Silicon Valley Frontlines

The Ten Hottest Private Companies in Tech - Good News for the Valley in 2011?

The good folks at Mashable just published a list of the Ten Hottest Private Companies in Tech, based on a survey by SecondMarket. SecondMarket is a rapidly growing exchange offering (among other things) the opportunity for sellers and buyers to trade private company stock prior to an IPO or other typical public liquidity event. (We can discuss another time how these exchanges operate but they are indeed offering a valuable service to liquidity seekers and prospective buyers). SecondMarket surveyed their buyers and potential buyers about these companies and, In order of most- to least-interest, they are:

1. Facebook
2. LinkedIn
3. Twitter
4. Zynga
5. Craigslist
6. Groupon
7. Yelp
8. SecondMarket(!)
9. Pandora
10. Bloom Energy

As an avid Silicon Valley fan, I love the fact that all except Groupon and SecondMarket itself are Valley companies. And all, except possibly the wacky guys at Craigslist, represent possible IPO opportunities in 2011. And this doesn't even include Skype (new headquarters in Palo Alto; IPO about to spring loose), Art.com, MedeAnalytics (both East Bay) and others in the wings.

Five great outcomes of some or all of these IPO'ing in 2011:

1. Liquidity events are a key driver of VC investment sentiment. While much of that liquidity happens through M&A activity, the big splashes and payoffs from IPO's will enable portfolios to show substantial returns, raise new funds and have the confidence to invest in new startups or growing existing ones.
2. More cash into the Valley economy from employees selling stock, hopefully stabilizing and improving the housing market and the general ecosystem.
3. Greater momentum on the job front as newly public companies scale up with the proceeds (at this stage they are not cash hoarders like the Apples of the world!).
4. A boost to the California economy and budget. Not only does the ripple effect of spending spread across the state but the taxes paid by employees and others in exercising and selling stock would be substantial. In 2006 California personal income tax receipts grew by $4.3 billion from the prior year due in no small measure to employees and others selling their Google stock. During that time Google's market cap grew from $70 billion to $100 billion - and as it happens many people believe Facebook is already approaching the lower number in that range.
5. Talking of which, one benefit is that it would not be all about Google any more ....!

Agreed, all this takes time to ripple through the system. For example, shareholders in an IPO usually have to wait 6 months in a lock-up period before they can actually sell. But sustained benefit over a long period is better anyway ...

Related articles

• The 10 Hottest Private Companies in Tech [REPORT] (mashable.com)
• SecondMarket Releases Q3 Private Company Stock Trading Report (eon.businesswire.com)

Buying a Car Online with CarWoo! Does it Work?

Buying a new car falls directly into that category of "things you hate to do but love the result". Everyone loves to be driving a new car but nobody likes the process of negotiating with dealers to get one. Price is always the key factor, of course. And while a number of intermediaries promising best prices have existed for some time - car buying services, agents, even Costco - you never really know if they are truly working for you. Costco, for example, is one of many which charges car dealers to have access to their service, so you question whether you're really getting competitive bids from a broad-enough range of dealers. With other intermediaries you never know if you're dealing with someone who simply has a "cozy" relationship with a few dealers that benefits them more than you. Various other resources exist to help you with the process. Consumers' Checkbook, for example, has a very good guide online (Download CarBargains_Secrets) and also provides it's own car-buying service. 

Given my role working with startups in the Valley it seemed appropriate, however, to test out the service provided by CarWoo!. CarWoo! is a graduate of the Y Combinator startup program and has just raised $8m in its Series A led by Interwest Partners. Basic premise: for a small fee ($49) "3 to 5 dealers" will "aggressively compete" for my business and I can use CarWoo!'s "negotiation tools" to get the "lowest prices, guaranteed". 

I wanted a 2011 Toyota Camry 4-cylinder XLE as a second car for the family. Not a lot of fancy options - leather plus heated seats and floor mats. No sat nav etc. Had to be Barcelona Red with Bisque (Tan) interior, per The Boss. MSRP: $27,745. For a Camry? Yikes!

We went to our local dealer, Toyota of Sunnyvale, test drove the car and asked for their best offer. They quoted $25,466 after "special Costco pricing" and based on financing the deal. Not bad - and a good yardstick for CarWoo! to beat. 

So did CarWoo! work? In a word, yes! Over 48 hours we got offers from 7 dealers (including a different sales person from Toyota of Sunnyvale but quoting the same price as above). One offer was for a completely different Camry than the one we spec'd - this same dealer told me none that I wanted were available in N. California (wrong!). So really 6 offers for what we wanted. They ranged from a high of $26,685 to a low of $24,457, after a couple of rounds of counteroffers, all via the site and without having to talk to anyone. This is all after adjusting any rebates etc to get valid comparables. Winner: Toyota of Palo Alto at $24,457, just over $1,000 lower than the visit to Toyota of Sunnyvale. 

Once we accepted the offer we went to the dealer and - no hassle, no renegotiation - we got the car for the price agreed. Plus zero percent financing for 5 years through Toyota. And two years free maintenance. (In fairness all the dealers offered the same financing and maintenance packages). 

Could I have negotiated in a dealer's office to get another $1,000 off? I suspect not. And certainly I didn't have to drive around a bunch of dealerships, knowing that when you're in their office they have you captive. Would another service have delivered the additional $1,000 off? Maybe, maybe not. Probably not with this transparency. And probably with a fee greater than $49. 

Was the final price a good one anyway? Well, I went to Vehix and put in the exact specifications of the car. For an identical vehicle they showed me that factory invoice is $25,603 and the net cost to the dealer after Toyota rebates or adjustments is $25,078. The average price other buyers have paid is $26,274 and I'm getting a "Great Price" with anything less than $25,743. Again, I paid $24,457. I think that's a "Super Great Price"!

