Love at First Site

This was forwarded to me in an email so I don’t know the author or I’d give him credit. I think this a good story/lesson for positioning a company for funding.

 

 

Love at First Sight

Yesterday I joined my fifth board and my first for Crosslink.

Years ago I had just received a term sheet for Series A venture capital and went looking for a looking for a bank.   My accounting firm suggested we consider a certain banker at Summit Bank (New Jersey).  I came home that evening to my little rented house, called my friend Steve, and declared I had just had lunch with the perfect woman for me.   We have been married for 21 years. When you know, you know.

My partner Gary Hromadko and I met with a small SaaS company about six weeks ago.  (I will keep the specifics out, as they have not yet announced the funding.) Not knowing what to expect, we sat down and began to listen.

What unfolded was a crystalline and complete story.  The whole package was so clear and compelling, I walked out of that meeting 90 minutes later with a sense of déjà vu. We had just met the perfect deal for us.  When you know, you know. 

So what was it that rang such an obvious and compelling chord?  I can easily enumerate the points.

Greenfield Opportunity
SaaS is a platform shift in the delivery of software.  Every bozo vc knows that by now.  And we all know that existing product markets always get replicated on new platforms, resulting in new businesses built in the ashes of old ones.  Saleforce.com is built in the ashes of Seibel.  Netsuite is trying to build itself in the ashes of SAP or Quickbooks.  This one was a SaaS version of a category that was multi-billions in annual enterprise software revenues, and there is no clear leader in the SaaS version of the category, yet.

Experience and Domain Knowledge
The founders had strong credentials (both business and academic) with a record of real achievement in exactly this product category.  They knew who the customers would be, why they would buy, and why a SaaS version would be appealing.  They also recruited strong, experienced marketing and sales executives whose experience and approach to the job were context-appropriate.  The sales strategy is the right one for the business and the VP of Sales has deep experience with exactly this kind of sales process.

Clear and Simple Product and Roadmap
The product demo was short (10 minutes) and drove home all the key points.  The key success factors were well established in the earlier part of the pitch, making it very easy to see how the product met those market requirements, and why the scheduled future releases amplified the core story and did not take the company in a new direction.  The product can become a franchise.

We Came Prepared
We knew what we were looking for.  As a firm, we have been developing a SaaS practice for some time.  While we were looking at this company, Gary was finalizing our investment in OpSource, which was announced about two weeks ago.  We also are investors in Omniture, which has blossomed into a franchise in SaaS web analytics, and several other smaller SaaS companies.  I had come close to two other SaaS investments earlier in the year.  So by the time we showed up, we had a clear idea of what quality looks like, how to value it, and how to assess it. 

Our diligence confirmed our instincts.  Not only did the team check out as we expected, the customers raved about the product.   When we asked customers about switching, we uniformly heard the “from my cold, dead hands” response.

Why am telling you all this? It is not to puff up the Company. This is part of why I left the company specifics out of the story.   The truth of this business is that it is often one of love at first sight, or never to be loved.  It is rarely the case that the second or third impression is the one that charms.  Probabilities asymptote to zero, not to one. Test yourselves against the first three points, because this is the simple set of criteria most investors use.  Test your audience against the fourth.  Are you talking to someone prepared to appreciate the opportunity you are presenting?

I think we went from first meeting to term sheet in about 10 days. It did take me a little longer than that to get married after that first lunch.  She needed to do a lot more diligence than I did.  When you know, you know

 

 

Curious what life as a startup founder is like?

Marc Andreessen (founder of Netscape) nails it describing the good and the bad. Here's a taste of his post...

First, and most importantly, realize that a startup puts you on an emotional rollercoaster unlike anything you have ever experienced.

You will flip rapidly from a day in which you are euphorically convinced you are going to own the world, to a day in which doom seems only weeks away and you feel completely ruined, and back again.

Over and over and over.

And I'm talking about what happens to stable entrepreneurs.

 

Sidewalk: Insider's view of why & how it was killed (aka sold) and why Steve Ballmer now regrets it

I was one of the first dozen or so members of the Sidewalk team at Microsoft that swelled to over 300 at one time. Personally speaking, it was the best of times and the worst of times. In my dozen+ years at Microsoft, it went from being the strongest team I'd ever seen assembled at Microsoft to my first evidence of Microsoft being infected with politics and big company shenanigans. In the 12 years or so since Sidewalk's inception, I've yet to see an accurate story of what really happened with Sidewalk. The local newspapers who reported on it not only didn't have an inside view but they also had a clear agenda to cheer Sidewalk's demise (e.g., the Seattle Times would never even publish Sidewalk's name). The industry trades simply took the story that was spun by Microsoft's PR and didn't dig deeper. Even astute industry commentators like Jeff Jarvis, Tom Evslin (an ex-Microsoftie), Frank Barnako, Stowe Boyd, Dan Gilmor and Fred Wilson, who often comment on the local Internet scene, aren't aware of some of the sordid history of Sidewalk.

I hadn't thought much about Sidewalk since I left that team in late '97 after spending a couple years on the team. However, a few things have brought back those memories and I thought people might find it instructive or at least somewhat entertaining to hear the story and share some perspective on the application of those lessons in today's web environment. It also shows how hard it is to incubate a new business inside of a behemoth corporation given the lack of patience that is often exhibited.

The following is an excerpt from a recent Herald Tribune article:

In 1999, Microsoft sold Sidewalk, an online city guide service. It seemed a wayward foray outside Microsoft’s software business at the time. “But Sidewalk was really aimed at what we now call local search,” Mr. Ballmer says. “Sidewalk is one we should not have gotten out of.”

