Will We Survive the Flip-Flop Economy?

I had a terrible vision of America’s future over the weekend.

All I did was visit BJ’s Wholesale Club, and there it was.  Suddenly solidified proof that America may never be competitive again on the world economic stage.  I didn’t need an incorrectly calculated bond rating formula to come to my own downgrade conclusion.

The good news for the recently financially-troubled BJ’s is that the place was reasonably full.  Shelves were stocked with incredibly large containers of, in no particular order, cayenne pepper (9 ounces, $4), canned clams (51 ounces, $16) and toilet paper (36 rolls, $22).   All great bargains.  The bad news for BJ’s and all the rest of us is that at least 50% of the patrons were wearing flip-flops.  America is doomed.

If you’re thinking “what’s the big deal, I wear flip-flops all the time?”, you’re slowing America down.  Flip-flops are the footwear choice of lazy Americans. If not lazy Americans, then flip-flops are the footwear of choice for Americans when they feel like being lazy.  For instance, I will wear a pair of flip flops when I’m home, grillin’ with the Jimmy Buffet playing on my patio speakers and a cool beer in my hand.

But I don’t think that one should drive to the BJ’s and shop for copious quantities of pantry staples and toiletries, while wearing flip-flops.  In the case of my trip on Sunday, the store was full.  Aisles were crowded and everbody, especially those in flip-flops, moved in slow-motion.  It made me realize that if there were an emergency situation, and I was behind people wearing flip-flops, I may be in danger.  Think about it…they’re difficult to run in.  You have to, kind-of, drag your feet, not lifting your knees.  Can’t make long, fast strides.  They make a rhythmic, almost hypnotic, schaaa-lap…….schaaa-lap-lazy sound when you walk.  Symbolically, any footwear that prohibits running, makes you slower.  And “slow” was as abundant as the toilet paper.  Unfortunately, we need more “fast” for the sake of our economy.

I won’t mention the general weight condition I observed among the people wearing flip-flops.  I did not conduct any sort of formal survey, but it did appear that running is not a familiar activity to most of the people wearing flip-flops.  If the old adage is true, that the clothes make the man (or woman), flip-flops are not the clothing to wear when dressing to impress.  While I have to admit that the variety of flip-flop styles has reached incredible levels…a fancy flip-flop is still a flip-flop.

My concern for America based on the flip-flop observation reached a crescendo when later in the evening, with my daughter, I watched the movie “Defiance” .  Defiance portrays the true story of three Belarus brothers, the Bielski’s, who helped lead 1200 Jews to freedom in the woods of Russia as the Nazis began their move east.  Incredible hardships were endured. Food, medicine, shelter, safety were in inhumanely short supply.  Not a BJ’s wholesale center in sight. Not a single person wearing flip-flops.

I don’t want to over react to this small and likely inconsequential observation I made on Sunday.  Our American civilization is not sentenced to doom because of our footwear.  It’s summer…people wear flip-flops.  And, while our economy is struggling, we’re nowhere close to being chased into the wilderness by fascist reactionary zealots.  But are we moving in the right direction? Would we know how to live without SUV’s stuffed with stuff? Could we hurry if we had to?

Or are we slowly schaaaa-lap…….schaaa-lap…….schaaa-lapping our way to economic uncompetitiveness?

Posted in Economic History Perspsective, Just Kidding | Tagged , , , | 5 Comments

Don’t Bring Me Angel Investors…Bring Me Hero Investors

X-Men Hero "Angel"... Super Hero Investor?

There is trouble in the town!

In case you haven’t seen the headlines, let me deliver some bad news to you. You’re not going to like it, but it’s time you hear it too.

The United States is no longer great at spurring entrepreneurial innovation and part of the blame lies with the angels (investors, that is) among us.

Access to start-up-stage capital has seemingly become limited to NYC- and Cali-based mobile-social-web-app-companies.  For less than a hundred grand, you can build and launch any inane spin on internet freemium business model you can dream up (unless you’re ColorLabs, in which case it costs $41 million).  Hire a couple of off-shore teenagers, recruit a cashed out late-twenty-something founder, meet a zillion friends-of-friends at an entrepreneurial summer camp, and you too could have a $100 million exit or more.

Let me just say that I completely believe in the free-market.  TechonomicMan understands that enlightened self-interest is the best platform upon which an economy should be built.  I understand that people should be rewarded for investing in companies that grow fast and succeed.  Invested in Zynga, LinkedIn, Twitter, etc. and stand to make a big payday?  Congratulations.  That sort of financial avalanche of success has a huge important place in this country.  Huge and important. 

Angel investors have been a driving force behind many hot companies today.  It is hard to get their investment and it should be.  But it seems as if it has gotten ridiculously hard over the past decade.  Many good companies have gone begging…if you can’t get the angel investment, initial milestones don’t get met.  If initial milestones don’t get met, the A round can’t be obtained and the company ends up dead-walking, mothballed or bankrupt.  At the seed stage of development, many companies need merciful angels to approach this valley of death.  But their investment decisions have become increasingly merciless in recent years leaving many promising, nascent companies to starve in the sun.  