Could CarWoo! be improved? Yes! 

• Customer service needs work. I called their 800 number to ask a question about the process with a dealer when it comes to financing. The person who answered said she was the answering service (wrong answer!) and would pass on my question. To her credit she made doubly sure she understood the question and read it back to me. Peter at CarWoo! then emailed me a few minutes later and said that CarWoo! does not do financing. I knew that and didn't ask that. CarWoo! needs to use some of the $8m to put in live 24x7 customer service with knowledgeable people. 
• Dealers will try and obfuscate the real price by being unclear on whether quotes are before or after rebates. Rather than have a text box that the dealer may or may not fill in in the quote I'd suggest the offers be in a structured CarWoo! format that requires full disclosure by line item. 
• CarWoo!'s "negotiation tools" seem to consist of a few FAQ's and a some reminders to counteroffer a dealer with a standard $500 less than whatever the dealer offered (even though this may still result in a revised offer higher than the lowest you have from someone else). A bit lame - needs work here!
• The site is of no help whatsoever with financing. Not with CarWoo! itself offering financing, but like Mint, providing financing offers from independent sources would be helpful. So would the key advice - which is to negotiate the best price, THEN talk financing. 
• Background education in a similar form to Consumers' Checkbook would be helpful. 

Will it work when I eventually buy that Aston Martin V12 Vantage? Er, probably not! Will it work with a Mini Cooper, with fewer dealers around to compete? Maybe. But with true internet democratization of the process combined with real transparency for your run-of-the-mill volume car, yes, CarWoo! works!

A Good Indicator of the Health of the Broader Silicon Valley Economy

One key indicator of the health of the broader Silicon Valley startup environment (my definition includes startups located pretty much anywhere in the greater Bay Area including San Francisco, Emeryville, San Mateo etc.) is the confidence in hiring plans evidenced by the signing of long-term leases for space. In some respects its starting to look like 1999 all over again - but with significant and encouraging differences.

Back then, in the dot.com heyday, what did we have? OK, some companies of true staying power starting to emerge - Google, Ebay and so on. But mostly wreckage in the making - Pets.com (major asset: one sock puppet), Webvan, Excite@Home ... gazillions of dollars raised from VC's and the public and a chunk of it spent in bidding wars South of Market for anything with a roof. And I mean anything - converted auto repair shops, derelict warehouses, rotting death traps with a quick coat of paint and a hundred employees stuffed in. I remember - I was there trying to find space for my first startup! Interesting aside: our original space South of Market was a wonderful old converted smokehouse, all brick and timber, that is now reincarnated as an upscale restaurant, Twenty Five Lusk, opening this coming Saturday - check it out:

Today the demand is back. Zynga just signed up for 270,000 square feet in San Francisco on a seven year lease. Twitter is leasing more space every quarter, it seems. Other startups are ramping up, getting funding, making commitments. San Francisco - specifically South of Market (the old Multimedia Gulch as it was called around South Park) is once again the center of gravity for many internet, media, social networking, gaming and other companies.

But other parts of the Valley also have their share of demand. Want space in downtown Palo Alto? Well, good luck with that. Facebook had to move to California Avenue, well away from downtown, to find enough space. If you can find it you'll pay upwards of $5 a square foot per month ($600,000 a year for a 10,000 square foot space in downtown P.A. In the second quarter of this year Cornish & Carey, a major broker, reported that Class A office space in Mountain View had just a 4.5% vacancy rate (basically fully occupied) - perhaps in part becase you'll pay soemthing like 60% of the downtown Palo Alto rate but with similar ambiance (and fewer panhandlers). Broader Palo Alto had a 14% vacancy rate - though I bet this was more like Mountain View's in the downtown area - along with similar rates in Santa Clara and Menlo Park.

Is the Valley as a whole doing well? Not yet. Class A vacancy rates in Sunnyvale? 42.6% in Q2. San Jose? 37.7% vacancy rate. Drive through San Jose's office parks, as I did recently, and it seems like For Lease signs are on every other building.

So what's really going on and is it sustainable? Well, like the parson's egg, you can see it's "good in parts". And getting better. Clearly a lot is dictated by the type and location of the space and the type of company seeking it. Many of these startups want character, proximity to transport or restaurants and general ambiance. They wouldn't be found dead in a San Jose business park. And the traditional occupiers of those business parks? Still downsizing or "rightsizing" or whatever Mark Hurd was axing to get HP profits up (good riddance to him, and good luck Oracle!). And the manufacturing is still gone.

Is it sustainable? Well, only time will tell. But I'm betting that the Zynga's and Facebooks and many others are far more sustainable long-term businesses than the Webvans and the Sock Puppets. We seem to have learned some lessons, for sure. And once again the broader Valley - certainly compared to the dreadful state of the rest of the economy - shows that there is hope!

 

 

Marc Andreesen - Entrepreneurial Thought Leader!

I'm startled to see how long it's been since I last wrote in this blog - almost 2 months! There's no shortage of interesting things to talk about, just a severe shortage of time to do so. I suppose it's a good thing because, frankly, I've been busier than the proverbial one-armed paperhanger. Lots of people needing help and I'm just happy to be asked to give it!

I did take time out a couple weeks ago to go see one of my favorite Valley entrepreneurs, Marc Andreesen, the Netscape, Opsware and Ning co-founder who now runs his own venture capital fund called Andreesen Horowitz. Marc was speaking at a Stanford University Entrepreneurial Thought Leaders seminar and it's always worth listening to what he has to say. In no particular order here are some of his topics and thoughts (excuse the paraphrasing). 

On the venture capital industry:

Interestingly enough, you need a license to have a gun or to drive a car. You don't need any kind of license - or indeed any specific background or expertise - to become a VC!

