Venture Adventure

Managed to make a different organization’s event this week. The VC Task Force sponsored the VC Connect – Small Fund SIG. From the website: VC Connect: A Q&A roundtable between entrepreneurs and investors from smaller or newer VC funds.  Speaking at the round table were Mark Platshon, Xseed Capital; John Steuart, Claremont Creek Ventures; Carl Showalter (substituting for the schedule Dan Avida), Opus Capital; and Larry Kubal, Labrador Ventures.  Moderating the panel was Bill Reichart, of Garage Technology Ventures.

The event took place at the offices of Wilson Sonsini Goodrich and Rosati, in Palo Alto.  The networking before the event featured some of the best hors d’oeuvres at any event.  They weren’t what I’d call excellent food, but a far cry from the stale munchies I’ve had elsewhere.  I had an interesting introduction conversation with a number of folks.  When I described my project as creating a replacement for Microsoft Exchange (I know – I haven’t talked about that before…), I got a resounding “yes, about time” response from all of the folks.

Unfortunately, one of the people was a little to enthusiastic, and engaged me in a conversation.  At first it was interesting, but then turned into the classic Valley Anti-Microsoft pitch – why wasn’t I going to do open source? What about iPhone?  What about Google?  No offense to this person, but you didn’t allow me to meet other folks, and it was hard to extract myself from your persistent questioning, which bordered on pestering.   I guess it’s something I’m going to have to learn how to handle better.

During the actual round table discussion, there were some useful nuggets that emerged.

• Quantifying the pain point is not worthwhile, as long as it’s big
• Look for signposts that predict rapid growth while being below the radar
• Don’t buy market research reports – it’s just not worth it
• Packaging your pitch – nothing substitutes for research, analysis, carefully selecting users and customers for reference.
• Find a market sub-segment where you can dominate with greater than 40% of the market share
• First mover advantage doesn’t exists
• Good founders do due-dilligence on their VCs
• Team coachability, domain expertise, chemistry, self awareness, why does the team see things that others can’t, are all factors

In general, it was another good introductory session, that allowed me to meet a few more VCs.  However, this was a little more costly than the SVASE events – $72 for non-members.  I’m still debating internally whether or not to join VC Task Force.  On the positive side, it does provide another networking point with the VCs.  On the negative side, entrepreneur membership does run $300/year.  Is this a good way to spend our company funds?

The ExecuPundit (Michael Wade) posts about ascribing motivation in the Motive Mess. Ironically ascribing motivation himself, Michael says “I suspect the practice stems from a desire to blame instead of understand”.

When looking at public issues, say the issue of Scooter Libby and the leaking of Valerie Plame’s name, Michael may be correct.  In the business environment, however, he’s way off base.

For example, a good friend of mine is a senior software engineer at a very fast growing software company.  Having just moved into a new building, he’s been tussling with the IT group to get lab space and network connectivity from the lab back to his office, and with little success.  His next step was to bring up the issue with the VP of Engineering.  My advice was to frame the issue in terms that affected and motivated the VP.  If my friend just went and bitched that IT wasn’t cooperating, the VP wouldn’t be motivated to act.  However, if my friend noted that schedules and revenue would slip without this vital cooperation and support, the VP would be compelled to act.

As a manager in a startup, I’ve often been tasked with  getting my team to put in the extra effort to meet a very aggressive development schedule.  Over the years, I’ve come to realize that for most senior engineers, the company rah-rah speech rarely motivates.  After 10 years of listening to the same ‘motivation’ speeches and sessions, most are pretty jaded.

However, by talking individually with each engineer, I was able to understand their particular motivation, and to frame the issues and desired results in language that  matched their motivation.  Some were  motivated by the prospect of future huge rewards.  Some of my key engineers were much more interested in the challenge of solving the problem.  Others wanted fame and glory.  With each engineer, I was able to get them to make the extra effort at the last minute by providing incentives, rewards, etc. that matched their motivation.

Had I not put in the effort ascribe motivation to past actions in order to understand the core underlying motivations, I would not have been able to be successful, and to fulfill my motivations!

When I was at Carnegie Mellon in the late ’80s, Steve Jobs came to pitch his latest creation, the NeXT cube. We sat in one of the lecture rooms and watched Steve’s presentation with awe. Here was the legendary garage-man himself, with this beautiful black box. That cool magneto-optical drive. Built-in Ethernet. Laser Printer. Amazing Graphics. Everyone was stunned by the coolness of it all.

