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Very Early Stage Technology Investing

Archive for the ‘Entrepreneurship’ Category

Paying to pitch…

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One complaint I hear from entrepreneurs about is having to pay an angel group or venture event to make a presentation.  There has been a dust-up recently about this topic, triggered by Jason Calcanis, founder of Weblogs and Mahalo.  He has attacked the notion of charging presentation fees, but I think there are some finer points to put on this topic.

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.

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Written by Mike Venerable

October 26, 2009 at 6:00 am

Treading water…

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Most of the outside capital taken in from Sept 2008 to the middle of 2009 has generated little in enterprise value.  This is bad news for investors, but even worse news for founders.  Unfortunately, the general catatonic state of the economy has resulted in little positive momentum for early stage companies.

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.

Written by Mike Venerable

October 7, 2009 at 3:28 pm

Keeping Score in a Start-up

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Every early-stage company I encounter is under-capitalized and under-talented.  That’s not to say they don’t have great talent.  There’s just never enough talent or money to do the things that feel important.  Sorting out the important from the unimportant is Task One for the early-stage CEO, with the help of investors and board members.

7 Habits guru Steven Covey introduced a powerful and simple matrix for task management back in the early ’90s.  In the context of a sound business plan, with key milestones identified, it is a good method for sorting the important from the unimportant, the urgent from the not-so-urgent.  In today’s world things will fall off the to-do list for even the most organized and capable executive. 

For the start-up CEO it is more a struggle to see through the clutter to clarity.  I’m not one to hype self-help gurus, but I think everyone needs a paradigm for managing themselves and their time.  Covey’s book was right for me when I was a start-up founder.  I won’t endorse everything else that sprouts from that seed, but his book is filled with simple but useful concepts.

Now back to the quadrants.  You can find hundreds of blog posts and references to Covey’s quadrants, but you really only need to understand the axes: importance and urgency.  By building a matrix around these you have a paradigm for dividing tasks and activities – assuming you have a good grasp on what is important, of course – into either important/urgent (crises, pressing items), important/not urgent (planning, strategy development), unimportant/urgent (feeling busy), and unimportant/not urgent (golf, Vegas, etc.).

For the start-up CEO, sorting through urgent items is the real challenge.  Why?  Because all start-up CEOs crave time to plan, develop strategy, reflect on the business and seek advice/mentorship.  We called this “Quadrant II time” in my company.  We found that not only did we crave Quadrant II time as a management team, but our customers craved it as well. 

I rarely encounter a start-up CEO who is focused on leisure activities, so we know the only way to make Quadrant II time is by prioritizing urgent tasks and ignoring those that aren’t important.  It is liberating when this habit first gains traction in a small organization of any kind.  But it requires intense commitment and agreement on mission, key milestones and culture.  Building this sense of alignment is what leadership in the early-stage company is all about.

To illustrate, in the early-stage company, it is comfortable and easy to talk about marketing, partnerships, and topics that are at least one or two degrees of separation from an actual transaction.  Most early-stage companies, as they enter the market, overemphasize their branding needs and marketing requirements.  Filling a funnel with unqualified leads only creates work for the sales team, or whomever is plugging that hole at the outset.  Almost without exception all that matters in the first 12 months of market entry is building transaction momentum.  In some cases that may mean generating only four-six deals in the first 12 months.  Any start-up should be able to source, qualify, and close that number of deals without any significant outbound marketing effort.  If you lack that amount of resourcefulness and talent, you might have a bigger problem.

Consequently, you need to build a scoreboard that is prominent and unavoidable for everyone to see.  The scoreboard should first display the date that you are projected to need another capital infusion, or by which you must break even.  Next you should have sales goals/actuals at the appropriate periodicity for your business.  Below that I would have major milestones with dates that are qualitatively critical to raising the next round.  You don’t need to post a name next to these goals/milestones because they should be owned by the entire company.  Everyone should be selling, everyone should be contributing to product development, everyone must be pulling the organization forward. 

I also think that anyone who takes on a leadership position in an early-stage company should have an individual sales goal, even if it’s only one deal.  Start-ups thrive when they engage the outside world with all tentacles.  Everyone should be sourcing opportunities, even the introverted VP of engineering.

