The current vogue in startups is to follow the agile programming mantra - release early, release often, have your customers partake in the design and debug process.  This makes perfect sense in the web world, where data loss, downtime and bugs are de rigueur.

However, a key concept of my product was reliability and resiliency.  And it’s hard to ensure those key concepts without a very significant amount of up-front design as well as a significant amount of testing before release.  It’s also very hard to convince customers to risk their data on an untested product.

This means I had to decide where to invest my time - building and testing a product with minimal customer input, and funded on my own dime, or try to find investors to fund the R&D effort.  I chose the latter.

As I started to have serious discussions with VCs, many of whom were used to dealing with web startups, the topic of prototypes, customers and development stage would come up.  While not originally a show stopper, as the financial crisis hit full bore, it became very clear that VCs were not going to fund a concept in the systems space at this point in time.

After some serious soul searching, and a long heart-to-heart discussion with my business partner, we decided it was not the right time to continue to invest in this effort.

Thus, the death of this dream.

Blackfive has an excellent post today on corrective action.  Or, as it’s known in the military, The Art of Ass Chewing.

For instance, the National Weather Service notes that it is able to see highway traffic patterns using its Doppler weather radar.  I can see many interesting applications here.  Scale down the radar, and focus on the highway rather than on the atmosphere, and you could have long range highway traffic flow monitoring without the expense of a video camera or sensor network.

Another simple technology applied differently is Apostrophree, which just received a $25 million investment for a spell checker dedicated to blog comments.  While I don’t believe that there’s a $25 million company there, I always enjoy creative entrepreneurship.

Roger’s top-seven mistakes:

1. The lack of a single, “the buck stops here” leader until too late in the game
2. No separation between the technology organization and the product organization
3. Too much PR, too early
4. Too much money
5. Not close enough to the customer
6. Slow to adapt to market reality
7. Disagreement on strategy both within the Company and with the Board

There’s many things that can be discussed and learned by looking at the details of this list.  But when I look at it from a very high level, it all points to 2 major issues — A lack of planning and a lack of leadership.

“Battle is a highly fluid situation. You - You plan on your contingencies, and I have. You keep your initiative, and I will. But what you don’t do is share command. It’s never a good idea.” — Vic Deakins (John Travolta), Broken Arrow, 1996

And this, to me, is a symptom of the web 2.0 mentality of creating a business web-site based on a high concept pitch with no plan and no real leadership.  I guess when the VC is only investing a few hundred thousand dollars, it really doesn’t matter.

But real businesses have an idea of who their customers are, what the customer wants, what the customer is willing to pay, and how the business will make money.  And all of this is known before a single penny is spent.

And real leaders lead!

Edit 1: Fixed Typos

Some time soon (I hope) I’ll be back to writing….

The Economist defines windfall profit as a controversial concept, often used by politicians to justify imposing a TAX on PROFIT that in theory is earned unexpectedly, through circumstances beyond the control of the company concerned, and is thus deemed undeserved and ripe for the taking by the tax authorities.

Does this definition fit the current situation? Clearly, the tax authorities (Congress and the Democratic Candidate for President) want to take the profit. And clearly the authorities believe that the profit is undeserved. Many of the proponents of the current proposals for windfall taxes on oil have been claiming that Chevron or Exxon are making $1300 a minute in profit, or a billion a day, or many other shocking claims on the absolute value of the profit. And, if you’re not involved in big business on a day to day basis, the numbers are really, really big.

But are the authorities, particularly Obama and the Democrats, correct?

Here’s a basic analysis using the 2008 Fortune 1000 list.

• Ranked by Revenues, only 2 Oil companies make the top 10. Wal-Mart ranks #1 at $6 billion more than Exxon Mobil. The only tech company AT&T at #10.
• Ranked by Profit, only 2 Oil Companies make the top 10. Exxon-Mobil ranks #1, but GE takes #2 before Chevron’s #3. In tech, Microsoft ranks 6, and AT&T 9.
• Ranked by Net Margin, no Oil companies make the top 10. Exxon-Mobil, with 10.9% margin ranks 219. Chevron, with 8.9%, ranks 298. This compares to Microsoft (27.5%) at 25 and Google (25.3%) at 34.