Sidewalk was purchased by Citysearch in 1999 which is now a part of Barry Diller’s empire (along with Expedia, also started by Microsoft...he tried to purchase other Microsoft assets but that's another story). I recently had the pleasure of meeting Charles Conn (founder of Citysearch). Coincidentally, we now live in the same town and are on a non-profit committee together. Though I’d never met Charles, I was very aware of who he was (one of my Sidewalk colleagues had been a McKinsey partner with him) and we always had respect for Citysearch as a strong competitor that had some innovative go-to-market approaches. After sitting down for a coffee with him and sharing some battle scars, I realized that as the acquirer of the business, he’d gotten spun a good story that didn’t mirror reality yet that story is what is broadly understood to be the “real” story about Sidewalk. The reality is quite different although Charles shed light on things from Citysearch's perspective which was enlightening.

I realize that describing what led to Sidewalk’s demise is a bit like a blind man describing an elephant. There are several perspectives but I had a pretty well rounded view not only from my own experience but that of several people in other parts of the organization that stuck around longer than me. I jumped off what I saw was a sinking ship when I got the opportunity to fulfill a career goal of being a general manager of a business at Microsoft (Encarta.com).

One of the impressive things about Microsoft is its patience and determination. However, this tends to apply to traditional technology businesses (e.g., Windows and the Server businesses for Microsoft took ~ 10 years to pay off) versus the customer side of the business or media businesses that it has yoyo’ed in and out of. If I had a nickel for every time I heard Ballmer, Gates et al say “we aren’t in the media business”, I’d be a very rich man. I always felt this was naïve or disingenuous and would say to others “if it looks like a duck and quacks like a duck, it’s a duck”. Ballmer was quoted in the Herald Tribune article as saying “One of the biggest mistakes I’ve made over time,” he acknowledges, “is not wanting to nurture innovations where I either didn’t get the business model or we didn’t have it.” I saw this in a previous role when I was one of the first two people in Microsoft doing vertical industry marketing. Ballmer would ask us, "why don’t you guys handle more than one industry per person" when we’d grown to all of eight industries (e.g., I started Microsoft’s healthcare business). We’d just shake our head when we knew our competition had anywhere from 20 to 300 times as many people tackling each industry as we did. Thankfully, Ballmer finally got it when he saw how much money we were bringing into the company with this approach (last I heard, the healthcare industry effort I started was ~$500M in annual revenue). Believe me, when Ballmer gets something watch out as he is wicked smart and relentless...it just takes awhile. The successor to that vertical industry marketing org now has 2,000+ people in it. Unfortunately, it was going to take Sidewalk a lot longer to bring in positive cash flow as it had large product development costs (and this was known from the get-go).

When the original “founders” of Sidewalk pitched their business plan to Gates & co, there was an expectation that we’d sink $500M before making a profit but that we were building for the long haul and that the $67B or so spent on local advertising was a prize worth going after. Unfortunately, a few factors transpired to prevent that vision/plan from being realized. At the same time, MSN was a complete cluster*&$# and was hemorrhaging money with some failed experiments such as Bob Bejan’s “shows” that were about 10 years ahead of their time and countless other wacky content plays such as “Microsoft Dogs”. Meanwhile Sidewalk was hemorrhaging money (as planned) and there were many other media/e-commerce plays that were driving the senior execs crazy particularly when some of the them presented conflicts with corporate customers. These customers threatened to stop buying Microsoft software if Microsoft didn’t kill or spin-off some businesses (e.g., a key reason Expedia was spun out as it was an irritant to major corporate customers such as United Airlines). Barry Diller , Charles Conn and others were savvy enough to realize there was some "throwing the baby out with the bathwater" effect when Microsoft was trying to get out of content oriented businesses (some it later had to duplicate investment in later such as in Entertainment, local search, etc.).

Around this same time, Microsoft had acquired a company named eShop for the technology that became Microsoft Merchant Server. eShop also had “eShop Plaza” that came along with the deal and became MSN Shopping which was part of the still-flawed model of “online malls”. Nonetheless, one of the founders of eShop was enamored with his “online mall” and wanted to fulfill his vision of being the predominant “online mall” on the web (to this day, MSN Shopping is a 2nd or 3rd tier shopping site that has had, at best, modest success). However, Microsoft had no intentions of staffing that in a way to win on the web. As I recall, for a long time, eShop had one employee and a contractor or two who heroically kept the thing going. Meanwhile, the technology guys (Will Poole and Arnold Blinn) were what the Merchant Server product team wanted so the business guy was put into a staff position working for John Neilson who oversaw Sidewalk, Expedia, Carpoint, and HomeAdvisor. Unfortunately, at a critical juncture in Sidewalk's history, its executive champion (John Neilson) was tragically struck down with non-Hodgkin's lymphoma. John was a phenomenally talented guy who was inspiring to work for and also happened to be good buddies with Bill Gates (e.g., in Bill's wedding party) and Steve Ballmer. There's no doubt he'd be one of the three Microsoft presidents now given his talent, passion and connections. On a personal note, the day I was finalizing my new role working for John in a role that spanned his four businesses happened to be the first day he was out "sick" (I later learned just how sick he was when he didn't come back).

John's illness came at a time when his dislike of content businesses such as Sidewalk was consistent with many senior execs such as Ballmer who were questioning why we were doing content. At the same time, there was a focus on cutting costs on content businesses and make the case that some of those resources should be redirected towards the online mall concept. The fact that Amazon.com was in Microsoft's backyard probably made the shopping angle that much more attractive vs. media businesses where Bill, Steve and others had no experience. It should also be noted that the online ad business hadn't matured to where it was clear you could make a boatload of money.

