Silicon Valley Frontlines

Pitching to Prospective Investors ...

In the past few weeks I've been sitting in on some funding pitches to angel and venture capital investors by a dozen or so startups. Its pretty interesting to be in this position as I'm usually the one pitching, not the one observing. And its startling to see some of the approaches - some are sophisticated but most are not. Very not! Some observations about how some of these guys could improve their chances - in some cases by a considerable amount!

First, listen to the feedback and questions and don't paint yourself into a corner. For example, one startup focused entirely on a market defined by Novell Groupware. This is rather like saying you're focusing entirely on the market for horse-drawn transport. Yes, you are right, there is no competition. There's a reason why - its not a large and growing market. Its a dying market. But when the prospective investor pushed back and said this  - and that they only focus on large and growing market opportunities - the startup's response was to insist that this was the right strategy and argue the point. When I asked if their solution could be ported to other platforms such as Microsoft's Exchange / Outlook suite they said "absolutely". They would have been far better served to have positioned themselves as addressing the overall market and - if appropriate - prove the concept with Groupware, but as a stepping stone to greatness!

Second, do a demo of the product or service. Its the best ad for what you really do. But make sure it works and works easily. Don't arrive lugging a big screen TV and fumble around trying to set it up while you're presenting. Seems basic - but I just saw it happen! Even if a demo is not in your plan, be ready if the prospective investor asks for it. One startup was so unprepared for this request (it should have been a simple web access to a site) that they couldn't log in because no-one knew the user ID and password! Yikes!

Image by YanivG via Flickr

Third, don't use one of those stupid red laser pointers in a small group setting and don't wave it around all over the place. You're standing right by the screen. People can read. A simple hand gesture gets the point across - not a laser lightshow. You need the investor to focus on your message, not duck to avoid being blinded!

My guess is I'm gonna have a lot more of these stories. Being prepared and properly coached is something that can never be undervalued. Coincidentally I can help with this - but some things are simple common sense, are they not?

Fred Wilson on Venture Capital Returns

As an entrepreneur its always good to know what kind of financial outcome or return your investors are looking for when the put their money in. The better you understand their motivations and dynamics the better you can line up the right investor and have all parties goals in alignment.

Fred Wilson, a partner at Union Square Ventures, gave a good view of this in a post on his "A VC" blog over the weekend. You can read the whole thing here.

At USV, which is an early stage or "seed" investor, Fred's rule of thumb "is "1/3, 1/3, 1/3" which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments". He then goes on to explain how the returns on that last 1/3 need to average around 7.5x the money they put in to get the returns they and their investors expect on their portfolio. Ideally, they get one big home run - big enough to cover all the money invested in the portfolio - with the other winners generating the overall return. Of course, it depends on a bunch of other factors - size of investment (a 10x return on a $1m investment has a lot less impact than a 5x return on a $10m investment), etc. 

Image via Wikipedia

So in a baseball analogy, you're considered pretty good if you can consistently hit .333 with the occasional home run, triples etc. within that average. Of course, its not cricket, which is a real bat and ball game and where you have to do some substantial scoring or bowling to win. But I digress ...

For an entrepreneur, the problem is that you don't have a portfolio approach you can take. This - your startup now - is it. You have to win. You have to hit the home run in your only at-bat. Being in the bottom 2/3 of the investor portfolio means you lose - your time, your effort and whatever sweat equity (founders stock) you put in. In fact, its a bit worse than that because you'll usually own common stock and the investors will own preferred stock - meaning they will get their money (and sometimes multiples of their money) back first before you see anything (except in an IPO where everyone converts to common at the IPO event). 

Thats the way it is and, as always, he who has the gold makes the rules ...!

Related articles by Zemanta

• Fred Wilson: Founder Dilution - How Much Is "Normal"? (via A VC) (avc.com)

Escapism Set in the Valley!

I was at the Four Seasons hotel in East Palo Alto yesterday evening for a talk and book-signing by Barry Eisler, launching his new novel Fault Line, set in Silicon Valley.