It will take a long time for a startup or entrepreneur to make the F1000. However, high-tech businesses do have high profit %. Looking at the % ranking, we see Mirant, an electricity generator at 70.9%, which may be an outlier, as the next in rank is Blackstone, in the PE business, at 53.2%. Gilead Sciences, at #7, is at 38.2%.

When I created the financial model for my business, I calculated a 39% net profit long-term. Looking at these figures, I don’t find it completely out of the question. Of course it’s aggressively high. But if I don’t shoot for that goal, I’ll never create a real business.

On the other hand, it is pure hubris for Congress to go after the oil business, and to not, at the same time, attack GE, Bank of Ameria, or the Oracle of Omaha.

The Rankings

Top 10 Gross Revenue

Top 10 Net Profit

Top 10 Profit %

This book was recommended to me some time ago by Jim Long of Gabriel Ventures during an SVASE Event. I finally got around to reading it, and can see that it will be an excellent reference. I’ll probably have to by the Kindle version as well, so that I have it with me to show others.

The book has three basic sections, although it’s organized into 14 chapters. The first section is an intro, covering both Weissman’s background as well as why you need to create better presentations, and, most importantly, WIIFY. No, that’s not a Nintendo reference; it’s an acronym for What’s In It For You, which is the motivation factor that makes people pay attention to the presentation.

The second section discusses brainstorming and organizing your presentation into a story with one of the 16 possible flows:

1. Modular
2. Chronological
3. Physical
4. Spatial
5. Problem/Solution
6. Issues/Actions
7. Opportunity/Leveratge
8. Form/Function
9. Features/Benefits
10. case Study
11. Argument/Fallacy
12. Compare/Contrast
13. Matrix
14. Parallel Tracks
15. Rhetorical
16. Numerical

The discussion on the flows and their uses is very helpful. Weissman’s layout of brainstorming and how to turn it into a story is very intriguing but lacking in some details. I wish he expounded more on this, as it is the hardest part of creating a presentation (and probably the hardest to explain in words, so I do give him a little leeway…)

The third section is the technical nuts and bolts. Rather than discussion typography, Weissman refers to the latin phrase de gustibus non est disputandum - there’s no arguing taste. Instead, he gives a small discourse on perception psychology. Because we read from left to right, things coming in from the left are natural and things coming from the right are unnatural.

I can see where this will be one of those books that needs to be revisited from time to time for a refresher course.

The Setup

Generic product

A NAS (Network Attached Storage) Solution with 10 TB of storage.

Generic Customer

A small enterprise - 1500 employees, a corporate data center, corporate IT staff

The Customer List

IT Staff

The IT staff has specific technical requirements for the product, the management of the product, and the integration of the product into their production environment. Quite often, they have relationships with other storage vendors that have to be broken in order to make the sale.

CIO

The CIO has to ensure that the generic solution (NAS) as well as the specific solution (us as a vendor) meet with all the strategic goals of the company - long term, financial, number/size/type of vendors, etc.

COO

The COO has to ensure business continuity, and has to be convinced that installing and integrating a new storage system will not cause any interruptions to the corporation’s work.

CEO & Board of Directors

Depending on the storage vendor and the type of customer, 10TB NAS solutions can cross the border from discretionary and departmental budget spending to corporate capital asset purchases. In this case, the CEO & BoD have their own set of objectives and objections that have to be met.

End Users

The end users may often have different requirements from IT for storage. For most end users, storage is a commodity on with the same value as pens and paper. As long as it’s there, we can get our job done. If we run out, then the work quickly grinds to a halt and there are a lot of very unhappy end users. Also, like pens and paper, end users perceive storage to be infinitely cheap, and therefore in complete abundance. Rationing of storage is not appreciated nor tolerated very well.

