First a note on homework.   Make sure you are even calling on an appropriate source of money.  To simplify managing their deal funnel investors often apply exclusionary criteria which they put on their websites, blogs, etc.  Are you pitching someone who would view your company as stage-appropriate and industry-approrpriate?  Do you meet their geographic preferences?  Are there companies in their portfolios that would suggest your company is a potential fit.  If you can’t qualify me as a prospective investor, you are not going to be efficient in how you go about other tasks.

The first characteristic I look for is a bias for action.  I want to invest in teams that are not afraid of taking on a big market, but also are willing to go directly at the unknowns.  This requires a willingness to get out and interact, make connections, seek feedback and insight from prospective customers and partners.  A seed-stage company, our sweet spot, is really a premise in need of validation.  That is really the essence of a seed stage plan – what must be true for this to work and how can I start knocking down those assumptions.  The DNA of a good founder or founder team is a combination of confidence in the premise and fear of being wrong.  I look for people with their senses turned way up, afraid of what they don’t know.  If you have that sense – and you can’t fake it – that makes a great first impression.  You should present evidence of proactive DNA, a bias for action and no fear of getting in front of people you don’t know, people that can help you.  One friend and successful founder simply asks everyday, “Who can help me move the business forward today?”  He then seeks those people out and asks their help.  Simple, but I’m amazed by how many times a founder is in front of our group with glaring gaps in knowledge and no plan to fill them.  Too often they are asking me to fill that gap for them in some way.  There can be no fear of knocking down the right doors and seeking out the right help.

Another characteristic is a mature understanding of risk and how each stakeholder in an early stage company is exposed to it.  Investors are exposing their money or their LP’s money.  Someone else made that money and someone has the responsibility to manage it.  To put that money in the mix for a seed stage or A round investment indicates an investor with a very high risk tolerance.  But successful early stage investors are trying to minimize capital exposure in the early stages of a business.  They seek very high capital efficiency and a clear path to value creating milestones.  To show that you understand that perspective on risk it is important to have a clear path to remove unknowns and build value in the company.  There is a quantitative element to that, but it is more important to show the qualitative aspects of progress.  It is bad form to simply ask for a year’s worth of funding, for example.  I’m more interested in funding a series of tasks that build to a value inflection point, not some arbitrary date on a calendar.  And be ready to show how you will extend the runway for the company if it takes longer.  Also recognize the risk you as a founder are taking.  Put together a plan that accelerates your awareness of whether this is a good idea or not.  Be passionate, committed, but not blind to negative market feedback.  Build a fact-based business as fast as you can.  Respect your time/effort and other people’s money.

Finally, know your market and be incredibly curious about the world you are seeking to change.  Being curious, by the way, means being open to the chance that you are completely and utterly wrong.  In building a relationship with seed stage investors, founders must be comfortable with admitting what they don’t know.  I am scared by cocksure founders with all the answers.  Rarely will they succeed, and never in a capital efficient way that protects seed stage investors.  Everyone involved in a seed stage company – investors, employees, founders – should be afraid of the one fact or law of the universe that invalidates the premise.  Finding those quickly allows you to stop, pivot and attack the issue head on.  It can be frightening and painful to face a piece of negative feedback about your idea, but you have to get it out on the table.  And you need to find people that can guide you on your journey, help you avoid pitfalls and fatal mistakes.  Know that the biggest investor in your business is you.  Life is short.  Get from darkness to light as quickly as you can.

These three characteristics – bias for action, risk awareness, and curiosity – are the cultural underpinnings of great entrepreneurial cultures.  They must be baked in at birth for a start-up, you can’t really hire it in later.  If you are a founder and feel that you don’t have these in abundance, or need someone to balance out some element of these, find a book-end to work with you on the company.  You won’t be able to fake it.

Reflecting on how the last 6 quarters might change the early stage world is appropriate.  It is instructive to think back to Q4/2008 and recall the dire mood in the country and world at the time.  I had conversations with people who worried at some level that  our prosperity was permanently at risk.  There was open talk in the public and media about another depression.  Investment losses, especially for those with an unbalanced portfolio relative to station in life, were life-changing.  Fear was evident, palpable, undeniable.  While we are no longer in that mood, having been to the brink in such a way changes perspective and behavior.