Sidewalk had a super strong group of city General Managers such as Kevin Eagan, Cella Irvine, Doug Heinrich, Chris Hearne, Anne Karalekas, Moya Gollaher and Brad Struss. They had all gotten past what was the toughest interview process I’d seen of the legendary Microsoft interview process. It was Microsoft’s heyday and it could basically get anyone it wanted to join the company. One of the key premises that Frank and the founding team of Sidewalk had was that Sidewalk was going to experiment like crazy and let these high-powered GMs have a lot of freedom to innovate. This led to a natural tension between Redmond and the cities fighting for who controlled what decisions (Redmond product people were used to having the final say on all product decisions). The new GM of the group was typical of many entrepreneurs I’ve worked with who by the sheer force of will, they succeed. Implicit in this is they have a group of people who rally behind them to pull it off. The new GM didn’t have this advantage at Sidewalk where you could get people to rally behind you as the city teams and many in Redmond were deeply skeptical of him and questioned his understanding of the local/media business where he had zero experience. This led to the Redmond vs. cities war to escalate.

Just prior to the GM taking over, one of the least pleasant things I had to do in my career was shutting down the Montreal Sidewalk office which Frank had decided to do. While it wasn’t pleasant, I 100% agreed with the business rationale. I was on point to ensure that it went smoothly from a human resources and PR perspective. It wasn’t a career highlight but I was told afterwards that it was the most successful “RIF” (reduction in force) that the company had gone through. The RIF’ed employees were treated well, there was barely a PR blip, etc. My reward? When the new GM took over, he was familiar with what I had done and basically offered what I viewed as making a deal that was at odds with my beliefs. I would take over management of all of the cities (I was managing half of them at the time) with the goal of progressively reducing the city teams to non-existence. In exchange, I would take over a substantial portion of the product team. It was the first time in my career where I had an explicit fork in the road where I could either be true to myself and what I believed made business sense (Ballmer's comments provide a measure of vindication on that front) or maximize the opportunity for promotion by being someone's hatchetman. To that point, getting rapid promotions was my primary career goal and it had worked very well for me. Ultimately, I politely declined the offer. The guy who took on the responsibility I declined became the GM of MSN Shopping. He’s a guy I like a lot but didn’t have the issues I had with killing off the city teams and was rewarded handsomely for bleeding the cities.

The new GM felt he had to reign in the cities and the pendulum swung from decentralization to centralization. Some of the city GM’s (e.g., Kevin Eagan was one of the original founders of Sidewalk and had ideas coming out his ears - I'm still surprised he hasn't started his own company) had creative ideas that were money-making ideas they’d teed up in their market, however most of those ideas were killed before they could even be tested. The byproduct was constrained revenue growth and innovation which made the case even more solid why Sidewalk should be eliminated. The case became even stronger when acquisition discussions with Citysearch were enthusiastically pursued . This would free up resources to redirect towards MSN Shopping and recoup some of the investment Microsoft had made in Sidewalk via the acquisition. To his credit, the corporate development team played their hand well as the Citysearch guys knew there were issues inside of Microsoft regarding Sidewalk but not the extent of those issues and had little idea that they didn’t have to buy Sidewalk to eliminate a competitor. The Sidewalk acquisition increased the attractiveness of Citysearch’s stock (Ticketmaster Citysearch went public December 8, 1998) and has gone on to success.

The stated purchase price for Sidewalk was $240M, but $150M of that was in a clever warrant security the Citysearch guys called the "weedwacker". This warrant was designed by BD's vice chairman, Victor Kaufman, and it had a strike price that decreased as the value of TMCS stock increased, potentially delivering huge value. But it expired unexercised when the bottom went out of the market (TMCS' stock declined to $14 at one point in the crash, well above their IPO price, but below the trigger point for the warrant). In the end they paid less than $100m for Sidewalk and once again Barry Diller et al saw the value of properties that Microsoft didn't.

Postscript: Several members of the original Sidewalk team went on to become successful CEOs outside of Microsoft while a few of them stayed at Microsoft. I worked with many great people during my Sidewalk tenure who have gone on to great success in and out of the work world. Google people like Michael Goff, Richard Tait, Frank Schott, Laura Bordewieck (later Rippy), Jan Even, Mike Gordon, Dan Fisher, David Harrington, Gayle Troberman, Peter Atkins, Cella Irvine, Peggy Brown, Bill Furlong, the aforementioned city GMs and many others and you’ll see that the caliber of the team was amazingly high. It’s too bad Ballmer didn’t have more patience for that team to realize its full potential. In fairness to Steve, he was sold a story that he bought that wasn’t the complete picture of Sidewalk, however he was very open to hearing that story. Microsoft’s Internet business would be in much better shape than it is today as that talent largely left the MSN arena or the company altogether.

As for me, I dipped my toes back into the local online space last year becoming an investor in SunValleyOnline.com (a local news and information site for the Sun Valley area resort community).To my knowledge, SunValleyOnline is one of the few local online properties anywhere in the country to be making money (e.g., Citysearch is now making a profit) and is applying many of the lessons (good and bad) from Sidewalk. For example, the web user of today is much more willing and able to contribute content to a site if the right tools are in place. If you check out a site like SunValleyOnline, you'll see that 3/4 of its content are provided by the community it serves. SunValleyOnline can also leverage off-the-shelf tools rather than have to build much of the technology on its own (it still has to have some proprietary tools but far from 100%). Whether it is leveraging blogging software (WordPress) or utilizing infrastructure of others (e.g., YouTube), it can bring new tools to market rapidly. Let me share one example of the power this has had in the greater Sun Valley area.