For pure escapism and some well developed characters and  plots, Barry's six prior novels featuring John Rain are a lot of fun. Rain is a conflicted half-Japanese, half-American ex-government agent turned contract assassin who specializes in making his hits look like the target died of natural causes. In one book Rain kills a muscle-bound Japanese yakuza in his own health club by winning his confidence then crushing his chest with the weight bar while he bench presses. Bummer of a workout.

Eisler was himself a former CIA covert agent and then lawyer before becoming a writer. Fault Line departs from the Rain character, introducing pair of estranged brothers, one of whom is a Silicon Valley lawyer and the other is a "military liaison element". Set in the Valley, the book makes use of a lot of the locations we recognize, lending a familiarity and connection to the work. 

Barry is an engaging speaker and his signings are popular. Organized by Kepler's Bookstore, the event was held at the Four Seasons to accommodate what was probably 200 fans. Barry knows the General Manager at the hotel, Tracy Mercer, very well as Tracy held the same position at the Tokyo Four Seasons when Barry lived there some time ago and they became friends. Tracy kindly donated the space and provided complimentary hors d'oeuvres and wine. Nice gesture from a guy whose hotel is the scene of two killings in the book (and whose business must be hurting in the recession)! Barry also has his own website and you can also see there some previews of the first John Rain movie, premiering in Japan next month.

I'm starting my signed copy of Fault Line tonight, so I hope I'm in for a treat. If you're interested in the book and, given Barry's support for local Valley businesses such as the much-beloved Kepler's in Menlo Park and next-door Cafe Borrone (where Barry wrote sections of previous books), please get it from Kepler's or M is for Mystery Bookstore in San Mateo or another independent local bookseller - or order online from Kepler's. Yes, more expensive than Amazon, but support the independents and the Valley economy!

Measuring Sales Effectiveness in Startups and Beyond ...

This is a post co-written with Robert David, an experienced Sales executive for whom I have the highest regard. Feel free to contact Robert via LinkedIn or contact me via the email link on my blog home page to discuss this and other sales-related topics.

Not sure who first said, "you can't manage what you don't measure," but in looking at a company's 'sales effectiveness', you'll need to both manage and measure. Applies to a lot of other functions too, of course!

According to Wikipedia, "Sales effectiveness refers to the ability of a company’s sales professionals to “win” at each stage of the customer’s buying process, and ultimately earn the business on the right terms and in the right timeframe." In other words, its a process at which you have to win at each step to ultimately close the deal you want. And as a process, with the tools available today, it lends itself to an array of measurements that can be used to manage it. It's one of the key areas in any startup - the health of the pipeline and the effectiveness of the organization managing it.

Improving sales effectiveness is not just a sales issue - it’s a company-wide issue. It requires deep collaboration between sales and marketing to understand what’s working and not working, and continuous improvement of the knowledge, messages, skills, and strategies that sales people apply as they work sales opportunities. In fact, it extends beyond sales and marketing - particularly in a startup - EVERYONE is in sales and responsible for sales success. Engineering and development is - the product needs to work and solve the customer problem. Customer support is - keeping the customer happy and ready to buy more. Finance, professional services ... all of them!

As a start, here are 3 actions that you can do take immediately to come up with a rough measure of your firm's sales effectiveness:

1. Pipeline movement:

Most high tech organizations have moved away from relatively simplistic Excel-based pipelines to SaaS-based (on-demand) systems like Salesforce or Netsuite with sophisticated analytics and management tools.

Start by looking at your individual sales rep's pipeline, by different sales stage. There are tools to see the 'movement' of deals from the first stages of engagement and qualification through to the final stages of closing the deal.

Create a metric that helps illuminate the positive (or negative) movement in the sales funnel. Rank order your reps and interview your reps that are succeeding in moving their deals along. What is working in terms of their sales development and what can be shared with the rest of your sales team.

On quarter over quarter basis, rate your pipeline movement on a 1 to 10 scale: 1 means 0% deals are not moving forward. 5 means 50% of your deals are moving forward. 10 means 100% of your deals are moving forward.

Sun Finally Throwing in the Towel?

Image by JulianBleecker via Flickr

In a post last month about cloud computing I said "For the traditional box sellers - Sun, NetApp, HP, Dell etc - its bad news. No longer will Sun make billions in revenues from companies each building out their infrastructure, as they did in the dot-com bubble."