Steve came to pitch us because, of course, he based NeXT’s OS on the mach kernel, developed at CMU. That and the fact that he desires to be a perpetual student, deciding to limit sales of the cube only to college students. With Steve’s excellent pitch skills, he dropped the bombshell – $6,000. Everyone thought he was joking.

The NeXT debacle was in the middle of a string of decisions that continued Steve’s trajectory of doing what Steve wanted while flying in the face of what his customers wanted. The Macintosh family is ripe with examples, such as the fixed, built-in monochrome monitor when color monitors of various sizes were already available. The single button mouse, in the name of ease-of-use. The closed architecture. PowerPC processors. Industrial design over functionality.

Unless you’ve been dead for the past few months, you’ve heard about the iPhone, the latest version of Steve’s way. This beautiful looking device has no buttons. How do I adjust the volume without taking my ear away from the phone, thus not being able to tell when the volume is correct without multiple iterations of moving the phone to the ear, checking the volume, than moving the phone away to adjust the volume again? Most other phones have a very simple, well understood rocker/scroll wheel volume interface that’s been around almost since the dawn of the radio itself. How do I do one touch dialing? With my Moto Razr, I flip open the phone, and press and hold one of the number keys. My 9 most used phone numbers are pre-programmed. I can do all of this without even looking at the phone!

Another innovative product shown at CMU at around the same time as the NeXT was the Chrysler TC by Maserati. Here was the first attempt at marrying Chrysler with European design. One of my mechanical engineering friends had gone to work at Chrysler, and brought a TC back for show-and-tell at the homecoming parade. He said his biggest issue was with Lee Iacocca himself. Apparently, Iacocca looked at the back end of the car during the design phase, and drew an exhaust outlet. From that point on, the size, shape, and exit location were fixed, regardless of the implications to cost, performance, or efficiency.

I’ve come to the conclusion that Lee Iacocca learned from Henry Ford — you can have it any way you want it as long as it’s my way. And Steve has learned from both of these iconic leaders that you can be successful with this philosophy. As an entrepreneur, I respect this very much. But I still hate the Apple user interface!

After a long hiatus of, well, everything, I’m back. Thursday, I went to the SVASE StartupU event in San Francisco. This month’s round table was to discuss Executive Summaries. The panel was Will Price of Hummer Winblad and Jim Long of Gabriel Ventures. Both Jim and Will have been on the entrepreneurs side as well as the investors side of the fund raising process.

Like most of the other StartupU events, this one was very much a round table rather than a lecture or question and answer session. This event, however, was far and away the most useful so far. Both Jim and Will basically did a brain dump of what to do for executive summaries, financial models, etc. Jim recommended two books – the first, the classic by Porter about researching competition, the second, Presenting to Win: The Art of Telling Your Story, by Jerry Weissman.

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Takeaways include:

• 6 months. Six months
  is
  the minimum
  amount of time
  required to
  fully bake your proposalSix months is the minimum amount of time required to fully bake your proposal – pitch, summary, business plan, etc. It takes that long to make sure that the story is crisp, and to get enough feedback and time to ensure that pitch delivery is rock-solid.
• The top goal of talking to VCs is getting to a quick no. [This led to an quick side discussion - VCs are usually bad about saying no (covered by Brad Feld, among others). Will and Jim maintain that this is because they don't want to burn a bridge on what may be a killer deal. The other issue is, as Will put it, they don't want to get into a point-counterpoint discussion of the reasons for the no.] The idea for the quick no is to ensure that, if it’s a no, you don’t waste either party’s time, and you move on to more worthwhile prospects.
• The executive summary is a sales pitch. In fact, everything is a sales pitch.
• The executive summary is an invitation fora conversation – a teaser. The sole goal is to get to the next stage.
• A corollary is that handling rejection is important. You have to learn without being defensive.
• Will’s preferred Executive Summary format includes a left side panel with key facts (team, technology, financial snapshot/summary, amount of investment required). Right side is text of executive summary, including business & product description, technology, market, distribution, competition, cap table summary, etc. Emphasis on problem you’re solving. Frame the deal for investors, and help to get to a quick no. Show how you get to profitability.
• Mine fields of the executive summary:bad financial projections, and not using the right semantics for market segments, etc. (ex: SaaS today, vs. ASP yesterday). You should assume most investors are current on the market, trends, etc.
• Competition is a good thing – it validates the market, product, idea, etc.
• Understanding competition (e.g., Porter’s Analysis) is critical. Also understanding the value chain and ecosystem.
• Financial model should be a 3 year model, with a bottom-up approach to revenue (see Will’s posts on the subject).
• You need to understand your revenue model – direct sales, channel, etc. Tom says he might even ask for the financial model spreadsheet.
• You can no longer be a Veritas with a 9-month sales cycle. Need to be able to explain why you will have an effective sales cycle.
• Gabriel Ventures looks for Capital Efficiency – if you can get to positive cash flow with less than $10M financing, that’s efficient.
• Absurdly high profit margins allow you to weather issues – non-materializing revenue, markets, etc.
• To develop your revenue projections look at the first few years of 20-30 comparable public companies.
• Develop your key assumptions – especially for what it takes you to reach $1M in revenue – average order size/ASP, time to close sale, %probability of closing random prospect… Build this in to data tables in excel for sensitivity analysis.
• One way to model a market is that the market size is essentially fixed, but you’re moving the dollars from an old technology to a new technology – TV to Video over the net. Advertising from print/tv/radio to the net.
• Demos and/or links to URLs in the executive summary are good (and allow you to track, etc.) You can put in links to your product, or press about the market, competition, etc.
• Demos are not a requirement – the potential investors can visualize the product.
• Don’t go to investors too early. You only get a few chances at that first impression.
• Raising money is a numbers game – Will visited over 60 VCs; Cisco, Intuit 50+, etc.
• Keep the investment pitch process going, even after you’ve signed a term sheet – until the money’s in the bank, it’s not a done deal.
• Lawyers make mistakes (as well as everyone else) – check the cap tables, term sheets, etc.
• Argue over what matters – $/share and # shares. Pre/post valuation, etc. are not as important.
• Series A valuation is a function of the target ownership and the amount of funds being raised. Typically $4 – $6M pre.
• In a syndicated deal, target 40 – 60% ownership after 1st round. E. g., 20% employee pool, 40% investors, 40% founders (high side). Typical employee option pool is 20%, and comes out of founders’ shares. So, founders will have 0.80 ^ (#rounds) when all is said and done.
• Forecast out your cap table in addition to your financials. Should probably include options for advisers.
• A round is to get to a B round. What are your key measurable milestones? A round typically lasts 18 – 24 months. Be concrete and focus on first 6 months.
• Adding value is about knocking down risk. Don’t become a ‘tweener’ company – where you’ve burned through your A money, but haven’t reduced your risk, so can’t raise B money.
• Don’t do the exit math. Stock (flippant) answer to exit strategy is ‘we’re building value here, and the exit will take care of itself. (Although Will did note that the IPO window has opened up a little bit recently.)

Wow! That’s a lot of stuff we covered in a little over an hour. Like I said – a brain dump – it felt like the first day back at school after a very long vacation. In a way, that’s what it really was.

Stealing from the title of a classic movie, I’ve been silent for almost a month.  And, in part, it’s because I went deep…. into a blue funk.  I was tired, and down, and depressed.  And was feeding on the anger and depression of my wife, who’s been struggling for a bit with her job.  And then, she took last week off.  For the first few days, she hid, spending the entire day and night watching Japanese anime downloaded from the net.  She watched the entire Monster story, all 76 episodes, as well as many other long-lost favorites.

Since it was her first break in a long while, and the first time we’ve had time to spend together in many months, I decided to take the week off as well.  And it turned out to be a good thing, as we finally got more information on my mom’s cancer.  My mom was diagnosed with peripheral T-cell lymphoma.  This rare (7% of all lymphomas) cancer has an untreated 5-year survival rate of 0%, and a treated 5-year survival rate of 20%, which are truly horrible statistics.  The good news is that, for some as yet unknown reason, my mother is not sick.  In fact, the swelling in the lymph nodes has shrunk.  There is a possibility that she may enter a clinical trial on a modification of the standard CHOP treatment.

Unfortunately for me, however, is the fact that I don’t deal with this type of news very well.  For the first few days, I was “unaffected”, or so I claimed.  In reality, I was just keeping all my feelings bottled up and ignoring it completely.  On about the 4th day after getting the news, I lost it.  I spent the morning in bed crying.  After talking with my wife about it for a long time, I’ve finally come to terms with it, and am now functioning much better.

So, this week sees me coming up from the deep, and starting to talk and work again.