Blaine County is the county that Sun Valley is in. For 17 years, Blaine County had tried and failed to get a new jail built including 3 failed jail bond elections. A jail bond election took place earlier this month. Prior to the election, the Sheriff and County Commission Chairman were reaching out to the local media in an attempt to raise awareness of the issues regarding why a new jail was needed (the list was long and compelling). Traditionally, if you tried to win an election in Blaine County, there were the typical tactics (newspaper ads, letters to the editor in the newspaper, etc.). SunValleyOnline (SVO) suggested a different approach leveraging the tools of the citizen journalism movement. There were two tools in particular that were suggested to the sheriff and commissioner that they took advantage of.

1. Video. The sheriff and commissioner offered to give tours of the jail to any citizen who wanted as he knew that anyone who saw the conditions his people worked in and the liability exposure the county had would vote for the jail bond. Realizing that very few people voluntarily want to go into a jail, SVO suggested shooting a video tour and posting it on YouTube/SVO. In other words if people won't go to the jail, take the jail to the people. It was far from a Spielberg production but it got the point across.

2. Blog. Naturally, voters had lots of questions about the true need for the jail and there were some conspiracy theories about the jail (e.g., it was going to enrich the sheriff) that they wanted to explain. As a voter who was neutral on the vote, I had several questions so I offered to post the questions in my blog I had about the jail. This spurred a tremendous dialogue between citizens and the commissioner answering questions, responding to rumors, etc.

The ads the jail bond campaign purchased on SunValleyOnline simply pointed to the videos and blog.

The end result? The jail bond passed overwhelmingly with nearly 80% of the vote. The sheriff credited the video tour based on the large number of comments he got as he was out in the community. It was apparent from the comments on the blogs that people who'd previously been against the jail bond changed their vote as well. The cost of using the aforementioned tools was negligible yet it had a demonstrable effect on the community. These are the sorts of things that weren't feasible in the early days of Sidewalk.

I searched my hard-drive for some of the early Sidewalk documents (back when it was still code-named "Cityscape") and found the original business and product plans. It's interesting to see how the opportunity was described and what the product vision was. Had Microsoft stuck to the plan and let the talented team pursue the opportunity, things might be very different today. Here are a few excerpts...

"We intend to play a similarly trusted role as the yellow pages and newspapers do today in consumers’ lives, by being the first best to look for an answer or a purchase. By developing a loyal set of consumers, we will create the best online advertising vehicle for local merchants and national advertisers, and capture a portion of the $67 Billion local advertising opportunity."

"To reach the comprehensiveness described above we expect will take 6 years." The reality is the plug was pulled in essentially 2-3 years before the yellow pages/local search opportunity could be tapped and before user-generated content became mainstream and would have made the cities far more cost-efficient (something Citysearch figured out) not to mention being able to do what I'd originally been hired to do -- scale Sidewalk in more efficient ways a la TV networks/affiliates after gaining insights from the so-called "owned & operated stations".

Why VCs don't invest

A former colleague of mine, Paladin Partners' Janis Machala. spoke at a recent event in Seattle and laid out the top ten reasons why VCs choose not to invest.

1.) Saying the company has no competition.

2.) Saying you will do an IPO or be bought in next year or two.

3.) Saying the financial numbers are conservative.

4.) Saying that this will be the last round of private capital needed.

5.) Arrogant entrepreneurs.

6.) The executive team doesn't have "skin in the game."

7.) No focus on milestones.

8.) Unreasonable valuations or terms.

 

I'm betting on Crayon like I bet on Jaffe 4 years ago

Crayon is “a new marketing company” launched by Joseph Jaffe, Shel Holtz & Neville Hobson of For Immediate Release fame and C.C. Chapman. I’m proud to say that if I wasn’t Joe Jaffe’s first client, I was certainly his biggest in his first year when he left working for “the man” and hung out his own shingle. At the time, I was working in MSN as Managing Director of Industry Marketing and Relations. Joe was instrumental in working on a project we called “Interactive Marketing Best Practices”. At the time, the Internet ad market was still in the tank and those that were starting to understand the power of Internet-based marketing needed some guidance on how best to use the array of tools available. Joe did a terrific job of not only creating much of the content (despite the fact that he wasn’t initially the project leader) but also doing yeoman’s work to travel the country and deliver the content that was very well received. It was one of the efforts along with the Cross Media Optimization Studies led by MSN & Rex Briggs and the Universal Ad Package (i.e., ad size standards) also led by MSN (Yahoo was also a key driver) that were critical in turning around the Internet ad market.

 

Joe was ahead of his time then and he still is. While Joe is certainly a talker/thought-leader, having worked with him, he’s also a doer. For those companies smart enough to hire Joe and his team, I’m sure they’ll get value. I don’t know Shel, C.C. or Neville but I’m certain Joe would only surround himself with people of his caliber. Joe doesn’t suffer fools (or at least not for long). One of the nails in the coffin that solidified my leaving Microsoft was seeing how Microsoft had evolved from a company of ruthlessly focused strategists/doers to having more and more corporate suckups that were threatened by (or jealous of) people like Joe. One of the people I worked with at Microsoft had worked with Joe at one of his agencies where this guy worked on a more prestigious brand than Joe probably because he was an effective suckup there too. He had a chip on his shoulder about Joe as Joe was well on his way to becoming an industry thought leader while this guy had only honed his suckup skills during the time Joe was building his reputation in the industry. This guy had the fantasy that MSN had made Joe a thought leader. While I’m sure it didn’t hurt to give him visibility, Joe was going to be a thought leader sooner or later regardless of what MSN did.