While end users are almost never included in the purchase process, if the end user expectations are not met, negative brand associations may result. For example, if, during the transition of files from the old storage system to the new storage system results in lost or corrupt files, the end users are very quick to blame the new stuff, as the old stuff was perceived to “just work”.

It is important for a new storage player to ensure that they meet with all the customers and determine their expectations for the system. Failure to meet expectations, even with a “successful” engagement, will quickly drive the Customer Lifetime Value to Zero.

Commenter Phil Sugar chines in with funniest - and best - comment:

Usually the good push is to tell them we are going to capitalize all of the accounting expense this year. Once we get things set up we can fire all the accountants and reap the benefit…..watch the gears smoke.

Some thoughts:

• On average, angels will take approx. 30% equity, and VCs 50% equity.
• The dropout rate between financing rounds is typically greater 50% - over half the companies never get their next round!
• The purpose of the Executive Summary is to get the next meeting
• Need to sell & excite!
• The reader wants information that’s important to them. Just as in resume writing, you may have different versions of the ES targeted at different audiences.
• Key founders/employees will have management contracts
• ES should be no more than 2 pages. In fact, it will always be 2 pages, as there is more information required than can fit on one page, and 3 pages is too long.
• The VCs read so many executive summaries that they do pattern recognition during review, and can very quickly decide on their interest level.
• There are 9 important sections to the ES. For the outline, and other useful entrepreneur tools, see the SVASE download page.
• The Grab is really the executive summary of the executive summary
• Write The Grab in the form of a story. It’s more interesting to read. And, more importantly, it helps the first reader to sell the idea to others.
• There are 2 sets of competitors - your product/service/market competitors; and other companies competing with you for Investor attention and money.
• There are 2 schools of thought on teams. The first says that team is everything. The second says the market is everything. In the second case, the investors can (and will) bring in a replacement team.
• There are 3 key roles in the founding team: CEO, CMO, CTO. More than one of these roles may be filled by the same person. However, it is extremely rare that all 3 roles will be filled by one person.

At the end, Chris left a handout, The Ten Commandments of Fundrasing. This handout has lots of good, basic rules for the beginner to follow. I’m not, however, a fan of the 10 commandments style of writing - Thou Shalls are hard to read, and require significant parsing to get to the meat.

SVASE is turning out to have a lot of utility.

I also spoke to Chris about a feedback review of my executive summary. He, unfortunately, doesn’t have the time to do feedback reviews. As an alternative, he suggested showing the executive summary during an SVASE breakfast blub meeting with VCs. He said that it would be very quickly apparent if the ES was generating interest.

So that will be my next step.

• Superior fundraising
• Brilliant execution of 50 state plan
• Soaring eloquence
• post-racial

However, he maintains that there are 2 additional important differences

• Obama is principled while Clinton is positional
• Obama is transformational while Clinton is transactional

I agree with all of this. However, the real questions are “why is this important?”, and “how does this apply to entrepreneurship?” Chris answers the first question:

“It seems to me that when you see a cataclysmic event like the defeat of an overwhelming favorite with nearly every factor in her favor, it’s important to identify the true underlying factors.”

As to how does this apply to entrepreneurship - well, to paraphrase Chris, may times we, as entrepreneurs are defeated evening when we should win. And it’s important for us to analyze why, so that we can succeed (win) in the future.

Let’s take the key differences between the candidates and apply them to business and entrepreneurship:

• Superior fundraising - There have been many posts on raising more money than you think you need. By raising additional funds, it gives you latitude to deal with unpredicted - and often unpredictable - events. It also gives you latitude to correct your own mistakes.
• Brilliant execution of 50 state plan - In entrepreneurship, this is really developing and sticking to a long-term plan. And often sacrificing the short-term for the long-term. This is also the difference between building a burger (flipping your business) and building a business.
• Soaring eloquence - Translate this to speaking the language of your customers. This is really Sales 101. This is the motivation for getting an MBA - so that you understand the lexicon of your customers (both the end-users and the VCs).
• post-racial - Translate this to market timing. You have to have what the customers want when they want it.
• Obama is principled while Clinton is positional - According to Chris, principled = accommodating while positional = confrontational. In business, it always pays to (appear to) be accommodating. Confrontational attitudes must be used with caution and purpose.
• Obama is transformational while Clinton is transactional - This is another version of short-term vs. long-term. By being transformational, you’re projecting an image of building for the long-term. Transactional approaches project that short-term image, and your customers are left wondering if you’ll be around in the next week/month/year.