Tonight comes news that IBM is in talks to buy Sun and that Sun has been actively shopping itself to potential acquirers. While its a shame that a company that was once one of the hottest in the business can't make it on its own any more, its not a surprise given the trends in the market andtheir failed strategies of the past. Example: Cobalt, acquired for $2bn in 2000 and the business discontinued by Sun in 2003. Now Sun's entire market capitalization is just $3.7Bn, for a company with $13Bn in annual revenues and $2.6Bn in cash on its balance sheet. Take out gun, shoot both feet off and, for good measure, do it again.

Not much better news for HP, mentioned in my quote above. In the last week Cisco announced its own range of blade servers, marking a direct frontal assault on their former close partner, HP. I know who I'm betting on and its not HP.

The hardware business in Silicon Valley will see radical changes over the next few years .... but the valley will continue to evolve and grow in other directions as it did with creating Google, Yahoo and Ebay and those new giants we have yet to see emerge. The talent, the money, the environment, the ideas - its still here!

Financing Your Startup with Debt - Good or Bad Idea?

Image by DanielaNob via Flickr

If you're an early stage company at some point you may consider financing your business with debt as well as - or instead of - equity.

There is no simple right or wrong answer about taking on debt as, with so many things in startup land, it depends ... on the company's stage of development, the availability of other funding sources, etc.

And as usual with banking, the less you need it the more available it often is.

Over the next few weeks I'll explore some of the factors to consider in looking for and taking on debt in your startup.

However, remember that debt is not like equity and there is a requirement of regular repayment of the principal along with the interest.  At some level its the same as a mortgage on your home - you repay principal and interest monthly (perhaps starting after some months of grace period) and therefore you need to be comfortable that you will have the ability to repay this debt even if the value of your business declines. You therefore need to be very comfortable that the reason to borrow is to use the loan as a bridge to a key event or milestone - a sale of the business, completion of an equity funding round, achievement of consistent positive cash flow in the operations of the business, etc.

I am not a fan of borrowing to generically "extend your runway". Unless you have a clear and achievable goal with a high probability outcome that the debt will bridge you to, then you will have simply created a pier and when you plough into the water you'll be in a lot deeper than when you were dabbing your toes in at the water's edge!

So, Rule #1: Use debt only to build a bridge, not a pier!

There are (Far) Worse Places to be Right Now!

A few years ago Paul Graham (now with Y Combinator) wrote some pieces about Silicon Valley and whether it could be reproduced elsewhere, and pointed out some of the things that make the Valley what it is. When it comes down to it, though, he rightly says its about people. The right people. Specifically, rich people (aka investors) and nerds. And specifically young nerds who are attracted to the universities, the environment, the lifestyle, the buzz and the general nuttiness. Even the investors don't want them to be somewhere else - Valley investors want them here, close by where they can reach and meet them at any time.

This struck me again today at a visit to Plug and Play Tech Center in Sunnyvale. To be successful, a huge number of startups from outside the Valley - from Europe and Asia - are trying to establish roots here because they know if they want to take the tech world by storm they have to be here. Many of them set up at Plug and Play, and there are many more that set up somewhere else in the Valley. To me this is a huge thing - despite the recession, despite the economy, THIS IS WHERE TECH PEOPLE WANT TO BE!

There are, of course, a lot worse places to be. ORC Worldwide and Business Week just last week published a study on the World's 50 Worst Places to Work, "based on a set of criteria that includes levels of pollution, disease, political violence, and availability of goods and services". I don't necessarily agree with the list, but I am pleased that some I think of as terrific places to work (Prague, for example) are no longer on the list. Anyway, here are the top 10 worst places and if you're in the Valley then be glad you're here. I am!

The worst: Lagos, Nigeria
2. Jakarta, Indonesia
3. Riyadh, Saudi Arabia
4. Almaty, Kazakhstan
5. Mumbai, India
6. New Delhi, India
7. Nairobi, Kenya
8. Bogota, Colombia
9. Ho Chi Minh City, Vietnam
10. Chennai, India.