 

The Crayon Manifesto sounds like Joe talking. If you are considering working with Crayon, it’s worth reading the manifesto a few times. I would give Joe only the highest recommendation professionally and personally. Here are a few excerpts from the manifesto.

 

1. We are shape shifters. Winning in today's ever changing and volatile landscape requires versatility, flexibility and the ability to morph on demand and as needed. We are a different kind of company that mashes-up a combination of consulting, agency and advisory services. We'll also do windows and serve tea if required.

 

2. We are not superior and we are not subservient; we have strong and defined points of view and we look for clients of similar ilk. We want to be challenged and we want to challenge you. We're not yes men or women and never will be. If you can't handle the friction, passion and intensity, we'll gladly refer you to another company.

 

5. If you're still with us at this stage, you're still far from the comfort zone of convention. We live and die by our ability to generate the kind of prolific thinking, original ideas, differentiated strategy and key insights that you need to be and stay competitive in this business. We also demand to be compensated accordingly. Performance-based pricing is not an option; it's a necessity.

 

7. Our culture is one which not only believes in risk-taking and experimentation, but embraces it as a vital part of our DNA. We would rather beg for forgiveness than ask for permission. Our team is individually and wholly empowered to make their own decisions and to take matters into their own hands. What doesn't kill us will make us stronger and you better.

 

8. We are biased in some matters and unbiased in others. Our master is the customer; our master is the truth; our master is change. We fully intend to bias against the status quo and represent the road not taken with 110% of our minds, bodies and spirits. If you need a compartment or label, then consider us media or communications biased and conversation or solution neutral.

-- You have enough yes-men telling you to tweak the status quo."
-- You can't take incremental steps and expect an exponential result

 

10. Talent (together with vision, culture and creativity) is ultimately what differentiates us from the shop next door. If you have new marketing blood pumping through your veins and have the kind of passion, intensity and originality that is waiting to explode upon impact, inquire within. There will never be a "no vacancy" sign hanging on our door. And we'll never downsize, rightsize, leftsize or upsize based on the flavor of the month or the direction the wind is blowing. If you're a square peg, we'll cut you a square hole. If the role isn't defined, we'll create one for you. It's that simple.

 

13. Following on from this, is the power and importance of direct and honest conversation and communication. e-mail sucks. It's ambiguous, lacks personality and encourages political shenanigans. We discourage "cc" and we outlaw "bcc" We try and call it like we see it, and if that means ruffling a few tail feathers along the way, so be it. If we can foster a culture of integrity, truthfulness and conviction, we believe it will naturally spillover to consumers and reflect accordingly with the brand.

 

Crayon is the first company to launch in Second Life. I have to admit that Second Life is something I don’t “get” yet. I’m sure I’m like others who don’t get it in that I have never been into video games and I don’t have enough time to do what I have passion for in my First Life let alone a Second Life. All the same, I think highly of John Zdanowski who recently took on the CFO role for Linden Labs (owner of Second Life) and if it’s something that Joe Jaffe takes seriously, it warrants attention. At some point, I’ll have to dig into it and learn more.

 

As an interesting side note, what a screw-up by Crayola to not “own” the word Crayon! This is the 2^nd company I know of using the “Crayon” brand name (the other is in stealth mode so I can’t describe what they do other than it is completely different than this Crayon).

5 screw-ups and Ten Rules from a high-flying startup CEO

Liz Gannes recaps a talk on a high-flying startup whose CEO was remarkably candid in a recent speech. What’s particularly interesting is this same CEO wrote a much reach piece entitled Ten Rules for Web Startups (see excerpts below). Here’s the list of screw-ups…

Williams went through a tidy list of the top five Odeo screw-ups:

1. “Trying to build too much” – Odeo set out to be a podcasting company with no focus beyond that.
2. “Not building for people like ourselves” – For example, Williams doesn’t podcast himself, and he says as a result the company’s web-based recording tools were too simplistic.
3. “Not adjusting fast enough” – The company thought its comprehensive web-based strategy would win out over the competition, primarily Apple, in the long term. “It turns out long term is not soon enough for a startup if you’re trying to get a foothold.”
4. “Raising too much money too early” – Williams seeded the money with $70,000 of his own money, and after the TED excitement added another $100,000. After he tied up over a million in angel funding, a term sheet came through from Charles River Ventures at three times the angel round valuation. They took the money.
5. “Not listening to my gut” – “When you’ve got a bunch of money and you’ve hired a lot of people and you’re talking to your board and you’re talking to reporters, your gut can get drowned out.”

 

Ten Rules for Web Startups

The following are the ten rules with a couple of samples of his rules. Click here for the details behind each.

#1: Be Narrow

Focus on the smallest possible problem you could solve that would potentially be useful. Most companies start out trying to do too many things, which makes life difficult and turns you into a me-too. Focusing on a small niche has so many advantages: With much less work, you can be the best at what you do. Small things, like a microscopic world, almost always turn out to be bigger than you think when you zoom in. You can much more easily position and market yourself when more focused. And when it comes to partnering, or being acquired, there's less chance for conflict. This is all so logical and, yet, there's a resistance to focusing. I think it comes from a fear of being trivial. Just remember: If you get to be #1 in your category, but your category is too small, then you can broaden your scope—and you can do so with leverage.

 

#2: Be Different

 

#3: Be Casual

 

#4: Be Picky

 

#5: Be User-Centric

 

#6: Be Self-Centered

 

#7: Be Greedy

 

#8: Be Tiny

 

#9: Be Agile

You know that old saw about a plane flying from California to Hawaii being off course 99% of the time—but constantly correcting? The same is true of successful startups—except they may start out heading toward Alaska. Many dot-com bubble companies that died could have eventually been successful had they been able to adjust and change their plans instead of running as fast as they could until they burned out, based on their initial assumptions. Pyra was started to build a project-management app, not Blogger. Flickr's company was building a game. Ebay was going to sell auction software. Initial assumptions are almost always wrong. That's why the waterfall approach to building software is obsolete in favor agile techniques. The same philosophy should be applied to building a company.