As an investor, most VC firms will break your heart. It's well documented that majority of VC returns are made by the top 20, 30, 40 firms and the other 700 or so will significantly under-perform the market at vastly higher risk. (He implies this is a badly broken model).

Because it's so much cheaper these days to get many companies started and ramped up than it used to be, there is a whole new layer of seed and Angel investors coming into the market and in essence displacing some of the traditional VC roles. And at the other end of the spectrum there are new firms coming into the market and investing hundreds of millions of dollars in much later stage companies like Facebook, Zynga and Groupon with the specific objective of providing liquidity to founders and employees and allowing these companies to stay private much longer than they would have historically done. (Being public is absolutely not all it's cracked up to be!)

Three necessities for a successful startup:

1. Is there a big market? An existing one, or a brand-new one.
2. Is what you bring to the market enough to provide a 10x change as a result of your product, technology or innovation. It has to be significant enough to create a brand-new market, or be able to punch through and displace existing, entrenched competitors.
3. Team. Preferably more than one technologist, and somebody who knows how to sell!

How to attract the best and brightest to your startup:

Stock options, yes, sure. But you really need a great vision. "The difference between a vision and an hallucination is that other people can see the vision!" It's a sales job. The entrepreneur must be able to create and sell that vision in a compelling enough manner to get everyone else - investors, employees, customers - to go along with it and help make it happen.

The Valley as the world's center for consumer electronics:

Marc believes that the combination of incredibly powerful chips and components, almost as commodities, and the design skills and software innovation here in the Valley is shifting the center of gravity for consumer electronics back here from Asia. Firms like Apple, yes, but also Mino (Flip cameras), Aliph, Palm, Tivo, Sling and many more. While they look and feel like hardware companies in reality their strengths are in the innovative product designs, software capabilities and related services (app stores, iTunes etc) these companies bring to the table.

For example, Aliph's Jawbone Bluetooth headset now comes with an app store where you'll be able to download apps that can do things like read you directions as you're driving, read you your email, etc.

Entrepreneurship "in the cloud":

Many of these consumer products companies - and others - are doing their software development in the cloud, particularly using Amazon Web Services. This has eliminated much of the traditional high costs - servers, software, bandwidth etc - associated with starting up technology businesses, allowing these companies to be much leaner, take less capital and scale up more rapidly.

There's lots more but you get the flavor! To see Marc's talk in its entirety look here at Stanford's Entrepreneurship Corner. If you missed his interview on Charlie Rose on PBS last year, go check it out here. 

Solyndra's IPO - Not a "Going Concern", But Hoping It's a Big Success!

As I've noted before, there are many companies now in the backlog of IPO's filed but not yet completed. One of them, the cleantech company Solyndra, is worth taking a closer look at because of its rather unique characteristics. This high-profile solar panel business has raised a whopping $961 million in venture financing since it began and has been in registration since mid-December last year. It's looking to raise about $300 million from the public offering. Sound like a lot? Well, yes, but they need a lot!

Since introducing it's unique cylindrical components and related panels Solyndra has grown revenues from zero in 2007 to $6 million in 2008 and to $100 million in 2009 - astonishing growth but for the unfortunate fact that it still costs the company a lot more to make the panels than they can sell them for. For that $100m in 2009 revenues it cost them $162m to manufacture the product - and then another $115m to develop, market, sell and cover overheads. So for those at home keeping score they spent $277m to produce that $100m in revenues. It's still better - relatively speaking - than the $228m they spent in 2008 to produce just that $6m in revenues ....

This is not a typical business, even for the sometimes-extreme Valley! Here's a company whose products are clearly state-of-the-art but where, after raising and spending almost a billion dollars, the true economics of producing and selling them are yet to materialize. In fact their auditors PriceWaterhouse Coopers, have just issued what's known as a "going concern" opinion about the company. To backtrack for a second, all companies looking to go public via an IPO have to file an S-1 registration statement with the SEC which has to include three years worth of detailed, audited financial statements along with an additional two years of summary financial information, assuming the company has been around that long. As part of those statements the auditors issue an opinion, basically saying that those statements fairly represent the historical financial position and results of the business.

While this opinion is largely a rear-view mirror look the auditors are required to do some procedures to determine whether it is able to operate as a "going concern" in the future as a viable stand-alone business. The typical approach - and rule of thumb - is that it is is a going concern if it has enough cash on hand to run the business for twelve months from the date of the audit opinion (in essence, the date the auditors sign off on the period they just audited). The auditors won't be able to assume future additional financing (including the IPO) because that may not happen. Nor can they assume some rapid growth or improvement in the business that suddenly makes it cash-flow positive. The most likely thing is that it continues as it just left off in the most recent year. So lets look at some of those numbers. 

In the year ended January 2, 2010 it spent $170m in cash just running its daily operating activities (basically the loss it incurred in selling the $100m of product plus its operating expenses and various other adjustments). It also had to build it's production facilities and make other capital investments - which totaled another $175m. So there's almost $350m - millon! - of cash consumed in one year.

How did they finance that, because the money came from somewhere? Well, they raised $336m in venture financing (part of the $961m I mentioned above) which included converting some existing loans into equity (an ownership stake), and took on an additional $140m in debt. That debt is worth looking at - its money they have borrowed against a $535m loan facility guaranteed by the Department of Energy and is money coming from the Federal government's economic stimulus and recovery commitments. It has to be used for the building of Solyndra's second production plant in the Valley (those of you who regularly travel on Highway 880 in Fremont will see the first plant right by the Eastern side of the road) and which Solyndra itself must finance at least 27% on its own in addition to the DOE guaranteed loans.