The scoreboard is a scary concept, but it is a grown-up concept.  It shows you are serious, that you have no secrets, and that the company thrives on transparency, unity of purpose and leadership.  It also eliminates by default any need to focus on the unimportant.

Written by Mike Venerable

September 29, 2009 at 1:27 pm

Exit Fixation

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I spent some time over the last week thinking about exits and how the world has changed in the last decade.  Eleven years ago I sold a company to a pre-IPO software company in California.  Six months before that happened it is safe to say that my business partner and I had never contemplated a liquidity event.  We were too busy running and growing the company to ponder an end to it.  I still remember operating the company as a great time in my life, as we morphed and grew and adapted.  I sense the entrepreneurial spirit of driving forward to build something that is self-sustaining and enduring has diminished in the last decade.

While I would never tell a company owner to ignore liquidity, it will most likely occur in a positive way if you are pouring your energy into growth and milestones.  When you are looking to sell you will only find bottom feeding buyers.  When you are looking to grow and prosper, you will likely find a buyer that wants to capture and own that magic.  I am increasingly mindful of this as I work with our portfolio companies and co-investors.  We are all very focused on capital raising and liquidity, and rightly so.  But I fear outside capital too often squeezes the joy out of company creation and company growth for the owners.  I spend too much time talking to CEO’s about fund-raising, not enough about revenue growth, sales and distribution, and market changing product ideas.

During the Internet bubble’s early days and to a lesser degree during the credit bubble this fixation was understandable.  But in today’s market, a liquidity event for a company is rarely an exit for the leadership team and often the shareholders.  Earn-outs are de rigueur today for founders and often attach to shareholders as well.  Founders who sell must navigate how to structure deals that make sense personally, which can include a few years of Tiffany-class servitude in a bigger company.

Better for investors and founders to be aligned on an exit that grants the liberty entrepreneurs and investors crave.  For investors that means cash at closing.  For founders that means being able to control and define their post-transaction involvement in the acquiring entity.  So how does that occur?  Three ways, I think.  First, getting customers to consistently purchase/use your high gross margin product is paramount.  Second, you must matter to customers that matter to an acquirer, not small and insignificant customers.  Third, you must show that you can win in competitive situations.  This is why breaking out of the boundary dimensions of your company – geography, vertical industry, platform, demographic – into a large market segment is so important.  It validates to a venture investor and to potential acquirers that you are going somewhere other than flat-line, segment-limited boredom.

In short, accelerating revenue growth is the path to capitalization and an exit.  We would all do well, investors and founders, to make sure we are doing all we can to make that happen.

Great Sales Advice

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A friend sent me this post from the NY Times BITS blog last week.  It contains some solid advice on software sales execution from Sohaid Abbassi of Informatica.  Informatica was blessed in its early years with some great sales leadership, including Clive Harrison (most recently at Exeros) and Mark Burton (ran MySQL prior to the Sun acquisition).  The company had a great pre-bubble run of growth under founding CEO Gaurav Dhillon.  Back then they won consistently on sales execution, and seem to be doing that again, more than 10 years later.  And of all the BI/DW companies of that vintage, they appear to be the only significant stand-alone survivor.

Now, to the advice.  During the downturn the company focused on near-term deals first, and tracked account progress weekly.  They focused on where purchase approval paths were clear and understood.  This was done in response to the current economic contraction, but the advice and approach would be a good daily operating model for market-entry software companies.  Most early stage companies struggle with sales and lack the experienced leadership or discipline required to define a clear sales process.  Qualification discipline is typically lacking, and is almost non-existent if the market path is indirect.

Good sales process metrics should be defined first using an analogous example from an existing company.  Hire at least one successful and qualified sales professional to work prospects as early as possible.  New products are first sold on the personal relationships and will of the founder(s).  That is great, but it will not scale.  At some point the product must be sold by sales people or distribution partners who can articulate a value proposition, qualify opportunities, and close deals without hand-holding.  Recognize also that early buyers are typically more vested in the product than later ones.  There is often a mutual feeling of creation and excitement around new products among the first 3-5 customers.  Normal purchasing behavior is ignored, competitors kept out, and everyone is working towards a successful first transaction.  Not so with later customers.  To succeed in scaling revenue the early stage company should focus on process discipline, hiring proven sales talent, and listening to the market feedback they provide.