 

#10: Be Balanced

 

#11 (bonus!): Be Wary

Top 5 Tools For Generating Sales Leads

From a podcasting news site, this talks about the top 5 sales lead generators.

When asked, "Which offers are 'very effective' for generating high-quality leads?" marketers in all three areas studied - technology services firms, and business software and hardware - put Blog and the Podcast in the top five.

The information comes from Marketing Sherpa's annual survey of business technology marketing executives. About 1,900 responded to the survey.

Top 5 Tools For Generating Sales Leads

·         1. Free Trials -- Business software marketers ranked free trials extremely highly, with 54% calling trials very effective.

·         2. Webcast -- At 41% this was another favorite for software marketers, however technology services and related hardware firms also ranked webinars at 33% and 31% respectively.

·         3. White paper -- All business technology marketers rated white papers fairly evenly, giving white paper offers ratings ranging from 31-36% 'very effective.'

·         4. Blog -- 35% of software and ASP marketers rated their blog as very effective, as did 33% of technology services firms. However, just 19% of hardware companies felt that a corporate blog was effective. This may be because general business executives are more likely to read a blog, while IT staffers may not.

·         5. Podcast -- Last year the concept of a podcast was barely on the technology marketing map. By June 2006, 22% of software marketers who'd given a podcast called them 'very effective' lead generation tools. Perhaps IT professionals are more likely to be in an early adopter community that might listen to a podcast.

Source: Marketing Sherpa (PDF)

Venture 2.0

In light of my recent post on what I see as the most creative solution to fill the funding gap between angels and VCs, Peter Rip’s post on Venture 2.0 is worth reading. In the first part, he does a preamble on Venture 1.0 that’s worth a read to better understand the current landscape. Here’s his intro to the series…

 

This the first in a series of posts on the idea of "Venture Capital 2.0."  I thought it was appropriate to first set the stage of Venture Capital 1.0 as the point of contrast.  This first post is obvious stuff to those of us who have been in the business for a while, but less so for the casual observer.

 

It will be interesting to see if he comments on the implications of fund sizes on the current landscape. In a nutshell, most Limited Partners (“LPs”) don’t want to invest less than $10M at a pop and don’t want to own more than 10% of any given fund. This makes the minimum fund size $100M. A fund can only manage so many deals at a time due to board commitments, etc. thus they typically need to invest $5-10M at a pop. That figure is no issue for some sectors but it is overkill or premature for others leading to unnecessary dilution for founders and current shareholders.

 

New venture investment model launched at Keiretsu Forum event in Sun Valley

One of the main reasons I have been light on blogging of late is my input to a new fund model that has been formed by Oracle and Microsoft veteran, Doug Woodward. Among other accomplishments, he was a founder of Microsoft Consulting Services and has worked with a number of startups in CFO roles. His firm, SmartStarters, and his board have been behind what I think is one of the most creative approaches to filling the funding gap between angel investors and institutional investors. Read the article I’ve excerpted from SunValleyOnline below for more details on the fund as well as the event that I catalyzed the Keiretsu Forum to put together. The event pulled together some of the best deals within the Keiretsu Forum network to present to a group of investors who descended upon Sun Valley last month.

 

Like the famous Allen & Company event held in Sun Valley every July, the most interesting discussions and deal-making happen outside the formal program. Though the attendees at the Keiretsu Forum-sponsored event weren’t household names like Gates, Buffett, Murdoch and the Google Guys, there were movers and shakers in the entrepreneurial world from Seattle, Silicon Valley, Washington DC and Atlanta. One of the most interesting side conversations creating buzz was a new venture funding model that fills a growing funding gap between angel investors and venture capital.

The formal agenda operated like a typical angel investor event with a sprinkling of what makes the Keiretsu Forum unique. That is, they have a major focus on relationships and collegiality as well as philanthropy.

Randy Williams, the founder of the Keiretsu Forum (KF) exemplified this by sharing his passions (he must have read “Never Eat Alone”) and his vast rolodex. KF prides themselves on doing whatever it can to help the companies who go through their screening process. During the presentation given by Martin Hedley (CEO of Positron Systems), Randy jumped in with how a contact he had in New Mexico in the aerospace sector could help Positron since they focus on aerospace (Positron’s intellectual property came out of the Idaho National Laboratory and has the potential to revolutionize aircraft maintenance).

The philanthropic facet of the Sun Valley angel investor event was evident at a fireside chat given by the extraordinary couple Paul and Debbi Brainerd. Paul is a retired tech industry legend who founded Aldus. Aldus and Paul are credited with creating the desktop publishing industry with the landmark product PageMaker. Aldus was purchased by Adobe for several hundred million dollars in 1994 launching Paul into the philanthropy world where he’s had an enormous impact. Even before the rise of the Gates Foundation, Seattle has been recognized as the most dynamic place for philanthropic innovation. Paul and Debbi spoke about two of the organizations they have founded – IslandWood and Social Venture Partners.