So I’m looking for a new breed of investor.  An evolution of the angel investor paradigm.  The term “angel” investor comes from broadway and the private money behind getting shows put on the stage (“angels” in the wings…get it?).   University of New Hampshire professor William Wetzel coined the term “angel” investor for those who made investments in start-up companies back in 1978.  Back in those days, and through most of the 90’s, angels acted fairly independent of each other.  Many certainly invested together, but angel groups and funds were far less common.  Individuals acting in a highly coordinated, almost collusive way, really became more common in the late 90’s.

And since then, two things have happened to fundamentally change the approach of angel investors.  For one, as angels become more organized, they became more aware of important legal terms like drag-along rights and participating preferred rights.  Angel group term sheets began to look suspiciously similar to venture capital fund term sheets.  I’ve recently seen a 12 page term sheet from an angel fund that would lead to a $200,000 investment at most.  That’s less than $17,000 of investment per term sheet page!!  (I’d like to suggest a new metric…each page of a term sheet must lead to $100,000.  For example, if your angel groups proposed investment is for only $200,000, the term sheet should be no more than 2 pages!)  Not only have the investment terms become more complex, but angel investors often belong to multiple angel groups.  One investor who doesn’t like a particular deal could contaminate multiple pools…which certainly reduces the entrepreneurs ability to raise competing term sheets.

A second fundamental change to the way angels invest is the prospect of a big, bubbly, exit.  Many that I meet in the angel community made their success in the dot-com era.  That world has evolved into the online application world today…and mobile apps.  These businesses are dramatically less expensive to get off the ground.  Quicker paths to market and early signs of success and subsequent valuation increases make these types of companies more appealing. The quick-hit or quick-cheap-fail model stimulated by Y Combinators and clones, prevents other types of businesses from receiving potential attention and investment.  A “crowding out” occurs in economics parlance.

These are the reasons I feel that America needs a new type of an investor.  Let’s call them “Hero Investors”.  We need private investors that are interested in helping to build long term sustainable businesses.  Find entrepreneurs who can launch a business that can be profitable in relatively short timeframes (profitability is a powerful concept ignored in many of todays technology stars).  Invest in companies that have bootstrapped their way to a few hundred thousand in sales and proven that they have a product that they will be able to produce profitably for a growing market.  These won’t be quick-exit businesses…might be 7-10 year windows.  These companies will probably produce actual products…electronic devices or advanced materials or enterprise software solutions. Pick an industry you actually understand, Mr. Hero Investor, and get involved in the business with your equity and your sweat. 

There are founders who need your help.  America’s innovation leadership is being stifled because great entrepreneurs with great business ideas are not getting funded.  I reject the notion that there is any significant innovation in Facebook and Zynga and LinkedIn and FourSquare and GroupOn.  These are advertising services that use true innovations invented by others like Apple and Cisco and Intel.  Don’t get me wrong; these are legitimate businesses.  But they don’t feed a bigger economy.  They don’t generate deeper supplier relationships.  It is not a coincidence that the fast growing economies today are economies that make tangible assets.  And we continue to slip on that scale.

So Mr. Hero Investor sir, if you’re out there, I’m sending this distress call.  I hope you’ll come to our rescue.  Help save us from from the evil villain of short-sightedness.  Restore our confidence that good companies can be built by a long-term vision for the future where hard work is rewarded with profitable businesses that sustain the generations.

Posted in Economic Development Policy, Innovation and the World, Seed/Venture Capital, Tech Based Economic Development | Tagged , , , , , | 2 Comments

VentureTips…Wise Beyond Their Years

Ah, youth.  Early signs of future success sometimes appear to be obvious, but so many do not live up to their potential.  Like the highly recruited college athlete who appears to be the “next one”, early promise can fizzle or flame into disappointment with one missing ingredient…wisdom.

Merely surviving the battles of the early years of a professional career, athletic or entrepreneurial, can often buy enough time so the young person with promise can acquire the one ingredient that can help turn the promise of youth into reality.  That one ingredient?  Wisdom.

Yesterday’s Business Insider blog post by Amy Levin-Epstein featured tips from 6 entrepreneurs under 30 years of age.  By themselves, the tips from these “youngsters”, are insightful.  However, since it has been at least a few years since I was under 30, I realize that these simple “tips” are merely the “tip” of the wisdom iceberg that they reveal.  There is addtional depth to several of these that are worth exploring.  To wit:

Erica Zidel, age 29, founder of Sitting Around, a company that makes parents’ lives easier through a complete end-to-end childcare system, provides this Tip: “Talk to your customers. Don’t assume you know what your customers want. You’ll be surprised — and most often, you’ll be wrong. There are many ways to solicit user feedback: email, surveys, focus groups, etc. Get creative, get out there, and listen.”  TechonomicMan says: Talking to your customers is a good tip.  However, listening to your customers is wise.   As the founder of your company, you must 1) ask your customers questions about their business and then 2) listen to their answers.  Listen to the specific words they use when describing their problems.  Ask them for the name of other customers that may have the same problems.  Of all the time you spend with a customer, a successful meeting should have you speaking for only 30-40% of the time.  Most of that should be spent asking questions or clarifying answers.  Your mission in these information gathering meetings is NOT to explain all the features of your product.  