At the end of 2009 where did all this leave the company? Well, it had $50m cash in the bank (it also had $151m of further cash on the balance sheet, but that cash is restricted and can't be used for regular operations). And the customers who bought the $100m in products still owed it $34m in remaining payments for them. Against that it owed $105m in current liabilities (payments for product costs, purchases, etc) and $140m in long term debt (the money borrowed above). Not exactly a lot of net cash on hand to pay the existing bills and then run the 2010 operations.

When you look at all the numbers, and you add to that the complexity of the business, the risk factors (their S-1 lists 24 pages of them!) in the technology and the marketplace, then on a pure business analysis you have to agree with the auditors - they are not a going concern. It's also not unusual for a Silicon Valley early stage company (and it is still very early in the development of this technology and it's market) to be in this position. In fact, that's exactly why they need an IPO - to raise the money for growth and to get to cash flow positive from operations. But its pretty unusual for a company to take the step they just did - publishing an open letter to their customers and suppliers to explain why, in their view, this is not a problem.

To take a closer look at their SEC filing, click here.

I'm rooting for this company. It's in the forefront of developing new energy solutions we desperately need. They claim that "by the end of 2012, we will be able to deliver photovoltaic systems that produce electricity on commercial rooftops at rates that are competitive with the retail price of electricity in key markets on a non-subsidized basis". I'd love to see that! They employ 800 people, mostly in the Valley. Many of those people are in manufacturing - a segment hard hit since 2000. That number will increase with their second plant and further production ramp up. This is the kind of business the Valley needs, and needs to be successful. And the country needs the technology.

Still, a lot of people will have to make some pretty big bets to pull this off!

Evil Mad Science! Get Some for the Kid (or the Kid in You)!

One of the great things about what I do is getting to meet interesting, sometimes wacky people. Sounds corny but true. I spend a lot of time at Plug and Play Tech Center in Sunnyvale among the 180 or so startups there and I had heard a while back of one tenant called "Evil Mad Science". Who, or what could this be? No-one running Plug and Play seemed to know (which is not unusual as it happens).

Today I ran into one of the founders, Lenore Edman, at a community meetup at the Center. She came to sit at our table and plonked down a device which seemed to consist of a printed circuit board, a row of sequentially flashing yellow LED's and four legs.

Now you will probably never guess what this is. A miniature road safety device for warning other cars about your breakdown? An electronic signpost prototype? Nope, you are completely wrong. It's an electronic menorah (of course!!). Celebrate the holidays! C'mon, only $14 from their online store!

Lenore and her husband started Evil Mad Scientist Labs ("DIY and open source hardware for art, education, and world domination") a while ago as a kind of hobby to provide amusing electronic projects and kits and it's grown into a big enough business to employ her full time and her husband part time.

Why here in Silicon Valley? Even though they could do this from anywhere, this is where the people are who enjoy and support this kind of thing. Everyone from open-source geeks to robotics interest groups. As Lenore said - not in Portland, not in Austin, not in Boulder Colorado (she has lived in all three) but right here!

Here's my favourite EMSL kit. In this LED clock kit (from their site): "The basic Bulbdial clock kit ($65) comes complete with three custom circuit boards, 72 ultrabright LEDs, pre-programmed ATmega168 microcontroller with Arduino bootloader, tactile button switches, aluminum standoffs, 20 ppm quartz crystal, custom clock face, gnomon spike, universal-input plug-in power supply, stainless mounting hardware, plus the resistors, capacitors and other little parts needed to build the Bulbdial clock."

Isn't that lovely? Order one here! I have to get one just to see what a "gnomon spike" actually is!

Now, you might say this is cute and fun, but not really TECHNOLOGY as we tend to think of it. Not so. For example, the clock kit includes Arduino technology that is one of a new breed of very low cost, open-source-based microcontrollers now emerging on the market and providing little building blocks for controlling all kinds of things - lights, switches, motors etc - that could, for example, make interesting and useful household gadgets in the future.

EMSL has lots of other fun stuff on their site that isn't "productised" but are fun things to reproduce at home with your kids (or just by yourself if you want). Here's one I love - the Bristlebot, a "tiny directional vibrobot". Watch how this sucker goes!

And The "World's Most Intriguing Startups" Are ... Here!

According to BusinessWeek's latest issue it's official - the place with the largest concentration of the "World's Most Intriguing Startups" is .... Silicon Valley (or the San Francisco Bay Area, if you want to be picky). BW identified 25 young companies from as far away as China, India, Ohio(!) and Europe. Of those 25 a whopping 13 - over half!! - are here, in or around the Valley.

This thrills me because when you look at the broad range of ideas being developed here and the fact that these are just the tip of the Valley iceberg you realize yet again how the Valley continues to be the world's technology leader and will be far into the future. It's not semiconductors. It's not computers. It's not networking equipment. It's a whole set of interesting new areas where we take the lead. So, here are the Valley companies making the grade!

BioFuelBox

San Jose, Calif.

Funding to date (in dollars): $9,500,000
Investors: Draper Fisher Jurvetson

BioFuelBox converts grease and fat from food waste into biodiesel. Its first plant converts waste from potato processing facilities in Idaho.

BrightSource Energy

Oakland, Calif.

Funding to date (in dollars): $160,000,000
Investors: VantagePoint Venture partners

One of the world's leading developers of solar thermal technology, BrightSource Energy won the contract for an enormous solar project in California's Mojave desert.

Bump Technologies

Mountain View, Calif.

Funding to date (in dollars): $3,020,000
Investors: Y Combinator, Ron Conway, Sequoia Capital

One of the hottest free iPhone apps, this software from Bump Technologies lets users share personal contact information and photos simply by bumping two phones together.

Coulomb Technologies

Campbell, Calif.

Funding to date (in dollars): $3,750,000
Investors: Estag Capital

Electric car drivers in San Francisco and Europe can plug in at Coulomb Technologies charging stations, which are about the size of a parking meter.