In much the same way as 9/11 has undeniably changed the way we behave on planes – witness the immediate passenger-first intervention on the Delta Christmas flight – the first financial crisis has permanently changed how people look at banks, Wall Street, investments, retirement, credit, employment security and spending habits.  Those with a self-dependent predisposition, the genetic anomaly that often leads to entrepreneurship, are less inclined to trust large employers.  Others who have not considered small company work in the past are now looking at early stage opportunities as no less secure than big company positions.

For small ventures of all kinds, including going concerns with long operating histories, the deleveraging of the economy was an unimaginable shock.  I know of one small business owner who lost most of his orders and access to working capital at the same time.  Orders fell of a cliff, a long-time banking relationship soured, and he had to survive on his own through 2009.  At just the right moment, a new large opportunity radically changed his upside potential and allowed him to start growing again.  I am sure that he will never again be in a position where he is beholden to the credit markets for survival or growth.

This is the most important lesson of the credit crisis for entrepreneurs.  Capital efficiency is paramount.  Those who invest in early stage ventures will demand it more than ever.  Venture investors were caught out in the same way, as everyone learned how much cheap macro-credit was the lubricant for M&A and PE exits.  Nobody in early stage growth can indulge often in anything but capital efficient, break-even trajectory investments going forward.  Of note, it is probably easier to start a company this way from the beginning than it is to change the habits of existing portfolio company.

It is also a bit early to think we have exited the storm.  Evidence that no one really knows where the national or global economy is the variety of opinions on the topic.  Is China a bubble?  Is Greece a ticking time bomb under the EU economy?  Where will inflation/dollar trends lead?  None of these questions will be answered soon, and the uncertainly calls for some basic, post-credit crisis rules for entrepreneurs and investors.  More on that in the next post.

It is also becoming a serious threat to online professional recruiting sites.  Targeting is much easier, and in many cases you can identify and reach out to prospective candidates without relying on ads/recruiters.  There are blogs on Linked-in etiquette, even books about how to use Linked-in.  But it seems to me that it is remarkably easy to understand how to use it and how to abuse it.

One odd thing I’ve noticed recently is the presence of the dead.  I know of two people on Linked-in who are deceased.  The system has been around long enough now to actually include a fair number of people who are deceased.  I can imagine a day when we could all track our advancing age and mortality simply by keeping track of how many members of our network have passed away.   I don’t know that action is required today, but at some point we will need a way to start tagging the dead in social networks, tastefully and with some process.  Perhaps we all need an online next-of-kin, who can be relied on to eliminate or memorialize our online presence when we pass.

I’ve also noticed that some of the most successful people I know in the industry have a profile but only a connection or two.  The power nodes in network really don’t need the notoriety.  In fact, notoriety in a world of obsessive network builders and hangers-on couldn’t be more frightening to those who are centers of influence.

Which leads me to some technical thoughts on Tiger.  I think we can all agree that there was something burning in him besides a competitive drive.  That he chose to live that out the way he did is a source of media fascination.  But as a former intelligence analyst, I am amazed at his naiveté about technology.  A smart phone is a gold mine for someone seeking personal information, as is a Linked-in profile.  Any aggregation of personal information and connections can be mined and exploited by others.  Tiger’s stumbling admission that his wife had “gone through” his phone was telling.

From his phone his wife had access to his call log, email, numbers dialed, etc.  It is hard to imagine someone with such a persona/behavior mismatch not realizing that his phone was his Achilles heal.  You can imagine the chain of events.  His wife hears of the National Enquirer story from a friend.  She waits until his phone is unattended and starts writing down numbers, reading emails and text messages.  She confronts him about the story and threatens to call all the numbers in his phone.  At some point during the ensuing arguments he secrets himself somewhere (bathroom maybe) and calls the girl he is most worried about, leaving the message that guarantees her a big tabloid payday.

Tiger is a bad husband, no doubt.  He also is remarkably wreckless in his personal life.  But all of us probably have things – proprietary or personal – on our personal devices that we don’t think to protect as well as we should.  The implications for the famous, for the young and vulnerable, are obvious.  There are technologies to manage this problem, but they are usually focused on corporate buyers.  Look for those technologies to recieve more consumer attention going forward.