I’m not a big fan of surveys.  You can’t gather the depth of knowledge you need as the founder.  Social media can sometimes be useful for listening to your customers, but only as long as you, the founder, are personally actively involved in the listening.

Taryn Scher, age 28, founded TK PR, a public relations and event planning company that specializes in luxury lifestyle brands. Her tip is to “Have a mentor. Everyone should have someone that they look up to that can offer them advice from time to time. Maybe you offer to buy them lunch for two hours of their expertise. Everyone needs a sounding board — someone who has been in the business longer and been through similar experiences. It will be the best $10 lunch you’ve ever spent.”  TechonomicMan says having one mentor is good.  Having a small group of mentors is better.  Having a small group of mentors who are mostly older than 28 is most wise.  A smart founder will select and ask 3-5 people to serve as advisors.  The advisors should have a fairly diverse set of backgrounds.  The group should be treated essentially like a Board of Directors (assuming you don’t already have one of these).  You should ask them to be willing to meet once per quarter for a few hours at a time.  You should promise to prepare an agenda for the meeting ahead of time and provide materials ahead of time (a week ahead is best).  You should be prepared to ask them for input on key issues.  Some small amount of warrants or stock should be provided for a year of service in this manner.  If you’re building a tech company and don’t have, or can’t find, people to agree to do this, I would argue you will struggle throughout many aspects of your business. 

Antoine Azar is 29 years old and founded 2XM Interactive, which creates mobile apps and interactive touch installations. His tip is to “Be very careful when starting up with co-founders. This is even more serious than a marriage. If all co-founders are not perfectly clear and aligned on the goals of the business, the business will fail. I’ve seen many start-ups with fantastic products struggle to near-death only because of co-founder issues.”  TechonomicMan says:  The number of ways in which founder issues can sink a business is perhaps larger than the number of stars in all the galaxies in all the universe.  You’ll sometimes hear advice like “be sure you get a good shareholder agreement”.  This is wise, but will not prevent co-founder issues.  It will, rather, define the sandbox in which the co-founders fight.  A recent piece of advice I saw that appeals to me is to found the company yourself.  Then, hire partners for specific roles.  Reward them with founders stock, even considerably large amounts of it if warranted.  If you are already talking with a partner about “co-founding” a venture, go through an exercise in which you both, separately, write down the mission or vision or goals of the business.  Separately write down the definition of “success”.  Then compare them and discuss them.  The discussion should surface key issues that could arise later when too much is at stake.  If you consider success to be a big exit in 5 years and your co-founder talks about running a 1,000 employee business to hand down to his kids…you’ll have surfaced an issue that you can then 1) unwisely ignore; 2) use as a reason to not co-found the business with this person or 3) prepare some smart documents that allows you to sell your share to the co-founder under agreed-to conditions at a time when your definitions of success diverge. 

There are some things in life that must be learned, but that cannot be taught.  These are the things that should be classified as “wisdom” and wisdom can only be obtained when you know the difference. 

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VentureTips…What Jim Riggleman Can Teach Us About Negotiating

Last week’s post at VentureHacks on negotiating terms in a capital raising effort provided an excellent context for evaluating the decision later in the week by Washington Nationals manager, Jim Riggleman, to retire.

The post by VentureHacks talks about utlizing leverage when negotiating with potential investors.  Their first point is to create an auction market as well as you can.  Getting one investor to take notice of you and begin some extended conversation can be difficult.  However, TechonomicMan says that you need to do a few things right so that you can use the interest as leverage when one does get interested.  Most important, keep investors updated.  If an investor has asked you for a meeting, but does not invest because you are “too early”, be sure to send an email to that investor every couple of months with a BRIEF update on progress you’ve made.  They’ll be particularly interested in revenue increases, new distributors signed up and other partnerships you’ve developed.  Keeping them updated in a friendly, disciplined way will keep them warm for when an investor steps up and offers a term sheet.  You can then, with a straight face, say that some others are looking and you want to go back to them…possibly to participate in a round. 

You’ve now created an auction in an effort to leverage the interest of an investor.  Contrast this with Mr. Riggleman.  The Nationals are his fourth big league managing gig.  He’s never had a winning record with any team he’s managed in the 12 seasons he’s managed.  The Nationals got on a roll in June and were winners of 11 of 12 games over the past two weeks.  Following a victory last Wednesday night, Riggleman abruptly quit.  He had a press conference in which he claimed to be tired of trying to get upper management to negotiate a new contract with him.  If we assume for a minute that there aren’t some physical or mental health issues behind the scenes, we have to ask…did Mr. Riggleman leverage his position with his “investors”? 