Driptech

Palo Alto, Calif.

Funding to date (in dollars): $100,000
Investors: Scott Petry

Driptech's low-cost irrigation technology is designed to help millions of poor farmers in the developing world struggling with water scarcity.

Fitbit

San Francisco

Funding to date (in dollars): $2,050,000
Investors: SoftTech VC, True Ventures

FitBit sells a $99 gizmo that tracks movement, exercise, and sleeping patterns. The data zips wirelessly to a Web site, where you can chart your progress.

FreeWheel

San Mateo, Calif.

Funding to date (in dollars): $14,750,000
Investors: Foundation Capital, Battery Ventures

Hatched by former DoubleClick execs, FreeWheel helps big media companies such as Warner Music manage and monetize ads for online videos.

Justin.tv

San Francisco

Funding to date (in dollars): $6,200,000
Investors: Y Combinator, Alsop-Louie

Justin Kan launched the site as a live video "lifecast" of himself. Now Justin.tv is one of the largest live video-sharing communities, with 40 million monthly visitors.

Permuto

Palo Alto, Calif.

Funding to date (in dollars): $6,030,000
Investors: Onset Ventures, Rembrandt Venture Partners

Permuto aims to bring the precision targeting of search advertising to display ads, by tracking consumers' online shopping behavior.

Scribd

San Francisco

Funding to date (in dollars): $12,800,000
Investors: Charles River Ventures, Redpoint

A sort of YouTube for publishing, Scribd lets 40 million users upload digital versions of reports and other printed matter and share them easily across the Web.

SolarCity

Foster City, Calif.

Funding to date (in dollars): $56,000,000
Investors: First Solar, Draper Fisher Jurvetson

The largest provider of residential solar systems in California, SolarCity provides financing, installation, and monitoring services for homeowners and companies.

Xobni

San Francisco

Funding to date (in dollars): $15,100,000
Investors: Atomico Investments, Khosla Ventures

Can't stay on top of your e-mail? Xobni overhauls Microsoft Outlook to make all that information more searchable and easy to organize.

Zynga

San Francisco

Funding to date (in dollars): $39,000,000
Investors: Clarium Capital, Foundry Group

Social game juggernaut Zynga is riding high on the sales of virtual goods, such as the digital crops purchased by players of the popular game FarmVille.

U.S. Immigration Policy Frustrates Startups!

Fred Wilson's post a week or so ago about the problems that one of his portfolio companies has getting a U.S. visa for one of the founders rings a big bell. Here's how he phrased it - "I started my day in a board meeting with one of our companies that was started in Europe. It turns out one of the founders of that company, one that is growing and hiring in the US, cannot get back into the States right now because of a Visa issue."

I've been working with a variety of startups out of the Plug and Play TechCenter for most of this year and I guess that some 40% of the new companies coming there originated outside the U.S.. These are businesses founded by young entrepreneurs who know that they need to relocate here to tap into the Valley ecosystem of funding, talent, prospective customers, partners and access the U.S. market. Despite efforts by many governments in Europe and Asia to develop their own Silicon Valleys there is still no real substitute for being here.

This trend represents an influx of new ideas, perspectives and talents that will be part of the next evolution of the Valley - and its a wonderful thing! And guess what? These entrepreneurs create jobs here. They don't take jobs away from this community - they add to them. Yet our asinine immigration policy makes these people endure constant returns to their home countries for weeks or months on end in order to renew visas, be interviewed at the U.S. embassy, etc etc. What a waste of time, money and opportunity!

The founders of two startups I'm working with - Martin Tantow of 3scale out of Barcelona and Alfonso De La Nuez from UserZoom out of Madrid - are both back in Europe now for extended period dealing with such visa challenges. They will get them of course, but their efforts to hire people, get funding and develop their businesses here stall each time they are gone. Which helps no-one.

There is, fortunately, a grass-roots effort going on to solve this, orchestrated among others by some folks at StartupVisa.com and supported by many with Valley connections. Basically they propose to create a Founder's Visa that will take care of all this. Great idea, definitely overdue. You can contribute to StartupVisa's efforts on their site.

How Not to Get Hired!

One of my companies, UsTrendy, is looking for a technical lead for the team. As always with a startup we want the best person we can possibly find. Someone who can be the focal point for development of our online store, our site and - down the road - our analytics services and more. He/she would also work with the founding team to expand the business strategy, platforms, evaluate in-house vs. outsourced alternatives and so on. And of course our new hire must be passionate about our fashion-related social networking business and a great fit with the team.

We posted the job on Craigslist to start with because a number of folks said they had great success through that site. The job requirements are pretty broad yet there are specific things we must have - hit the link to see the posting and I've also copied it below in case the CL listing expires before you read this.

So, what happened? We received perhaps forty responses so far, universally disappointing. Here are the high ... er, lowlights:

• Most obviously, it was very clear that many people couldn't even be bothered to write a cover note. Why would you not make at least some effort to say how you're interested in the company and why you think you're a fit. I'm going to give maybe 15 seconds to my first look at each response, so you'd better have something there to get my attention.

• Of those who wrote a cover note, only a few - perhaps three of the forty - even acknowledged who we are and what we do. I'm betting that many people didn't even go look at the site. How feeble is that?

• OK, we're basically looking for an engineer. So I expect some geeky stuff in the resume. But a whole page of programming languages as your starting point? Please! We're non-geeks looking for a tech lead. I have no idea whether your knowledge of BEA Tuxedo can help us (I suspect not) but please tell us which skills you have that can actually help a business like ours. By all means give us the full list in the resume if your cover note says which of those things will the key for u and why.

