture and analysis technologies. Our software products utilize state-of-the-art computer vision techniques and high performance graphics hardware to deliver an industry first set of production, entertainment, and research tools for use in a variety of industries.

We are seeking to expand our Manhattan, NY based engineering team with applicants who have a solid mastery of practical C/C++ development skills combined with strong analytical and problem solving skills in a variety of areas including computer vision, computer graphics, networking, pipelining and optimization, biomechanics, and more.

We are looking for candidates having 2 or more years experience in a professional development setting in addition to a PHD, Master’s degree, or an exceptional Bachelor’s.

Required skills include some of the following:

* C, C++ (required)

* Stereo vision – 3d reconstruction / mesh creation & optimization 
* 3D programming (DirectX, OpenGL, Shaders, HLSL, CG, GPU) 
* Multi-threaded / multi-process programming

* Networking – sockets, RPC, streams, low latency hardware

* Computer vision / image processing

* Low-latency / real time 

Secondary skills:

* Game development
* Distributed systems
* Motion capture creation / analysis 
* Physics

* Scripting languages (Python, Lua, Bash, Perl, etc)

* UNIX, Linux

* Mathematical modeling, filtering, signal processing
* Biokinematics
* GUI development (MFC, Qt, WxWidgets) 
* Autodesk 3d animation suite API

Responsibilities include: 
* Optimization (single-core / multi-core / multi-process) 
* Algorithm development (raw 3D data analysis) 
* Application development (server and client side)

* Code maintenance and troubleshooting
* Supporting conferences and shows (past shows: SIGGRAPH, GDC, CES, I/ITSEC)

This is an exciting opportunity to join a dynamic team with potential for rapid growth and access to a great deal of compelling technological resources. We are looking for individuals with fresh ideas and the skills to put those ideas to the test. This is a unique opportunity to have a major impact on a growing company!

If you are an excellent candidate, then please reply with your resume in Word or PDF format to careers@organicmotion.com. A code sample would also be a big plus!”

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