The VentureHacks advice piece goes on to say “positive leverage should improve your psychology during the negotiation. You’ve gone from a situation where you want something from the investor to a situation where you both want something from each other. ”  A nice winning streak like he put together, even if the investor-owners had been ignoring Riggleman’s request for a new contract, should have given him positive leverage.  The owners certainly wanted something from him…um, to keep winning.  They know that the Nationals have not exactly experienced much of that.  He had finally gained some leverage and proceeded to basically put it in a shredder, light the remains on fire and flush the ashes down the toilet. 

TechonomicMan has seen several of his clients react the same way.  After months and months of seeking investment, an investor is interested and goes to the trouble of putting a term sheet together.  It’s a crappy term sheet with dozens of aggressive terms that need to change.  The deal is, Mr. Riggleman/Mr. Entrepreneur, as soon as the investor puts a term sheet together, he is indicating he wants something from you.  This is a major step up from the minute before when no one did.  Do NOT ignore this term sheet.  Do NOT assemble your own term sheet.  Do NOT wait for 2 weeks to respond thinking you’ve really got them where you want them.  Use their term sheet to negotiate from.  If you believe this is a good investor to have on your side, humbly discuss objectionable terms.  You are correct that you may never come to terms and it can be frustrating and annoying.  But you now have an option.  You now have a major uptick in leverage and the future of your venture depends on how you use it.

Herein is another lesson from VentureHacks: “[now that you’re negotiating] you can now identify other things that your opponent wants and deliver them.”  Make no mistake, the investor is not your friend…yet.  However, a smart entrepreneur now has a chance to uncover other hopes and fears of the investor.  Jim Riggleman no longer has that chance.

One final TechonomicMan observation.  Investors do not NEED to do anything.  They don’t need to act quickly.  They don’t need to act at all.  They, angels especially, have lots of other interests and hobbies on which to spend their money.  Your urgency is NOT shared by them.  Get used to that.  Their reason for existence is NOT to invest in your company.  You need to get them to want to.  In order to create some urgency, you need to be ready to create an auction.  Set a closing date for a round of financing that coincides with the start of a new phase of your business.  Maybe you’re launching a new product in September?  Announce a financing closing on July 31.  Now this will only work for you if you’ve been keeping a bevy of investors updated and apprised so that they are already warmed up to your business and deal. 

Speaking of warming up…Mr. Riggleman can now hit the showers.  He’s been indignant that his investors-managers wouldn’t negotiate with him earlier.  I’m sure that earning some leverage and then telling your boss to “shove it” probably felt damn good for 20 minutes!  But Coach Riggleman historically only wins 4.5 games out of every 10 he manages.  After the euphoria of sticking it to the man wears off, he may need another 12 years to earn such leverage again.  If he even gets another one.

Posted in Entrepreneurial Advice, Seed/Venture Capital | Tagged , , , , , | 1 Comment

Can Detroit Save America?

Diego Rivera's 1933 Detroit Industry

Everyone will have a different opinion, but in my opinion, the Chrysler Super Bowl advertisement highlighting Detroit and Eminem is the greatest commercial of all time.  I have spent many years working to make a small, urban industrial area more economically viable.  Many cities have symbolized America’s industrial decline over the years…Cleveland and its Cuyahoga river fire, Newark and its recurring rise to the top of the crime charts, Pittsburgh and Erie and my own Bethlehem with their steel-centric declines.  Perhaps none have come to symbolize the economic trouble with America more than Detroit in recent decades.

Although I’ve escaped to the suburbs myself, I still work to revitalize a region in the rust belt by managing a high-tech incubator in a former Bethlehem Steel building.  So, when I see a brilliant video like the Chrysler ad, figuratively flipping the bird at those who’ve left it for dead, I get goosebumps and want to leap from my chair to shout “Hell yeah!” along with them.  And you should too, because that which pulled down Detroit is what has pulled down America’s economy.  Fortunately, maybe, Detroit may have some fight left.

The Detroit News ran this story the other day about how the City fares in technology compared to other midwest cities.  Now I don’t want to put too much stock in a story touting Detroit’s comeback in the tech sector when the study was created by a large technology trade association in Michigan.  But I do like the attitude and it’s the second time Detroit caught my attention this year (see my earlier post on how the private sector can save Detroit). 

Pandora had a fair day yesterday on their first trading day.  Up a bit from their $17 IPO price, on a day when the DJIA was down 1.5%.    LinkedIn, Zynga, Facebook all make up the new pantheon of technology moguls.  Clearly at somewhere north of $2.5 billion in market cap, the Pandora leaders have built something that people value. But I continue to look at these companies and wonder if there is sufficient intrinsic value in companies like these, that generally make money by advertising, to sustain our nations economy.  Or, was the intrinsic value in companies like those built in Detroit in bygone days, more useful in building GDP and wide-scale nation-building jobs? 