There are business and entrepreneurship lessons in national politics - and in most every other activity we encounter, and we should study and learn well from them.

Now, all these years later, I’m starting to regret my decision.  There are many benefits to military service, including training in discipline, recruiting and leadership.  And the personal knowledge of having served the greater good.

Unfortunately, I’m too old for service today.  I’ve even looked into the WOFT - Warrant Officer Flight Training as part of the National Guard.  So, the military is no longer an option.

Regardless of my personal status, I must say thanks to all those who serve our country - particularly those who’ve paid the ultimate price.

Thank You!

We start with Paul Bragiel who disects his creation Meetro for TechCrunch. Well, he sort of disects the failure, but ultimately blames it on being too soon for the market, and claiming he could have fixed everything but was ready to move on to bigger and better things.

Next up is David Feinleib of Mohr Davidow, with an actual analysis of why startups fail. David’s thoughts (with my comments):

• Spend too much on Sales & Marketing before their ready
  
  Absolutely an issue - in the early ’90s, NeTpower had an inside sales force of 10 to sell MIPS based NT workstations - before we ever had a product of our own and were simply reselling ACER workstations. And were only selling about 5 units a month.
  
• The market outpaces the startups ability to executeI actually boil this down to simply Poor Execution. David mentions analysis paralysis, which is one cause. Another is just not understanding the time-frame by which startups operate. Chromatic Research attempted to create a kitchen sink multimedia processor ASIC and board while simultaneously creating an Intel x86 clone. Yet all of the internal managers and directors running these two very aggressive projects were ex-HP and believed in management by consensus. We could not make a decision on even the simplest of tasks without a quorum. My particular group had 3 leads, and our weekly staff meetings would run 5 to 6 hours!
  
• There is no EntrepreneurThis is super critical (and I expand upon this below). I’ve seen way too many startups where the founders are sidelined by the VCs for the professional CEO. While the professional CEO may know how to run a business, they have no passion for the technology or for the customer, and are often more interested in deals than in customers or product.
  
• The market takes too long to developThis is Meetro’s complaint. I was also hit by this at Silverback Systems, where we were too early in the iSCSI market. This is where a professional CEO falls apart. The lack of a market becomes an excuse for the lack of success. This was always the claimed cause of failure at Silverback Systems, where we developed an iSCSI offload engine ASIC.

  However, a Real Entrepreneur is able to adapt his company and product to the existing market. At Silverback, we could have retargeted our product (through software changes) to other markets, such as network processing and deep packet inspection for routers, firewalls, and DPI solutions. This is a market where a high cost low volume ASIC can succeed.

Bernard Moon follows up with some additional thoughts:

• Breakdown in team chemistryThis is really a Failure in Leadership. A fundamental component of leadership is team and personnel management. In fact, of Colin Powell’s 13 Rules of Leadership, only one doesn’t relate to people.
  
• Bad VCsBad VCs exacerbate bad situations - typically by making decisions either without truly understanding the underlying causes of the particular situation or without analyzing for unintended side effects and consequences.
  
• Not enough capital at the early stagesReal Entrepreneurs build a business plan so they truly understand what it takes to build their business. The Entrepreneur may do this in their head or on paper or on the computer, but the Entrepreneur understands the true cost of the business.
  
• There is no marketThis may be the Achilles Heal of the Real Entrepreneur - too much passion for the product may cause blindness about the market. And this is one area where good VCs and good advisers can provide significant value.

