Friday, December 26, 2008

Ghosts of Christmas Past

I gave a talk to the Monte Jade society a few years ago in the midst of the 2002 tech nuclear winter. In Asia, America was often referred to as the land of the golden mountain--hence the jade mountain term evolved for Taiwan although in that case there is actually a mountain (whether or not there is jade to be found remains an undiscovered jewel). I broke the talk up into three segments, and since it was around Christmas, I called them the ghosts of Christmas past, present, and future. This year we are all feeling some déjà vu from that heady time and the subsequent fallout of the last tech bubble, and I was again visited last night by three ghosts--whether it was from the grave or the gravy I’ll leave up to you.

I first came to the US in the late 80s and landed in search of the gold mountain, but found myself in the middle of a recession. It was a tough time to build business, and that first company we started almost went bankrupt several times. While it was hard to get customers, it was actually easy to get people, space and resources. It was actually a great time to build a startup but we couldn’t raise money because we simply had no idea how to go about it, and perhaps even if we did, no one would have funded two inexperienced entrepreneurs with funny accents--Dan Hogan taught me a huge amount about building business’s. It’s a long story, but that company created a successful Nasdaq IPO in Feb 1996.

In the last crash, here in the Valley we felt it first and worst, while the rest of the country really didn’t get hit all that badly. There was a big swing of assets from equities into real estate, and the rates were so low that it fueled a boom in real estate that ironically could be blamed for a significant part of the current financial meltdown. In 2002, I found this quote:
“America fell into an economic slump. The crisis capped a decade of frantic speculation in [space] securities and land stoked by heavy borrowing. The exuberant boosterism of the [space] was suddenly and dramatically quelled.”

Now if you put telecom or internet in the first space, and 1990s in the second, this quote applied perfectly to the tech nuclear winter of 2002. This quote was actually from Rockefeller, in the 1880s after speculation in railroad securities--you could also substitute mortgage securities for the 2008 recession--the two constants are land, and its all happened before. Telecom interestingly boosted railroad stocks again for the rights-of-way.

In my 2002 talk, the ghosts of Christmas future, predicted that telecom would come back in wireless, had no idea about cleantech, and had visions of optical processors. So the cleantech industry was born in the worst tech recession of all time, and ironically driven by the same people who had shifted from solar in the late 80s into telecom because solar was a dead space, then shifted back to solar when telecom crashed.

This recession's ghost of Christmas future, is simply this--innovation and creativity never die, recessions bring out the best in them, and great companies still get funded even through the decision paralysis of the biggest market meltdown we’ve ever seen (so far….).

To get funded in this market you have to be aspirin for the pain, not steroids for performance. Some VCs would even say you have to be antibiotics or an open heart surgery, rather than aspirin because the latter just covers the pain but doesn’t fix it … if we can't even agree on the right metaphors imagine how hard it is to agree on the right strategy ;-)

In this current recession the feeling in the Valley is somewhat opposite to that in 2002, back then we were badly hit here, and the rest of the country was lightly touched. This time the Valley is somewhat insulated while the rest of the country has been hard hit all year. Have no illusions, wherever you are, we will all be hit by this--the world’s economies are intimately connected as never before, there is no such thing as recession proof. China is hurting, India slowing, there is a wave coming so be ready for it. If you can get funded now, do it, always take the money when you can. At some point, greed will overcome fear again, but first there will be capitulation--my guess is real estate reaches bottom in Q3 next year, equities maybe six months later. You will know when it happens because, just like the taxi driver giving you stock tips signals the peak, when everybody stops caring about the price of a home in the Bay Area and are just sick of hearing about how bad things are we will have hit bottom. Companies that stick together during these times become great. That said, the next wave of great companies will emerge from this downturn, large corporations have more cash than ever there was in 2002, so M&A will be a rich area albeit at tough prices.

So to all a Merry Christmas and to all a goodnight ;-)

Tuesday, December 16, 2008

How to pick a fund

Somebody has been running around the valley trying to educate entrepreneurs with ways to qualify VC funds. Now it's important to ask questions and show interest in any interview process, but here’s the problem: Asking the VC, How big is your fund? Are you investing currently? Or even the better educated, what percentage of your funds are currently committed? generally causes two reactions--
1. Why didn’t you do your homework on us before you came to pitch us? and
2. Do you think I’d be wasting my time listening to your pitch if I wasn’t actively investing?

Now #2 may not always be true because sometimes VCs hear a pitch out of courtesy to a trusted contact, or a favor to another firm, or just to get better educated. Generally the size of the fund isn’t hard to find, it's usually on the web site. The date it closed is also often mentioned--most funds have a 4-6 year investment period, so if it closed anytime in the past two years you are on safe ground.

More importantly, you should have done your homework on the partner in question, not just the fund. Does that fund do medical device, or lasers, if that’s your deal? What about the specific partner? Have they built a company or done several deals in your space? Are they likely to have deep contacts and domain expertise in it?