It’s a long, complicated and esoteric conversation to engage in, but I would argue that Detroit-type businesses grew while our economy grew to become the world’s largest and without peer.  It should not be surprising that the businesses involved in electronics, automotive industries, industrial automation and machine technologies are currently building the formerly poverty-laden economies of southeast Asia.  There are countless other ripples that roll across the globe to shift economic power.  But I’d be interested to look more deeply into the nature of the ripple effects generated from a Detroit-style economy compared to San Jose-style economy. 

Companies like LinkedIn, Google, Microsoft and others are able to leverage the easy, and almost-free, flow of information across the world.  Businesses that support these industries don’t need to be located next door or down the street or at the other end of a rail siding.  Detroit-style economies, by contrast, were vertically integrated and suppliers benefitted from clustering around the big buyer of, well, stuff.

Much of this shift has been stoked by the venture capital industry.  I like venture capital.  Private sector money flows to the opportunities.  I get that.  But it has evolved a very short term view of success.  Five years and we want to be public.  Maybe a strategic acquisition in 6 years.  Others use 3-month time horizons to measure progress.  This is the preogative of the private sector.  And it has built a shallow economic base upon which it becomes more and more difficult to plant a seed bed for long term growth.  I’d like to hereby declare this era the “dust bowl” economy. 

So, maybe the private sector alone can’t save Detroit.  Maybe, if the private sector gets some help from the public sector, and we invest vigorously in Detroit-style businesses, we might just yet re-rev the economy of the country.

Posted in Economic Development Policy, Innovation and the World, Tech Based Economic Development | Tagged , , , , | Leave a comment

How Do You Coach This Stuff? — Does GroupOn Prove Profitability is Obsolete?

Somewhere along the way, I’ve been miseducated.  Or, perhaps, I misunderstood my education.  Whichever it is, I’ve been wrong about a fundamental element of business.  And now, hundreds of entrepreneurs I’ve worked with and advised are paying the price.

I’m speaking of course about profitability.  Long a sacred tenet of basic microeconomics and business teaching, the notion that you should generate more in revenue than you expend in expenses is apparently not important in GroupOn’s case.  According to the WSJ on June 2, the company generated over $713 million in revenue in 2010, but had a net loss of  $390 million.  I don’t have a cash flow statement, but that is what, a $1.1 billion annual burn rate?  This was funded by stock issuance in the 15 months of 2010 and Q1 of 2011 of that amount…including $509.7 million in the first 3 months of 2011 alone (see page 59).

Now in fairness, the incredible growth they’ve experienced requires cash.  Gobs of cash.  I mean Q1 2009 revenue was $252,000.  Q1 of 2010, revenue was $44 million.  Q1 of this year was $644 million!  One does not even bother to calculate percentage rates of growth like that.  And the only way to get your $1 billion out is to go public.   Remember in the dot.com days when we were told there was a “new” economy.  In the “new” economy, revenue didn’t matter…only sticky eyeballs matter and we’d worry about earning revenue later.  That type of thinking led to a big burst bubble.  Is GroupOn the first of a new “new” economy wave where profitability doesn’t matter and we can worry about it later?

The company has plenty of supporters…Jim Cramer on June 3 tweeted to “get in on this deal”.  He understands public markets way, way better than I do.  Frankly, compared to him, I don’t understand the stock market at all.  He and others are buying into the excitement surrounding the rapid growth and believe that the founders will find a way to get the company profitable.   I would just have too much concern that the competition will keep GroupOn in check and that profitability will be hard to come by.  GroupOn has built, perhaps, the fastest growing company in the history of the world.  They’ve done a shockingly huge number of things right to achieve this growth.  In two years they went from 37 employees to 7,100 employees!  But is the growth sustainable?

The same question could have been asked of Amazon and eBay.  My biggest concern with GroupOn is that they basically offer coupons.  My local Sunday morning paper yesterday exclaimed, with a red banner across the very top of the front page, about the $892 in savings from coupons within its pages.  Coupons are everywhere.  I now get emails from a couple of online, GroupOn-like services.  And a few other local businesses send me printed booklets with coupons with GroupOn-like 50% off buys.  Lots of competition for GroupOn…and by the way, the offers I’ve been getting lately from GroupOn are weak and crappy and not at all a fit with my psychographic box (pedicures from some little shop 15 miles away is not my idea of well-targeted couponing!).  So, I think they will find it hard going to continue the pace of growth (of course, this is an easy prediction…infinite growth rates will be tough to sustain!), but I think profitability will remain tough. 

However, my objective here is not to judge the future stock price of GroupOn.  My point here is that it is not possible to predict anything like this kind of success.  I provide business advice almost every day to entrepreneurs dreaming of this kind of business growth (some even dare to project this type of growth!).  My job is to tell entrepreneurs that, especially these days, you need to get a basic product out the door, try to make it profitable or show that profitability can be seen from where you are, and that when you get to about $1 million in revenue, you might be able to raise $1 million in venture/angel A round capital.