Of course, Tiger might have saved himself some trouble by using a pre-paid phone purchased by a friend at a Cricket store.

“What number can we call you at?”

The other party sent back a number and confirmed the time.  I had that moment of hesitation – do I need to confirm?  This circumstance isn’t uncommon, and there are many conversations that have an unclear etiquette about replying.  Electronic communcation has created all kinds of situations like this.

In researching this problem I discovered the idea of “NNTR”, which is common in the text world but I haven’t seen it used in email.  The notion is to end a text or email with “NNTR”, which means “no need to reply”.  I like that, but there are some situations where you want to convey a bit more.  One is when you send someone a time/place update on where/when you will meet or call.  In this case it almost requires some confirmation, especially if the thread is to change plans.  “NRIC” is my suggestion, and maybe there is something in the text world that already implies this, but I couldn’t find it. “NRIC” means “no reply is confirmation”.

If you have other short reply suggestions or other suggestions, comment away.  We need to get a standard set of these going to save keystrokes and thumb muscle cramping.

Another rule I’ve implemented with a handful of people I have cell conversation with frequently.  Often the calls start with a specific topic and then degenerate into topics and threads that are intriguing but not urgent.  They are just conversations.  The rule is simple.  If the call drops after the principle business of the call has been dealt with and we are just yammering, there is no obligation for either party to call back.  Implementing this rule worldwide would eliminate a good 5% of wireless network traffic.

Which leads me to the notion of typing as a concept.  As I transition from a Blackberry Pearl to the Droid this week, I find that all existing typing methods on phones are completely outdated.  It seems that we are stuck trying to improve or innovate around character-based typing systems instead of seeking new ways to input information with our digits and voices.

I found a boggle-like word game interface among the growing number of Android apps that uses an interesting finger-sliding across a letter grid method of building words.  Made me wonder if that might be a better way to create words on a touch screen.  We also need some context-based potential next word generation engine, as opposed to the word-guessing tapfest that you can get today.  I became pretty proficient on the slim-downed two-character per key Pearl series, but I still thought it was wildly primitive.  I think we are in the stone axe period of smart-phone interface development.  We need to look at the power of stenograhy or short hand and come up with something new.

Voice-to-text is an equally maddening use case.  Suffice it to say that the initial Droid V2T interface and application options are indecipherable.  I think you are more likely to crash your car talking to your Droid than you are texting someone.  Hands-free operation is meaningless if your mind and eyes are engaged in trying to figure out what language the damn phone is speaking.  One element of the interface requires that you wait for the screen to display a prompt or notification that it’s ready for you to speak.  Well, I don’t know if this occured to anyone at Google/Verizon/Motorola, but the eyes are as important to driving as the hands.

Don’t get me wrong.  I am blown away by the Droid and its potential.  I know all the iPhoniacs think of those who have waited as Luddites, but who cares.  I have an open platform that will clearly be a body blow for RIM and the last nail in the coffin for Palm.  Carriers love the Droid because it breaks the handset makers control of the innovation process.  Software innovation constrained by hardware innovation cycles went out in the ’80s in most industries.  Wireless is finally there.

So what bugs me about the Droid is really that I want it to have incomprehensibly innovative interface elements that are probably years away.  Its heavyness, squareness and somewhat dated look don’t really bother me.  I think you could break a car window with it in an emergency, then call 911, take a photo of your destroyed vehicle, email it to friends, Tweet about the experience, and learn Chinese ideographs while you wait for the police.  I’m not sure the iPhone would survive the window-breaking.

In fact, entrepreneurs complain a little too much about angel groups.  These groups have become much better at having consistent processes, working from standard and reasonable term sheet templates, and seeding companies that would otherwise never see the light of day.  With venture investors farther upstream, organized angel groups are an integral part of the funding life cycle.  These and state-supported gap funding entities like ours are the best path for entpreneurs seeking to raise significant capital.

Angel groups are increasingly organizing funds as well.  These funds consolidate early stage capital and also allow those with strong affinity for a deal to sidecar.  We have a great network of venture groups in Ohio that share information on diligence and have reasonably consistent processes.  They often co-invest and have been good partners on many of our investments.