• Why do you think being illiterate - or presenting yourself as if you are - is a good idea? If you can't string together some basic communication in writing then why would I think you can sit in a room and articulate your thoughts clearly to the team?

• If I ask for prior startup experience it's because it's likely to be a core ingredient of a successful match between us and the right candidate. I'm probably not asking for it because it's irrelevant, so if you don't have it you should at least say why, despite your wasted years at Sun/IBM/Computer Associates/YouNameIt, you nevetheless are convinced you are right for a startup. If you can't convince yourself you certainly can't convince me!

• If you are a recruiter, why are you sending me resumes when I say "If you are a recruiter, sorry but please don’t send us unsolicited candidates!"? Not only will I not hire your candidate but if I have their resume already I might not talk to them anymore because I don't want you claiming a fee which I don't owe you. As a candidate you should never work with recruiters you don't know well and who don't discuss any approaches to potential employers with you first - and never contact the company on your own if you are working with a recruiter who has already established contact, even if unsolicited. 

• Show me you have some passion for something, anything. Please!!

Here's our listing for the opportunity as we posted it. If you know someone that is a GOOD FIT please let me know!!

UsTrendy is a new site allowing emerging and independent fashion designers to upload their creations, have consumers, fashionistas and others decide what’s hot and what’s not, and then market and sell their products. In less than a year we have more than 7,000 designers and 300,000 designs loaded, making us one of the largest sites in the space. We’re ramping up the consumer side of the business rapidly through initiatives to increase awareness, attract and retain visitors and keep people coming back.

Longer term we’re looking to create a fashion destination site, develop retail analytics services, targeted advertising and other revenue-generating opportunities directly through the site and through partnerships.

We have a ground floor, hands-on opportunity for someone to join us in a senior software engineering capacity. We are flexible on the right title – more important are the key things you would bring to the table. 

You will have a proven track record in software development in a rapidly growing start-up environment – with all the opportunities and challenges that brings. You will participate actively with the team to develop the vision and strategy for the business and translate that into the site, services, databases etc we need to make it happen.

You will be our technical lead and the primary interface with our small development team in Argentina (Spanish language is a plus but not mandatory).

You may be determining our architecture and platform approach one day – and programming the next! Key technical abilities include web development, ecommerce, database development and analytics. If you can tapdance while balancing a spoon on your nose, that’d be great!

At this stage of our development it’s important that we bring on people who are self-starters, highly motivated and a good fit with the team. We truly believe that the sum is greater than the parts and that a great, passionate team with complementary skills can achieve far more than we can even imagine. We are currently based in the South Bay and it’s important that you be located with us to achieve the chemistry and teamwork we seek. 

If this sounds interesting to you – and you meet most, if not all, of our criteria – then please contact us! We look forward to hearing from you. (If you are a recruiter, sorry but please don’t send us unsolicited candidates!)

HR Management Resources for Start-Ups and Trends in the HR Space

One of my readers asked me to talk about trends in HR, and about HR companies getting funding and M&A in that space. Very relevant for this blog as one of the great advantages of building a tech business these days is the incredible array of tools and services available to assist with that process - and there are a host of companies now doing this on the HR side.

For start-ups needing HR help, gone are the days when you needed people early to manage this function. Ten years ago in my first start-up there were very few tools to help, so people had to do it all. We had to use a broker for health benefits and do a lot of analysis ourselves on choices, costs etc.. We had to use an antiquated payroll service like ADP. We had gazillions of forms and reports and compliance things to address. We had to develop our policies and procedures from scratch or We had to use big excel workbooks for commissions, to develop compensation ranges etc. We had to buy salary data to see how competitive we were. In going from 25 to 175 people in a year and getting IPO-ready I had to have an HR Director, a manager, a comp analyst, an HR admin and three full-time, in-house recruiters to handle everything. All of which is not focused directly on developing the core value of the business. Yikes!

Today I simply turn to an outsourced service like Trinet (contact Carolyn Phelps at [email protected]) orJose Montes at Nationwide HR ([email protected]). With their help I don't need to hire any dedicated in-house HR person until I have maybe 100 people - or more. These folks will manage all of the things I mention above on a 100% outsourced basis. I get a far wider range of benefits choices for my employees, I get an HR person in my office to help when I need it, I get all my handbooks and policies, all my compliance issues handled - in the case of Trinet for $40 per employee per month. Employees enroll and sign up by themselves online. All I need to provide is a part-time person to enter payroll data twice a month. How cool is that?! You do need someone (a CFO, or Controller perhaps) to  manage the relationship, check things like Workers' Compensation rates etc. (watch this latter particularly carefully).

An IPO tip: expect Trinet to go public within the next 12 months. They're getting big (recently acquired Gevity) and keep building out their Board (Ray Bingham, Board member at Oracle and Board member at one of my prior startups, joined not too long ago. Ray is the sort of person you bring on as a financial expert to head up an Audit Committee for a public company).

One area that is still a huge problem is recruiting. If someone can find a better solution to match companies and candidates than the existing weak job boards like Monster and Hotjobs, or even DICE, then you will make a fortune. In this economy someone needs to find a better way. Recruiters are not the answer. Yet this is not insoluble with technology, surely. There are a bunch of startups trying to tackle this but nothing compelling that I've seen ... so far.

There are a number of other private or public companies that are very interesting in the HR space. SuccessFactors is a fabulous company that went public a couple of years ago that offers on-demand goal setting, performance management and other tools. Expect new product announcements from them later this month. Taleo is another public company focused on talent management. Xactly is a private, venture-backed company focused on sales compensation planning and management. As one who has had to deal with this area in many prior companies I can tell you that it's a complex management challenge and ususally hard to administer. Xactly has a good set of tools and recently rounded out their management team with the ex-CFO of Salesforce.com who took the latter public. Guess what he's at Xactly to do ...? Another early stage start-up in this space is IncentAlign which just recruited a good friend and former colleague, Bill Hunt, as CTO. All of these companies are SaaS-based - so its easy to get started and the solutions are scalable as you grow. Expect some of the public players to also look at acquisitions of the smaller players and a consolidation in the space.