The GroupOn guys mostly funded the early work themselves , and I don’t know what their original projections looked like.  But I gotta tell you that if a couple guys showed up in my office yesterday, saying they’re going to go from $0 to a $2+ billion revenue pace in a couple years, spend $1 billion including $500 million paying off the founders and go public…all because they’re gonna “sell stuff better than other people have”, I wouldn’t have believed them to say the least.  Undoubtedly I would have suggested they re-look at their plan and call me when their projections are more realistic.  I mean, how are you going to raise that kind of money?  How are you going to protect your idea?  How are you going to generate that kind of traffic?  And, when the hell are you going to MAKE money? 

For now I’m going to play it safe and suggest that GroupOn is an outlier.  It’s an anomolous situation that has no peer and is not the leading edge of a trend.  TechonomicMan hereby declares that the notion of profitability is NOT dead.  It DOES matter!  Do not use GroupOn as a “comparable” in your exit strategy Mr. New Entrepreneur.  Show me the profits!  Long live the profits!

Posted in Entrepreneurial Advice, Innovation and the World, Uncategorized | Tagged , , , , | Leave a comment

VentureTips…Did You Plan Your Next Venture Over the Holiday Weekend?

Let me guess…You spent some time over the long Memorial Day weekend with family who encouraged you to “go for it” in launching your new business?  No?  Ok, then you spent some time over the long weekend at a backyard barbecue with your successful neighbor who recently cashed out on their venture?  Wrong again?  Ok, one more try.  You spent most of the long weekend desperately working on your new business plan, but don’t know where to begin?  If any of these are true, then this post’s for you.

There are thousands of blogs, books and articles with great advice on what your plan should say, how it should be structured.  But you found this one!  Take a look at the single slide prepared by Sequoia

What follows is some additional clarification/opinion on what some of the items mean:

Sequoia says:  Start-ups with these characteristics have the best chance of becoming enduring companies.

TechonomicMan says:  The items in this column aren’t “nice to have’s” for raising venture capital from a VC of the caliber of Sequoia, they are “must have’s”.  Large markets, team DNA, frugality and the rest can’t really be “faked”.  The investor will see through false answers and rationalizations.  Before you start pitching to investors, take a cold hard look at the facts of the business you’re starting and know your weaknesses.  Seek out harsh criticism and do not simply defend your position.  Think about it!  There is nothing wrong with a business that fits into a $5 billion market or a $1 billion market…you could build one heckuva business there.  Just know who you’re pitching to and understand what they like!

Sequoia says:  Focus…Customers will only buy a simple product with a singular value proposition.

TechonomicMan says :  Too often, I’m confronted with business plans that propose accomplishing too many things.  Too many products, too complicated products, too many markets, etc.  It is especially true these days that you develop a relatively simple configuration of your product to be your first product.  If a customer says, “can you make it do this or that?”, great!  Customize it for them, and make them pay for that customization.  Do not immediately assume that every customer will want that configuration.  General Electric, Johnson and Johnson, Amazon…on and on did not start life with a massive line of disparate products being sold all over the globe.  Founders need to first make one thing for one customer!

In writing the business plan, Sequoia says define the problem…they say:  Describe the pain of the customer (or the customer’s customer);  Outline how the customer addresses the issue today.

TechonomicMan says:  As when assessing your business opportunity, use a mirror in harsh light and look very closely at yourself.  Every business I’ve ever been introduced to believes that their product/service configuration is the only one like it.  And that is very likely true when you define your product in terms of features.  But customers don’t really buy features, they buy solutions to their problems.  Even more importantly, they buy solutions to their most pressing problems.  Get your prospective customers talking about their problems in the area that your product sells in.  If your product doesn’t solve their problem directly, work to find a partner that can.  This is simple stuff…understand what your customer wants, don’t just try to sell him your product with 16 features that no one else ever combined before just because you can. 

Sequoia says…Describe your Business Model.  Namely, 1) Revenue model, 2) Pricing, 3) Average account size and/or lifetime value, 4) Sales & distribution model and, 5) Customer/pipeline list.

TechonomicMan says: This would be a great section for the plan.  I see so many start-ups that do not understand the most significant achievements of their company.  If you have a customer list, and an organized and professionally characterized and quantified pipeline, please be sure to share this information!  What are the key decision points for each customer?  How much revenue do you anticipate generating from each?  Over their lifetime?  I know these are still projections, but jeez…you’ve got real live customers who are buying or interested in buying what you have.  Remember when you didn’t have that!

The Sequoia list, like many others is a great outline and I’m partial to it over many others I’ve seen (and written!).  Feel free to contact me if you want some “harsh light” cast on your business plan.  Click the VentureTips header and send me an email.