So $200 is small price to pay for some feedback from a group of accredited investors who see a lot of deal flow.  Too few entrepreneurs think about that.  Very deep pockets exist, but they rarely invest in early stage technology alone unless they have a very high affinity for the deal.  And they typically only do a deal at a time.  So the odds of finding the right very deep pocket is pretty low.  Angel groups have a built-in syndication mechanism, have relationships with other angels, and will give you informed feedback on your deal.

If you don’t think there is a difference, consider two identical products that are equally reliable:  generic and name versions of the same drug.  There is simply no rational reason for someone to pay more for a drug of equal reliance.  Yet the brand affinity lingers somewhere in the value chain of patent-holder to doctor to patient.  Some patients will swear that they can tell a difference between equally efficacious versions of the same medication.

Brands are built to drive higher prices, and thus higher gross margins, even where noticeable differences are illusory in terms of reliability.  Brand builders must build associations for a product that extend beyond the utilitarian elements of problem/solution.  Traditional advertising builds brands, TV being the most obvious and historically important platform for building the brand image.

As marketers began to build behavioral databases of consumers in the ’80s and ’90s, they were able to identify more granular profiles that could be aligned with companies’ impressions of product brand imprints.  This was the purpose of all of those annoying check boxes about age and income and habits on warranty cards.  Granular understanding of consumer habits led to analytic systems that were able to target consumers directly with mailings or telemarketing.

Then came the Internet, direct mail opt out, do not call registry, and analytic parity among direct-mail marketing businesses.  Consumers retreated behind their doors, moved to cell phones, and began consuming media in ways outside traditional channels and methods.  Brand build and reinforcement is increasingly difficult.  Consumer activation through direct mail and telemarketing is fading fast.  And despite the concerns of privacy advocates, Web targeting efforts remain primitive compared to the glory days of direct mail.

Consumers of all ages are more selective, secretive, and elusive.  Media interaction – social and traditional – is a fragmented, continuous experience.  And social media, broadly cast, is becoming the lead channel.  It is a channel that we tune into, including email, social media, twitter, and SMS all day long.  It spans business and personal lives, work and family, parents and children.  This channel is evolving into the most trusted media channel of all, displacing the traditional channels that conveyed brand messages.  Brand companies are attenuated to social media for that reason.

Unfortunately for brand advocates, consumers are being conditioned to reliability first, trust second.  This evolution of the consumer is very difficult to imprint with brand associations that are enduring.  Enduring brand association creates brand loyalty, which is arguably the repeat purchase of high-priced alternatives for other than functional reasons.  The influential elements of social media carry a different currency of trust than a brand.

In fact, consumers of social media referrals value objectivity and innovation first.  Any hint of payola or favoritism undermines consumer trust.  Rather, they want a referral to a reliable product/experience, regardless of brand.  As such, reliability is the currency of trust that the product/movie/experience reviewer deals in.  Brand affinity may undermine the trust between a consumer and a social media source.  How that drives the future of brand marketing is unwinding before our eyes.

First, I don’t think venture fairs/forums should charge start-ups to present.  It’s a bit like asking the pig to pay for breakfast.  They’ve already paid.  While these events obviously cost money, there should be enough critical mass of attending funds, law firms, and other service providers to support the event.  Most events we follow do not charge, but some are less entrepreneur-friendly.

A good event is the 3 Rivers Venture Fair in Pittsburgh.  It is well attended, has great pre-event coaching for companies, and brings together a critical mass of regional investors.  The organization reaches out to other communities in the Midwest to help find and filter companies that will present.  It is a serious event that represents a regional one-stop shop for entrepreneurs.

In contrast, there is youngstartup.com, which runs the New England Venture Summit.  Recently two of our portfolio company CEOs received the following email:

Hi {Name Redacted},

Wanted to confirm that you received my previous email regarding the opportunity to present and be recognized as a top innovator at the 2009 New England Venture Summit being held on December 8 at the Hilton in Boston/Dedham MA. Let me know if you’d like further details.

Regards,

{Name redacted}
youngStartup Ventures

They both sent it on to me to see whether we knew of this event.  While the event does exist, it is clear that the email is nothing more than a come-on to get company CEOs into a dialogue about paying the $1,500 presentation fee.  It’s very much a “Who’s Who” approach to recognition.  You’ll be recognized as a “top innovator” if you pay us $1,500 to attend.  Note that the line about the previous email is suspicious as well, since neither CEO could find a previous email.