.... and a bunch more Chinese and Indian cities follow.

Upside of the Downside ....

In San Francisco today for a lunch event with a presentation from Come Lague with Nueva Ventures about raising money for startups in this environment. What struck me is the sense of déjà vu for someone (me) who has been in the Valley for many years.

The market is basically saying that startups have to get back to fundamentals – tangible value propositions, bootstrapping mentality, friends and family funding, work for equity and nominal cash only for a while…. You know, this is how startups used to be 15 – 20 years ago in the Valley. People just seem to have forgotten this in the easy money days of the dot-coms of the late ‘90s and the internet-based social networking boom more recently. No doubt they’ll forget it again in the future, but right now this is where its at.

The good news today is that there are many, many more creative ways to build a business than ever before, and many more tools and resources to available to become successful. And now more people with great skills and talents available to help make it happen – the upside of the downside in the Valley!

Still, cash at some level is a necessary ingredient. I think Come’s firm, as a newer kind of “micro-cap” VC, has an interesting niche to help promising startups bridge between the bootstrap/friends and family/angels stages and getting investments from the bigger VC’s. They invest $100k - $1m or more at an early stage, sufficient to help entrepreneurs prove a concept, get traction in the market and so on before going to the big guys for their funding to then build something big from it.

In passing, one comment made at the lunch … something like, for startups, “the less the CEO is paid the greater the chance of success”. I don’t know if anyone has actually studied this but it’s an interesting assertion. Having a passion for the business and being hungry (not starving, perhaps, but motivated) for success THEN brings the financial reward. Not that I would turn down the big money offer mind you….!!!

Some Tech is Still Alive and Well - Part 1!

OK, well not all of it. But amidst the gloom of layoffs and down-sizing here in the Valley there are still some tech sectors doing well.

One such includes the companies who build and deploy on-demand software, often called "SAAS" (software-as-a-service) vendors. In this context, "on-demand" literally means that - these companies provide software-based services to their customers on a pay-as-you go, use-just-as-much-as-you-need basis.

This is a fundamentally different model to the traditional old-style software vendors such as Oracle, the former PeopleSoft, the former Siebel, SAP, Microsoft (for enterprise level applications) and the like. Those guys still rely heavily on selling you a very expensive (hundreds of thousands of dollars or more) one-time license for the right to use their software application "in perpetuity" and then charging you, directly or through partners, a significant fee to implement the application and then charging you 18 - 22% or more each year thereafter to maintain and support the software. While this last item technically is optional, woe betide you if you don't sign up because sooner or later your mission-critical app will stop working and then you're hosed (and Mr. Ellison will gladly charge you a fee equal to all the years maintenance you missed if you want to go back).

So what's your TCO (Total Cost of Ownership) over 5 years? $500,000? $1,000,000? At least twice the cost of the original humongous license fee! Yikes! No wonder about the yachts. At least they don't demand my firstborn as well ... yet.

How does the on-demand model work? Well, typically it's a per-user, per month fee. Salesforce.com, the pioneer of this model, charges you from just $69 per person per month for their entry level package. Their application enables sales people in a company to manage and track their entire customer and opportunity pipeline through to closed deals, and customer support people to track, manage, service and support them. Got 50 sales and customer support people using this - and that makes you a pretty good sized business? Then its less than $3,500 a month. What's your TCO here for 5 years? $200,000 or so. You may have some implementation costs upfront but its usually around process design and definition - far, far less than the perpetual license guys.

Appirio, which sells a plug-in to the Salesforce platform for time tracking and professional services project management, charges just $20 per user per month for that. Let's see ... the cost of maybe one latte at SBUX a week. OK, its on top of SF.com's charges - but you get even more!! How cool is that!

Oh yes, hidden costs too. For the perpetual guys you'll need at least one, maybe more, dedicated in-house IT people to support it. For on-demand, typically no-one. No-one.

Remember I said "former Peoplesoft, former Siebel". OK, they succumbed to Larry's voracious appetite. But in reality the business models were broken.

In Part 2 of this I'll talk more about how all this is changing the landscape here in the Valley and around the world and what it may mean to you. Stay tuned!