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Tiny Bubbles, In The Whine…Make Your A Round Happy, Feel Fine

Most people younger than 40 may not even recognize the name Don Ho.  It’s probably not even vaguely familiar; not stored even on a single synapse way in the back there from  when you were channel surfing and accidentally heard his name as an answer on an episode of Jeopardy.  Well Don Ho was a Hawaiian who had a brief few moments of pop music fame with his ballad-diddy Tiny Bubbles.  He would honor   WW II veterans from the Pacific theater at all of his shows, inviting them up on stage to dance with his accompanying hula girls.  Other than the name of the song, Tiny Bubbles, he has nothing to do with this post.  I just wanted to link together a pretty cheesy song and the bubble discussion underway all over the internet. 

If you’ve managed to find this blog post, you’ve probably read all about the debate about whether or not we’re in a new internet bubble.  I’ve recently put myself pretty squarely in the no-bubble camp after flirting with the other side.  The Economist seems to be a bit more concerned in this May 12 article.  Reading the article made me realize that many crooning on the debate have incorrectly framed the question.  The 2000 bubble wasn’t a bubble, it was a ga-jillion bubbles.  All boiling up in a rolling, frothing pot on the economic stove with the gas up high.  The National Venture Capital Association reports that in 2000, $100 billion was invested by venture capital funds in 7,900 transactions.  That, by the way, is about $12.75 million per investment.  9 consecutive quarters passed with at least $10 billion invested (Q2, 1999 through Q2, 2001).  Q1 of this year saw only about $5.8 billion invested.  That’s one of the better quarters of the past 2 years, but still roughly 30%+ off the pace of the pre-recession 2000’s, let along the pace of the true bubble-era.  

Here’s the point.  In Q2 of 2001, the cooks in the kitchen noticed that the pot was boiling over.  It’s hot, steamy bubbles flowing over the rim of the economic pot.  It was making quite a mess!  All the cooks came running over and grabbed the pot and hurriedly took it off the stove and they reached down and turned off the gas.  The September 11 attacks removed any ideas we had of quickly turning the pot back on.  We eventually started cooking again, but the mortgage derivative crisis was a real doozy…it was like the gas company shut the whole dang building down for the past couple of years!

So here we are, a bunch of smarter cooks now, and we’ve put the pot back on the burner and turned the heat on low.  Even a low flame will start to heat the water.  And if you ever watch water come slowly to a boil, you’ll first notice….wait for it….tiny bubbles.  Stop whining about them.  Remember people, you want the water to boil, right?  We’ll never eat without boiled water, so we need an occasional overvaluation of a company with over $800 million in revenue.  We need an occasional irrational $41 million investment amount in an untested company.  (It helps us current investors not suffer 3x liquidation preferences!)  What we don’t want is for them to be happening every day.  What we don’t need is companies closing $6 million rounds on Tuesday and by Friday have an offer for another $6 million at double the Tuesday valuation.

So, the next time you hear the financial news and some company with too much cash pays too much for some other company, raise a glass of wine to Don Ho and sing along…

So here’s to the golden moon, And here’s to the silver sea

And mostly here’s a toast, To you and me.


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Small Time Politics, Big Time Stakes

Twenty-some years ago, I was a young economic developer working in the City of Allentown, PA.  My job frequently took me to city council meetings where I was able to witness fishbowl politics at its worst.  There were plenty of important issues at stake for the city of 100,000 residents.  Hit hard by decades of suburbanization and the rust-belt realities of northeastern PA, Allentown needed smart, selfless leaders who could legislate well-informed policies to save the economy of the city.  But we didn’t have those leaders.  We had Charlie and Emma and Tony and Joe.  Most city council meetings were consumed with indignant bickering about procedure and protocol and indignities dealt in earlier campaigns.

If you’ve paused to read this post, and have read this far, you’re probably wondering why I’m sharing that story.  It’s because our country appears to be run by small city politicians who don’t seem to let making a good decision get in the way of scoring for the party.

A few weeks ago, I posted a piece about the SBIR program.  I liked it so much, I posted a second part to it!  In those pieces, I tried to argue that the SBIR and STTR program are important pieces of American legislation and spending.  They allow the economic engines of the country, namely entrepreneurs, produce innovation that big companies with vastly different economic standards than small business, simply cannot match.  Through organizations like the National Institutes of Health, Department of Energy and others, your federal government is obligated to find small companies (sometimes very small, 2-person companies in Allentown and Bethlehem, PA) to receive federal funding for the most cutting edge research.  As I argued in the pieces, the legislation and proposed changes to it, have flaws.  But the discussion about the legislation was important and well-intentioned.  And that’s where my flashback to my city council experience comes in.

Today I read this NY Times story about why the legislation to revamp the program is likely dead.  Since I feel the revamp was not ideal, the fact that it is dead isn’t too painful.  Assuming of course, that at least some “continuing” legislation is passed to keep it in its present form.

The story tells of how Senators Reid and Snowe bickered about procedure and protocol and failed to lead our country.  The only, only, only reason I can come up with as to why meaningful legislation that empowers entrepreneurs in technology can’t be passed …is that too many in Washington are more concerned about themselves than about the other 300 million of us.  The biggest insult I can think to throw at them is that they’re behaving like a bunch of small-city councilmen. 