I think David and Bernard have hit it on the head, but may have missed a couple of critical items:

• Burgers vs. BusinessToo many people these days are creating startups with the intention of flipping them to a Google. Unfortunately, there are very few Googles, and even few ideas worth pursuing by a Google type company. If you build your business, eventually, it will be worthy of additional investment, either in the form of an IPO or an acquisition. If you build your business with the goal of flipping it a few years later, what happens when there’s no one to buy?
• Entrepreneurial PassionI touched on this before - many startup leaders - the founders and the leaders - are in the business to win the lottery - they all want to be the next Google. So, when they don’t win the lottery the first time, they’re unable to figure out what to do next. Real Entrepreneurs (as David says, with a Capital E), have a vision. But, more importantly, they have a drive to make that vision successful, and are unwilling to let anything get in their way. Real Entrepreneurs understand and internalize the old saw “Lead, Follow, or Get Out of the Way!”

As a summary, have a gander at Brad Feld’s Famous Failures….

However, I didn’t - and still don’t - have a good answer for barriers against new market entrants, and was freely willing to say so.

As I left our meeting, my adviser again commented on the subject, wondering both about patent protections and the potential for lawsuits (most some of my competitors are very willing to turn to lawsuits as a business strategy to tie down and defocus the opposition).

I commented that if we actually got sued, it meant we were doing something right, as we had become successful enough to appear on our competitors radar screen.  At that point, if we were in a defensible position (which is my intent), given our success we should be able to work our way out of the situation.

However, I’m not a strong proponent of software patents and didn’t have a really good answer.  In part because I had previously stated that should we be sued for patent infringement we could almost always rework our code to work around the issue.

Today comes word from Josh Kopelman of First Round Ventures and founder of Half.com that Half’s software patent was finally issued - 8 years later.  And that he and other VCs (Brad Feld, etc.) don’t really believe that patent (pending) is a valid barrier.

When I look at everything else about me, my partner, our concepts & architecture, experience, etc., I start to say, “we have XXX”.  Then I realize that everyone else has XXX as well:

• There’s no new black magic in what we’re doing.  We’re just integrating existing technology into a unique package that provides significant value-add for our customers - more so than any of the existing solutions on the market.  But once what we’re doing is known, others can emulate…
• We have significant experience in doing what we’re doing.  But there’s nothing that prevents someone else from forming a team with even greater experience to do the same things….
• We are domain experts.  However, there are other domain experts….

While having validated my views on patents, I’m still left with the open question….

What seems to be lacking is an understanding of the motivation. Why does the implementor want to be a manager? Why be a VC? Why does the founder want to be CEO?

As I talk to people, I’m always curious as to their motivations. I have many friends in the engineering world, and most don’t want to be managers. Most that are managers are their because that’s the only career progression to them. And those that really want to be managers usually understand that management is not just a step on the career ladder, but is a jump to a completely different job, with different requirements, tasks, risks and rewards.

I’ve also talked with a number of people, primarily while at SCU B-School, about why they want to be a VC. We even had some VC alums come and talk on that specific topic. The consensus seems to be that VCs get rich quick, and that they have first access to cool toys. But, of course, getting rich quick is not a job description, and most of these people are motivated by the money rather than the job.

The same goes true for many of the Founder/CEOs I’ve talked to over the years at the plethora of entrepreneurial/startup events I’ve attended. The typical founder/CEO is motivated to be a CEO as the path to wealth. But gaining wealth is really an insufficient motivator for the CEO role.

The CEO is responsible for many things - balancing risk/reward; employees concerns vs. customer concerns vs. board concerns; resource allocations; ROI; etc.

But, ultimately, as the Founder/CEO, I’m the father of the business. I give birth to the business through my ideas. I gather the resources required to help my baby grow. I work with my team, so that we all have the same goals for our child. I help our child to grow. Eventually, we have built a business that is successful and can stand on its own without my help.

There is a beauty and creativity to this that I cannot really express, nor can I find in any of my other activities. It’s this creativity and beauty that really motivates me.