A quick visit to the website of the company is revealing.  It is clearly a business that makes money primarily from start-up companies and events around the business, if it makes money.  I really don’t know.  I do know that there are no people listed on the website whose backgrounds would indicate the company could help you do anything other than pay them to attend an event or get introduced to people.  There are also no tombstones of deals done, companies won.  The company and its founder also have limited information on Linkedin.

The event is real, and there are some VC attendees at this event and other youngstartup events, but I think entrepreneur/presenter registration must be lagging.  Not surprising in this economy, but the onus should be on the event and the sponsors, not the start-ups, to underwrite the feast.

So events/forums/summits should be free to presenters in my opinion, once selected through a reasonable screening process.  I applaud all the volunteers at law firms, funds, angel groups, and others who carry those start-up friendly events forward.  Stay tuned for a perspective on angel groups charging to present.

The emergence of keyboard data terminals in the late 1970s allowed expert programmers to type in commands.  Finally, in the late 1970s, specialized end-user applications emerged.  This event was revolutionary to the industry, requiring accountants, actuaries, and other business end users to interact directly with a computer rather than pass instructions through a programmer or specially trained data-entry clerk.

These early end-users were the first to complain about interface design.  The interface at the time was a simple monochrome screen with characters.  No graphical elements or icons to build a rich user experience.  No mouse to navigate.  No multiple windows to support multiple tasks.  In this world, computing tasks were highly linear, with step-wise data entry and batch reporting as the principal end-user functions.

I entered the industry in the late 1980s and lived through the graphical user interface (GUI) transition in computing.  The introduction of graphical, pixellated, multicolored screens ushered in a new age of application possibilities for the industry.  Unfortunately, application design methods and standards were divorced from how people thought and how tasks were accomplished.  There also was a steep learning curve for the industry on fonts, colors, contrast and other visual elements of design.  About the time application design had evolved to a reasonable level of competence, the Internet came along and reset expectations again.

The principles of good interface and application design that were well established when Mosaic was first introduced created outsized expectations for end-users about what could be done online.  The PC-based client-server computing environment was a complex system that supported far more intricate application elements than the Internet could at first deliver.  Even today most online applications that gather and manage data are primitive in structure and design compared to their client-server ancestors.  Moreover, Ajax and other client-side Web interface elements represent nothing more than a continual thinning of the client-side of computing.  This is true of mobile applications as well.

The real revolution driven by the Internet is the proliferation of training-free, intuitively obvious applications that address mass audiences.  Even when user interface design reached a reasonable level of proficiency in the mid-90s, the typical user was a business employee taking an order, working in a call center, running a financial report, or hiring a new employee.  Each user went through specific training on how to use each application.  User-support specialists stood by to help everyone use each business system. The Web changed that completely.  All users now have consumer-based expectations for application design.

One simple example is travel.  If you are old enough to remember travel before the Internet, you will remember that average individual travelers had no direct computer interaction with reservation systems.  Travel agents and airline/hotel/rental agency reservation agents were trained in a handful of complex applications to make reservations.  The main system, SABRE, still lives behind most travel Web sites in some form. 

The Internet allowed the casual consumer to make reservations directly.  To accomplish this, the travel industry had to design user interface elements that were immediately clear to the end user, who had no special training or previous exposure to the system.  This is why Web site design revolves almost entirely around simplicity, obviousness of intent, and field-based data entry.

Today the formerly labor intensive task of taking reservations in the travel industry has been entirely outsourced to the consumer.  Making a reservation using any of the major travel sites is remarkably similar in each case, and few novelties have been introduced.  In fact, a travel site missing a pop-up calendar or violating the basic and well-known steps to complete a reservation would likely fail.  Incremental improvements to the process are allowed, but keeping things simple and task-oriented is the first rule of Web application design.

These simple principles have cascaded into business applications.  End users are trained to use computing resources first on the Web and next on their phones.  Business applications that present a more complex interface design are not likely to meet with broad acceptance.  The evolution of Web design, with a cult-like focus on customer intimacy and task focus, means less innovation in bells and whistles and more innovation in simple metaphors of usage.  It is critical for early-stage Web companies to get this right from the outset.  Tight functional circles defined by clear design elements will attract consumers or business users.  Forget simplicity and complexity will seal your fate.