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New Dynamics Emerging in Early Stage Funding ...

Start-ups have been through a dreadfully dry funding period over the last 9 months or so as VC's, angels and other investors have retrenched following the financial market collapse. It does seem as if there is a thaw starting to happen now, driven by an improvement in exit prospects (IPO or M&A) and a returning confidence now that we appear to have avoided a second great depression. And frankly there are some very interesting ideas out there like UsTrendy, a start-up with which I'm working, that in a slowly normalizing market deserve funding to drive to the next level. So what's happening out there now?

We know valuations are down - maybe half of what they would have been a year or more ago, even for start-ups that have made good business progress over that timeframe. While no-one likes a down round, if you raised money a year ago just be happy that you sold less of the company then than you would now to raise the same amount - and that hopefully the cash kept you in business during this downturn. 

However now we're also seeing the amounts raised go down as well. In fact your traditional Series A round is now looking more like a seed funding - perhaps a $0.5m to $2.0m raise versus the more traditional $2m to $6m. Despite valuations being down this is also translating into selling less of the company in the fundraising - maybe 20% to 40% versus 30% to 50%. The reality of many start-ups today is that they can do a lot with less money anyway. People are cheaper, and with the tools, technologies and techniques available today (eg: building cloud-based apps as opposed to complex software applications from scratch) developing the business is faster and a lot less expensive that it used to be.

What we see now is a class of micro-VC's emerging and filling the space occupied previously by angel investors, along with larger VC's getting in earlier with smaller amounts. In the micro-VC class are funds like Come Lague's $20m Nueva Ventures, Fruition Ventures, Capybara Ventures and all the way up to the new Andreessen-Horowitz fund which with $300m is not micro in size but many of the deals, in which they plan to invest from $50,000 and up, are definitely at the seed/early stage. New firms like Javelin Venture Partners, with two partners and a $75m fund are also emerging. Meanwhile established firms like Matrix Partners just closed a new fund in part focused on new seed/early stage investments (this is a marked shift from their typically bigger, later-stage investments) and Draper Fisher with a $7m (miniscule for them) seed stage fund focused on Plug and Play TechCenter startups. 

The reality for VC's is that their limited partners put money in their hands to invest and get better-than-average returns (around 20% per annum as noted in my recent post) for higher-than-average risk. VC's don't accomplish that by sitting on their hands. If anything, logic says the dynamics of great ideas, cheaper costs of execution and lower valuations should be encouraging more investment right now. And I think this trend of micro-VC with micro-investments in micro-startups is going to be the key funding growth area for the future in terms of number of deals being done. That said, there is also a good argument to say don't raise any true VC money if you can get where you need to go with friends and family, angels and a little seed money.

Which brings up the next question - as an entrepreneur, what kind of terms do you want/expect to get for this species of money these days? See my next blog shortly!

Three Keys to Startup Success ... Monetization Strategy, Effective Marketing and Management

Three things keep showing up as critical to getting a startup on the road to success - Monetization Strategy, Effective Marketing, and Management. Ok, yes, cash helps too. But you won't get cash without being clear how you'll use it to execute well in these areas. A good, working product or service? Of course - but history is littered with great ideas and good products that never went anywhere because people didn't know how to turn then into successful businesses.

Success in the near term may be getting enough funding to enable the next stage of a company's development. This may be completion of the initial product, build out of the team or gaining initial marketplace traction. In the long term it's building a sustainable, profitable, growing business with a large market opportunity (unless you're building a lifestyle business - which looks a more and more attractive option these days!). So what do I mean with these three things that are so critical to getting on that road to success?

Monetization Strategy

As I've noted before, with certain exceptions (Twitter, at least for now; YouTube - though not for much longer), having a clear, well thought out and tested monetization strategy is critical. "Tested" ideally means people paying real money for your product or service and who will be reference accounts (ones that a VC can call and talk to) - or, if you're still very early, credible people who will say "yes, if you produce that I'd buy it and here's what I'd pay". Its highly unlikely you're going to be a trailblazer in your monetization strategy. Leave that to Google, Salesforce and others. But you ought to know what others are doing and how you play off key trends and examples in the marketplace - term software licenses instead of perpetual, scalable subscription-based services rather than fixed fee, micropayments (many  payments of small amounts) and so on. See my post from May 8th for more!

Effective Marketing

For many of the startups I've seen pitch this year the biggest near-term challenge is getting known and then getting customer traction in the market. "Who are you and why should I care?" is a major barrier - but when you solve it you are in great shape! In a pitch I saw last week from a very exciting startup, UserZoom, being able to say you have eBay, Monster, Shell, Novartis and others as paying, happy customers in less than a year from starting their service is the most compelling thing you can have when raising money. Fortunately these days the options for creative and cost-effective marketing targeted at getting that initial adoption are better than ever. See my post from April 11th for more on marketing spend - what's worth it and what's not. 

Management

Although it's an old axiom in the VC business - that VC's invest in management teams - it rings even more true today when money is scarce. Why? Because VC's know that great management teams are far more likely to execute effectively, with fewer mistakes, and find ways to turn good ideas into successful businesses with the least amount of cash investment and lowest risk. The VC money is the lubricant - but its people who have to make it happen. Regrettably, many inexperienced founders have a hard time understanding that the best thing they can do is hire people who have been there, done that - but that's what it takes and what a VC will look for. Find and hire the best people you can to help turn your idea into reality - these days those people are even more readily available than ever before.