Believe me, it’s a pretty big insult.

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Angels Invest in People

I caught up on some reading over the weekend.  Not as much as I would have liked because I had to help my wife around the house on Mother’s Day.  Mostly I was taking notes on all the help that our two kids gave her.  Father’s Day is coming and I’m ready to compare and contrast the amount of love and support the kids gave her as compared to what I’ll get.  Of course, I’m only expecting about half as much since my wife is twice the parent I am…even with one arm metaphorically tied behind her back (technically it is in a cast and sling).  Nevertheless, I got a little reading done, including Martin Zwilling’s piece on 5 things every entrepreneur about seeking and finding angel investors.

I excerpted the five points below…and embellished a bit to provide some additional depth.

  1. Angels invest in people, more often than they invest in ideas.That means they need to know you, or someone they trust who does know you (warm introduction). For maximum credibility, start networking for potential investors to build relationships a few months before you start asking for money.They also favor entrepreneurs who are experienced in starting a company, and experienced in the business domain of the startup. Your business model may be very attractive, but if you are new to this game, you may not be fundable. In this case you need a partner who has deep domain knowledge and a track record of building businesses.  TechonomicMan says:  This means that you need to have a non-confidential executive summary of a couple of pages in length that you can distribute.  All those service providers (attorneys, accountants, consultants, etc.) who want to help you…LET THEM!  They frequently have connections to investors, even though they’re not investors themselves.  Develop relationships.  Nurture them by being responsive.  Friends, Family and Angels invest based signficantly on your character –the difference is that Angels need to get to know your character while Friends and Family already know and love you!
  2. A complete business plan is always required. Maybe friends and family will give you money with no plan, but angel investors expect a real plan. All professional investors know that entrepreneurs who start a business without a written plan almost always fail. Don’t forget to clearly outline the problem you are solving, before you give the details of your solution. Clearly spell out your business model and your exit strategy, so investors will know how you will make money, and how and when they will get their return.  TechonomicMan says: Your plan needs to be readable!  As in #1 above, the founder needs to have deep subject matter expertise in the market and the business plan will reveal that.  Know whether or not you are a good writer…and have the humility to ask people to read your plan for content, structure and grammar and spelling.  Do NOT use one of those “fill in the blanks” software packages to write your plan.  My preference is still for a prose-written plan rather than a powerpoint version as your official plan although customs are changing in that regard.  Either way, 30 pages, including financial projections, is a fairly long plan.
  3. Angels like to get involved directly with the team. This means they are generally only interested in local opportunities. It won’t help your case or your workload to do an email blast and follow-up with 60,000 investors around the world. If there is no one in your area interested or experienced in your type of business, you may have to move to Silicon Valley or Boston, or wherever the right angels for your domain congregate.A related issue is the size of the investment you need. Angel investors tend to limit the size of individual investments to $250K or less, and even in groups they rarely consider requests for more than one million dollars. If you need more, you need to focus on venture capital territory.  TechonomicMan says:  If you have a chance to be choosy, choose Angels who have experience that you do not have.  Know your weaknesses and find people who can fill them.  Much of the hard stuff about being a successful entrepreneur is intangible…relationships that you have, knack for selling, negotiating ability…whatever.  If your business needs to produce thousands of widgets a month and you’ve never managed a production environment, get someone who has.  Angels increasingly behave like VC’s.  That is they tend to take closer to 6 months to make an investment than 3 months.  Be aware of this when you start.
  4. Financial projections and opportunity in the right ballpark.Investors won’t fund people who don’t push the limits, or inversely won’t recognize business realities. Here are some rules of thumb. Your fifth-year revenue projections better be between $20M-$100M. Smaller numbers mean a low return, and larger ones aren’t usually credibleSecondly, you need a large and growing market, to offset the huge risk of funding a startup. Rules of thumb include an opportunity projection that exceeds a billion dollars, with at least double-digit growth. Smaller numbers may easily make a viable business, but won’t attract investors.  TechnomicMan says: Know your exit opportunities that relate to that revenue number.  Experienced angels know that the longer it takes to hit the 5 year projections, know that it may take more money than is anticipated today to survive to that time.  This leads to the potential for taking later money that hurts the position of early-in angels.  Your knowledge about comparable types of companies and what their exit multiples were like, may give you some extra credibility with angels who are concerned about being crushed by later punitive rounds of capital.
  5. Business domain and your character must be squeaky clean.Certain business sectors have historical high failure rates and are routinely avoided by investors. These include food service, retail, consulting, work at home, and telemarketing. Also, don’t expect investor enthusiasm for your gambling site, porn site, gaming, or debt collection business.Angel investors are people too. They expect you to understand their motivation, respect their time, and show your integrity in all actions. They probably won’t respond well to high pressure sales tactics, information overload, or bribes.  TechonomicMan says: Exactly!

Apologies to Martin Zwilling if he disagrees with TechonomicMan.  Let me know if you have any feedback, or experiences of your own with Angels.

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