While you could argue that product development continued apace, revenue and relationship progress barely registered in most early stage businesses.  Only now are we beginning to see progress across the software, health care, and digital media companies we invest in or track.  Technology budgets are being held tight through 2009 from what we see, with project starts tied to 2010 dollars.

One potential leading indicator of economic activity starting back up is interest in marketing spend optimization.  Our portfolio company Thinkvine is seeing an increase in sales and interest as marketers dust off their old plans and think about improving ROI and accountability across all media spend categories.

Unfortunately, whatever capital early stage companies spent in the last 12 months was simply applied to treading water.  While it is fashionable to spin troubled economic times as an opportunity to work smarter and be more creative, that is hard to do when the economy as a whole is unresponsive.

At least through Q1 there was so little economic activity that it would be hard to understand how a start-up could have learned much about the marketplace.  Companies were cutting costs, squeezing vendors, and delevering their businesses.  A year ago many reasonably healthy, consistently performing businesses faced existential threats to their credit lifelines.  Many methods of capital formation and distribution were extinguished.  The hangover from last year is only now beginning to ease.

And we are clearly in a new normal.  Marketing dollars will flow more slowly. Consumer spending will be markedly lower for years.  Traditional media (especially print) has lost market spend/share that will never return.  The banking industry faces an uncertain regulatory future.  All of these realities cascade into risk averse behavior by buyers. Risk averse behavior means avoiding new products.  Companies that make progress against this headwind in 2010 are likely to regain at least some of the value lost in the downturn.

With a week to go before production/distribution, the publisher decided to pull the book.  The stated reason was fascinating.  The publisher said that pre-orders from brick-and-mortar book stores were lower than forecast. For that reason they were unsure that the book would meet their sales targets.

I asked him what marketing the publisher had done ahead of this decision.  None, of course.  Technical books have been a long-tail market forever.  I remember the first time I walked into Reiter’s Books in Washington D.C. back in the late ’80s.  I was amazed at the variety of obscure titles and subjects.  Browsing the stacks there at lunch was much more fun than surfing around Amazon.

Technical book sales have dropped about 20% a year since 2001, an astounding number.  Many technical topics are now covered well online, but books still have a role to play.  My friend’s book is a comprehensive, non-product-specific, how-to on an enduring topic.  He is one of the recognized experts in the field.  It will be well read and purchased widely among practitioners who can be reached online through Linked In groups, search ads, email campaigns.

Traditional technical publishers are apparently unaware of the Internet and are reducing the number of titles they issue.  Rather than finding ways to adopt long-tail marketing techniques, they are publishing fewer titles through old channels.  Each book will need to drive more sales and profit.  With sales declining or flat, the old-line technical publishers will offer fewer titles and little innovation.

This behavior, along with emerging on-demand and alternative media publication options (see this blog on the rumored Apple tablet), will drive technical publishers to the dust bin in a few years.  Their value is simply as  a conduit to brick-and-mortar book stores that offer shrinking exposure to technical books.  As authors discover this they will find new ways to publish and market their works.

Meanwhile, my friend has found on-demand resources that will allow him to publish the same quality of book and garner 3x the per-book revenue he would have gotten from the traditional publisher.  He will need to invest in marketing, but as an expert in the field he has the connections to do so effectively.  I’m sure there are marketing specialists who will help the self-publishing technical writer.

Remarkably, the on-demand publishers he researched do not care if he repurposes the work for another delivery medium, such as the Apple Tablet.  He is now thinking through all of this and developing a plan to format the content for multiple platforms.  Of course, digital platforms will allow him to continuously update and augment the book.  What on Monday seemed like a body blow was, by Thursday, an opportunity to rethink how his knowledge and experience could be distributed and applied more effectively and profitably.

Meanwhile, his publisher remains head down in the sand.  Even if they desire to adapt, their falling sales give them little room to maneuver.  Look for the computer and technical book sections at your local mega store to continue to shrink and for the few remaining technical book stores to face the fate of the local record store.