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Real Estate in the Valley ... My Personal Story This Year, Part 2

Image via CrunchBase

In my May 31st post I talked about my dismay in the lack of interest from potential buyers of my great Mountain View townhouse. Here was my conclusion ... "despite record low interest rates, and despite having excellent credit ratings in many cases, people are just not buying. Period. Thirty properties in my price range and general size have been listed in Mountain View in the last six months. Only three have sold. That's it. People just don't want to make the commitment - job uncertainty and a fear/hope that prices will drop further. There's no confidence."

Given that lack of interest the obvious next step was to rent it out and wait until a market recovery to sell. I have to say I faced that with some trepidation - what if people are just not interested in that either? So I carefully researched the market with agents and looking at other online listings, figured a reasonable asking price and then posted the unit via Postlets on Craigslist and a bunch of other sites - Google Homebase etc. Here's the listing.

I was swamped! Within a week I had more than 40 inquiries, a dozen or so people who came and looked (I just couldn't schedule any more), and serious interest from almost everyone. Well-qualified professionals, families, postgraduate students .... you name it.

I even had someone looking to relocate from New York want to take it without even seeing it in person and looking to send a deposit the same day (this was just a few hours after the posting). This latter was not bogus either - this individual had been here looking in person and found nothing at all that met his family's criteria - and he then flew out to see my place a couple of days later. He and his family are now my new tenants and are paying me - happily for all - more than my asking price!

So now what did I learn from this quite opposite experience?

• The demand for housing is still very strong in the Valley. So strong that I underpriced the unit despite my research
• While people are unwilling (or unable) to commit to buying in this environment they still want to live here. In fact, I had inquiries from Chicago and Germany as well as New York. I think this augurs very well still for the longer-term in the Valley and despite the economy is a still better than the net exodus we experienced after the dot-com implosion at the start of the decade
• Craigslist is it! 100% of my inquiries were from that posting. No other site created any interest whatsoever. None. And its still free!
• Postlets is great. I put the link to the posting above to show what can be done with this very sexy service. Ok, you have to take the pics and write the copy - but look at what you can do as a non-professional with a little effort. Its free for basic service and for just $5 I could add a boatload of additional pictures (pictures sell). By the way, this is how it shows up on Craigslist - very professional, don't you think?
• Well marketed product can still sell well.
• Newpapers are dead. Even the online services from some local papers just can't do what Postlets and Craigslist can do.

So I rented my home for more than my asking price for a little effort and a total cost of $5 listing and $30 for all the forms and lease documents (Nolo Press and California Association of Realtors). How cool is that??!!

Marketing Spend. Worth it, or not?

Image via Wikipedia

Having been CFO at a number of tech startups over the years you develop a strong sense of what's worth it and what's not when it comes to the various priorities for investing money in the growth of the business. Of course it varies from company to company, but experience (and common sense) say that, for example, having integrated business systems (lead management, salesforce automation, customer relationship management, finance etc) deployed across the company makes sense, while fragmented, stand-alone or point solutions generally do not. Despite which many companies end up with the latter rather than the former because of lack of leadership and vision in these areas at the outset.

Probably the hardest area to evaluate is one of the most important - the company's marketing spend. Particularly for early-stage businesses the key challenge is to get the word out and become known, become "top-of-mind" in a prospective customer's evaluation of the choices. Without that, the best ideas or technologies don't go anywhere.

The good news these days is that the appearance of social networks, the reach of the internet, the effectiveness of new search and advertizing solutions and many other factors have all combined to provide astonishingly effective - and cheap - alternatives to traditional marketing efforts. Here are some examples of what I think is worth it and what's not on the marketing side for early stage tech companies.

Worth it:

• Viral PR. Cultivating key influencers such as bloggers and via new media such as Twitter. 
• Speaking engagements on panels and at events.
• Highly focused and optimized key-word search advertising.
• Compelling, engaging and search-engine optimized websites
• Engaging smart, hip folks in such as Matt Stewart and JoAnn Peach to devise the strategy and make it happen.
• Online case studies, customer references and success stories.
• Lead managment solutions such as Marketo or Eloqua.
• Hip, fun, cheap videos such as Flaii's, using employees and associates. 

Not Worth It:

• $12,000 a month (or more) retainer-based PR with traditional agencies. I hate that stuff. You  might as well set fire to $100 bills and enjoy the show.
• Large, fancy tradeshow booths and splurges at big events. No chocolate fountains! Still better to have a speaking slot than a booth though!
• Advertising in traditional print media. Its dead or dying, hugely expensive and no-one cares anyway. 
• Lots of traditional print collateral and materials.
• Sponsorships
• Trash and trinkets - T shirts, lanyards, tschotckes ... urgh!!!

Work - Life Balance ....!

So I'm at the Web 2.0 conference in San Francisco this week, and sitting in on a workshop about pitching to VC's. In addition to Christine Herron from First Round Capital and Bryce Roberts from O'Reilly AlphaTech Ventures there were some guest entrepreneurs and CEO's, one of whom was Jeff Bonforte who recently became CEO of Xobni ("Inbox" spelled backwards), an exciting startup with a plug in that helps you organize your email inbox.

Jeff is quite a character (take that however you like) but he spent some time talking about life in a startup and how important it is to get a good "work-life" balance. For instance, he quoted a study someone did to show how a software programmer's productivity drops dramatically after 50 hours in a week. He also noted how ridiculous it is that so many startup people wear their 100% commitment to their idea or business as a badge of courage (I'm paraphrasing but that's the general idea).

Shortly after, Jeff starts getting distracted by checking his mobile device while still doing his talk (another typically silly multitasking thing everyone does here) and then tells the audience he's keeping an eye on it because he and his wife are due to have their first child that day.

Am I the only one to see the irony in this?