Written by Mike Venerable

September 14, 2009 at 12:54 pm

Trust no one, get nowhere…

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I came across a story in the local paper this weekend about an inventor in Indiana who is suing Clorox and Bird’s Eye for “stealing his idea”.  His idea is a microwaveable container that uses steam to cook/heat frozen foods.  The story, from the Indianapolis Star, only reinforces the fears that many entrepreneurs feel about sharing their ideas with investors or big companies.

These fears are sometimes justified, as companies can undermine legimate claims and tie up inventors for years.  The movie “Flash of Genius” tells the story of Robert Kearns, inventor of the intermittent windshield wiper, who spent his entire life enforcing his patent claims against the auto industry.  By the time he triumphed in the 90’s, he had spent 30 years enforcing his claims, not always with success.  He spent $10 million on legal fees and eventually won about $30 million in damages.  But he died less than a decade after his legal victory.

Kearns was a victim, but sometimes the “inventor” is mistaken about the validity of their claims.  In the Indiana case the most telling aspect is that the inventor is not suing the companies for patent infringement, but rather for beach of contract for violating confidentiality agreements and unjust enrichment.  It is hard to imagine that these companies, involved in the packaged food industry for decades, did not have a variety of research ongoing into how to improve microwave meals.

Occasionally we hear from an inventor or founder who is overly concerned about protecting an idea or concept.  It is a legitimate concern, and anyone going down the inventor/founder path should have a basic understanding of how intellectual property law applies to their field of endeavor.  But at some point the kimono must open enough for judgments to be made.  Ideas that are properly protected are nearly impossible to steal.

Many early stage companies fear that venture capitalists are going to steal their idea.  Even the best ideas are hardly worth stealing, since the thief would lack the individual insight and creativity that led to the idea/business concept.  It is the rare idea that is really not being considered or advanced in some way by someone else at the same time.  How many search engines preceeded Google?  How many cell-phones preceeded the iPhone?  Execution and fate are often more important to winning than novelty.

Written by Mike Venerable

September 2, 2009 at 9:00 am

Shark Tank – How not to raise money…

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I had heard about the show “Shark Tank” from someone last week, and my kids were also badgering me to watch it.

The premise is would-be entrepreneurs pitching their ideas to a panel of five “Sharks”, successful entrepreneurs who will evaluate the idea and possibly offer to fund the company.  During the two segments I watched it has the usual “acting out” problems of most reality shows.  The Sharks try to act cool and heartless, the entrepreneurs act coy and play hard-to-get.

In the most interesting segment two women with a patented slip-cover for porta-cribs agreed verbally to give up 40% of their company to a real estate entrepreneur in exchange for $350,000.  That puts the pre-money at $525,000 without considering any options.  Forgetting the absurdity of focusing entirely on the valuation (we don’t know whether they are selling preferred, etc.), I thought they got a raw deal.  They had 200k in revenue, plus distribution through Target and a handful of hotel chains.  And, as an analyst in my office pointed out today, they have now had free exposure to boatloads of prospective buyers and investors.  They’ll get a much better offer now that everyone knows how little it would take to get them to play ball.  And they might get it from someone with more experience in pushing out such a product than the real estate Shark.

Which made me wonder if these poor souls had signed any restrictive contracts in exchange for appearing on the show.  The reality TV world is famous for driving hard term on contestants at the beginning, before they make them famous.  Would they really be able to just walk away, or would the panelists have the right to match any offer they received based on the exposure they received on the show.  Let’s hope not, because the co-founders of the porta-crib slip cover company deserve a better term sheet and board members.

I have to give the show credit for at least having a credible panel.  They were also willing to discuss the issue of patent assignment in this instance, which made me wonder what other rather technical issues they would delve into on other episodes.  Could next week bring a dispute over liquidation preferences?  Ratchets?  Redemption rights?

What’s bad about the show?  That they imply that investment decisions among people like the Sharks – professional investors – can be boiled down into a few minutes of product presentation and chit chat.  TV oversimplified the process.  Imagine that.

Written by Mike Venerable

September 1, 2009 at 9:00 am