 

After the fireside chat, the buzz along with the Brainerd chat was the aforementioned new venture model. Watchers of the capital markets for startups have observed that Venture firms have ‘receded’ to later stage deals due to risk aversion and size of fund. That is, most funds these have more than $100M in the fund leading to the funds needing to invest $5-10M per deal which is more than many companies need or want. This has led to a shortage of funds for earlier stage deals since VCs are moving to later stage deals (so called “expansion stage” deals) and angel investors are few and mostly on the sidelines after getting burned during the dotcom era. The paradox is that fundable deals require real progress in financial management, corporate operations, product marketing and especially sales yet young companies can’t afford the services of high quality financial, sales, and marketing professionals—as hires or as consultants.

"I've seen this time and again with the 50 odd startups we’ve worked with", stated Dave Chase, Managing Partner of venture consultancy Altus Alliance. "We see a great young company stymied by this funding gap. We have long endorsed a “go slow to go fast” philosophy that focused on effective revenue generation as a key part of enabling early stage companies to gain initial traction but even this takes the right type of talent to survive the days of the tough initial sales that a startup must achieve in order to survive. "

Doug Woodward, a veteran of Oracle, Ernst & Young and Microsoft, is the architect of the new model that he proposes is a solution to this via an “operating fund” that finances acquisition of the necessary talent for young companies. The fund provides “execution” methodologies to early-stage companies for key processes (i.e., equity and debt financing, accounting, sales management, product marketing, etc.) that enables young companies to mature rapidly thus reducing execution & market risks. The byproduct is it produces emerging companies that are far more ‘fundable’ and have much higher probability for success. Woodward is currently working with angel investors and institutional investors prior to rolling out the fund to prospective portfolio companies. Contact information for Woodward’s firm can be found on their website.

Take Care of the Big Rocks First

This little story is applicable both for running a startup as well as taking some breaks…

 

A philosophy professor stood before his class and had some items in front of him.

When the class began, wordlessly he picked up a very large and empty mayonnaise jar and proceeded to fill it with rocks, rocks about 2" in diameter.

He then asked the students if the jar was full? They agreed that it was.

So the professor then picked up a box of pebbles and poured them into the jar. He shook the jar lightly. The pebbles, of course, rolled into the open areas between the rocks.

He then asked the students again if the jar was full. They agreed it was.

The professor picked up a box of sand and poured it into the jar. Of course, the sand filled up everything else.

He then asked once more if the jar was full. The students responded with an unanimous - yes.

The professor then produced two cans of beer from under the table and proceeded to pour their entire contents into the jar - effectively filling the empty space between the sand. The students laughed.

"Now," said the professor, as the laughter subsided, "I want you to recognize that this jar represents your life. The rocks are the important things - your family, your partner, your health, and your children - Things that if everything else was lost and only they remained, your life would still be full.

The pebbles are the other things that matter, like your job, your house, and your car.

The sand is everything else. The small stuff."

"If you put the sand into the jar first," he continued, "there is no room for the pebbles or the rocks. The same goes for your life. If you spend all your time and energy on the small stuff, you will never have room for the things that are important to you. Pay attention to the things that are critical to your happiness. Play with your children. Take time to get medical checkups. Take your partner out dancing. There will always be time to go to work, give a dinner party and fix the disposal.

"Take care of the rocks first, the things that really matter. Set your priorities. The rest is just sand."

One of the students raised her hand and inquired what the beer represented.

The professor smiled. "I'm glad you asked. It just goes to show you that no matter how full your life may seem, there's always room for a couple of beers."

 

 

Basis for Altus' methodology published in Harvard Business Review

Regular readers of this blog know that we (Altus Alliance) have been working with Mark Leslie for 2 years putting into practice the framework that Mark and Chuck Holloway have been developing over the last few years that we anticipated would be ground-breaking for the tech startup world. Mark has previewed this framework with some select audiences in the venture community which has led to several people very positively about it. These have included VC’s such David Cowan, Ross Mayfield, Tim Oren, and Jason Ball. There was also a recent post by Ed Sim on “When to hire a VP of Sales” that espoused ideas strikingly similar to Leslie’s framework. One of the most popular posts on this blog has been “What does Vinod Khosla know about Web 2.0 that others don't?” that recapped my take on the applicability of Leslie’s framework in the Web 2.0 context. With the recent publication, we have drafted a news brief that we’re sending out to a few of our contacts that I’ve previewed below.

 

Venture Consultancy, Altus Alliance, delivers on the promise of the Sales Learning Curve – published in the Harvard Business Review this month.

 

For the last 3 years, over 30 companies have sought out a new method to grow their companies and challenge the traditional strategy of startups who are taught to raise as much money as possible, grow a sales force and “get big fast.”  One of the core elements of the new approach is that the cheapest and most sustainable form of capital was revenue.  Another, is that when you introduce new products, there’s an inevitable period of “bumping around in the dark” while you refine your product, marketing and sales strategy and execution where you want to avoid over-investing in sales resources. In other words, slow down the initial trajectory in order to speed up the path to scalable and profitable revenues. These guiding principles formed the basis of a venture consultancy (Altus Alliance) focused on helping early stage companies gain revenue traction in a manner that preserves and expands their limited cash reserves.

 

At the same time, in the Bay Area, the former CEO of Veritas (Mark Leslie who is a current Stanford Graduate School of Business professor) was formulating a ground-breaking framework published this month after years of development in the Harvard Business Review (HBR). This framework had a strikingly similar premise to what Altus was implementing with its clients in Seattle. Mark is a member of an extremely small cadre of entrepreneurs who have taken a company from zero revenue to well over $1Billion while sitting in the CEO seat. With billions of dollars of venture capital residing down the street from Stanford University on Sand Hill Road, Leslie and his Stanford colleague Charles Holloway (the Kleiner Perkins Caufield & Byers Professor of Management) have been attempting to answer a fundamental question, “why does it always take longer and cost more to build a high-tech company than anyone ever expects?” For all the intellect, experience and graduate degrees in the venture capital industry, the sad truth is that 80 percent of venture capital investments do not pan out.

 

The answer (at least a key one), according to Leslie and Holloway lies in the Sales Learning Curve laid out in the pages of the HBR which they hope will prove as powerful a construct in the high tech sector as the Manufacturing Learning Curve (MLC) was to the manufacturing sector at an earlier time. Today, manufacturers wouldn’t think of running their operation without tracking the MLC because of the dramatic improvements in productivity that it offers. Similarly, Leslie and Holloway believe the SLC holds the potential to change fundamentally how high tech companies are managed, and they believe that it will lead to more high tech companies reaching the promised land of “positive free cash flow.”

 

“Because new-product launches often take longer and cost more than expected, many promising offerings are prematurely aborted. Smart companies give themselves time and money enough to climb the sales learning curve before ramping up the sales force.” Harvard Business Review, July 2006

 

Leslie refers to the type of sales people you need at the early stages as “Renaissance Rep” as opposed to “Coin Operated Rep” that you want when you have a proven, repeatable sales process. Renaissance Reps have strong entrepreneurial and product management skills and also must be resourceful, able to develop their own sales models and collateral materials as needed. In addition to its SLC practice, Altus has set itself apart by offering its clients direct assistance as “renaissance reps”, closing initial deals, iterating and improving on the initial sales process and generating initial revenues.

 

In 2004, the principals of Altus Alliance and Mark Leslie had the opportunity to meet and found great commonality in their respective experiences. Mark’s SLC thought leadership provided a more formalized structure to the approach Altus had been using in its work with clients. Since that first meeting, Altus became the first firm to become practitioners of the SLC framework. This approach has been at the core of Altus’ approach (even before hearing of the SLC) and has led to numerous successes with its clients including four successful exits in the last year alone.

 

 

The following is an abstract of the Sales Learning Curve paper published in the Harvard Business Review that I highly recommend reading (you can get an earlier version on our website from when Mark presented at a CEO briefing we hosted):

The Sales Learning Curve by Mark Leslie, Charles A. Holloway
Harvard Business Review - July 2006 Issue Reprint # R0607J

When a company launches a new product into a new market, the temptation is to ramp up sales force capacity immediately to gain customers as quickly as possible. But hiring a full sales force too early just causes the firm to burn through cash and fail to meet revenue expectations. Before it can sell an innovative product efficiently, the entire organization needs to learn how customers will acquire and use it, a process the authors call the sales learning curve: The company--marketing, sales, product support, and product development--and its customers transfer knowledge and experience back and forth. As customers adopt the product, the firm modifies both the offering and the processes associated with making and selling it. The more a company learns about the sales process, the more efficient it becomes at selling, and the higher the sales yield. As the sales yield increases, the sales learning process unfolds in three distinct phases--initiation, transition, and execution. Each phase requires a different size--and kind--of sales force and represents a different stage in a company's production, marketing, and sales strategies. Adjusting those strategies as the firm progresses along the sales learning curve allows managers to plan resource allocation more accurately, set appropriate expectations, avoid disastrous cash shortfalls, and reduce both the time and money required to turn a profit.

Sun Valley Angel Investor event

Yesterday, we wrapped up the angel investor event in Sun Valley orchestrated by the Keiretsu Forum. The weekend offered the attendees a chance to golf, hike, raft, bike, relax, etc. before heading home and making way for Gates, Buffett, Murdoch, the Google guys and the rest of perhaps the biggest collection of billionaires in the world at the Allen & Company conference that takes place each year in Sun Valley. Given the short notice of the event, it was well attended with angel investors coming in from Seattle, Boise, San Francisco, Denver, D.C., Atlanta and Sun Valley. They heard presentations from 3 companies in a wide range of arenas – Voxilla (operates in the VoIP space), Festival Media (trying to do what NASCAR did for stock car racing in the festivals business), and Positron (exclusive licensee of some killer Dept of Energy IP in what’s called “non destructive testing”). They all did a nice job presenting but I was most intrigued by Positron. If they can execute, they are going to be picked up by someone like GE.

 

Friday evening, I hosted a gathering at our place that was highlighted by a fireside chat with Debbi and Paul Brainerd. Paul is credited with creating the desktop publishing industry by founding Aldus which created the landmark PageMaker product. Aldus was purchased in the mid-90’s by Adobe for over a half billion dollars. Paul turned his attention towards philanthropy and became one of the key people who turned Seattle into a hotbed for philanthropic innovation along with a few others such as Scott Oki (longtime MSFT exec who started Microsoft’s international business), Jeff Brotman (co-founder of Costco) and of course Bill Gates. Paul and Debbi are amazing people who’ve done tremendous work with the Brainerd Foundation, Social Venture Partners, IslandWood and many other organizations. They spent most of their time talking about SVP and IslandWood – both stellar organizations I’ve had first-hand exposure to.

 

It was fun to see all of the relationships that were built throughout the few days people were in town. As I’d hoped, I thought there’d be benefit in cross-pollinating angel investors from around the country. There were already discussions about doing this more often as well as having collaboration from a few angel groups around the Northwest that are interested in joining forces with the Keiretsu Forum. For example, there is a great angel group in Boise that has many seasoned entrepreneurs and successful executives who’ve moved to the Boise area. One of their leaders (Phil Bradley – CFO of ProClarity which was recently purchased by Microsoft) attended the event and is the kind of seasoned entrepreneur enriching the startup community in Idaho which is still growing. He saw a number of synergies with the Keiretsu Forum that could benefit Idaho’s startup ecosystem.