These are simple questions, and easy to answer just using basic web research. Leverage your service providers, especially in the Valley. Everyone from your landlord to your lawyer will know a firm or two, and most of them will know who’s investing. Your lawyers will have access to the venture databases, and can fill in the blanks on the questions above on fund size, and so forth.

There are also profiles to partners and funds. The classic profile is replace the CEO with a seasoned exec.--quite a few of the top tier firms have this systematic approach to investing. If you are particularly sensitive to this issue, you had better get over it, or don't pitch those firms.

You want to pick a VC partner who can really be a partner, someone you can build a trusted relationship with and ideally become lifelong friends with. There are a lot of entrepreneurs (and VCs) that are about as sincere as the IRS in trying to “help you.” I’ve said before that raising money is like getting married, so the insincere entrepreur or VC is to be avoided. It takes time to build a lasting relationship, and to build trust. The adversarial approach doesn’t help here, i.e. some VCs expect you to beg for money (and I admit I was always a bit cap in hand when raising capital--it always amazed me that someone would give you millions of dollars to fund just an idea). And on the entrepreneur side, we are looking at all offers and we’ll pick the best one. I don’t want to be part of a competitive bidding process to find a partner (investment or otherwise) I want to invest in things where I can add unique value, and with companies who can create unique value. If valuation is the only metric for fund selection then entrepreneurs should go first to a credit card, then friends and family, then a bank, then high net worths, then angels, but frankly never to VCs.

What’s harder is to guage the spirit of each firm--ideally, you want to talk to entrepreneurs who have taken $ from this fund, especially from the particular partner you are interested in. This is another reason why CEO forums/networks are so powerful, because it provides a great resource to qualify VCs in addition to giving a self help group for first-time CEOs. Fortunately, we have a great benefit from the carnage of the tech bust--because we have a four-year historical perspective on what the VC funds actually did to support their companies during this time vs. what they said they would do ;-)

Answers to questions:
Philip Crowley CEO Market Tech on your post "Picking the right VP Marketing":
Larry,I liked your comment “coming from a place that marketing was confused as marcom”. I think a lot of us in the photonics industry have seen this happen. There are many different and separate marketing functions that are required to have an effective marketing program. In larger organizations these roles, marcom, branding, product management, strategic marketing, can be filled by individuals. Of course in a start up situation this is not possible. What is really difficult is finding a single individual to fill all these roles as they are all important and in fact require different skill sets. I agree with what you pointed out that there really is no substitute for experience. My view is that marketing needs to start at the point of conception, the business plan. How large is the market? Who are the customers? What is the USP? If this information is vetted properly marketing is all about execution for a seasoned individual.

Yes, there is often a mistaken idea amoung investors that we should have a pure engineering team first, run it lean and defer bringing in the big guns in marketing and sales until the product is developed. Clearly this is partly right, but without a clear market vision even if the product gets invented it will likely be wrong….

Monday, December 1, 2008

Picking the right VP Marketing

This is a tough one and probably the one thing I can say with authority is, as an engineer I've always found it really hard to find a really good VP marketing. I’ve learned to be really tough on this position, like VP Sales, because it's so hard to see the results of a bad one until its too late. I also grew up in a place where marketing was confused with marcom, and sales & marketing were confused as the same thing. My other confusion on venture backed companies is why they so often look like science projects with bloated engineering teams but really thin marketing (and sales). The defense for this is that the product hasn’t been invented yet so what’s the use of (sales and) marketing? Obviously marketing is more valuable before the product is invented, and ideally before the company has been funded.

All of us who grew up in the laser business are painfully familiar with the solution looking for a problem syndrome ... a great marketing person is deep enough in the space to have a vision for where the market is going, what it needs, and can therefore determine what product to create, and when it will be needed. Also what groups will want to buy it, and what value it will be to them in order to create a model for sales. This understanding is key to success--often the CEO has this vision already, so can get away with a weaker VP marketing, which is why this position is often filled with a great marcom person with little or no strategic vision.

The other critical element is the ability to point sales, to target the right verticals and user groups within those verticals, and to create the leads that sales can go try to close. The Internet has created many new tools to accomplish these goals and most capable marketing people should do well in this area. A finer filter is the quality of lead generation, and targeting--which again requires a pretty clear vision of the market. The next piece is analytic--how well can the marketing VP analyze the data coming back from the market, sales, engineering, etc ... and course correct accordingly?

The most arduous issue is that even a mediocre marketing person is great at marketing themselves, so it's really hard to tell how good they really are. Reference checks are absolutely critical here, and especially back channel i.e., not the references listed in the resume but ideally the boss they reported to and people around them in the companies they worked at.

Unfortunately it's not an area where you can afford to hire someone who does not have domain experience; you can’t afford to have them learn on the job--they have to already have a vision of your market. I have had a couple of cases where I was able to take a promising engineer, or sales person and combine them with an experienced marketing person to create a great marketing team, and put the inexperienced person on the right marketing track for their career, but it's rare.

Being an engineer I have a personal bias towards marketing people who have come from the technical track, but really, a well trained marketing graduate, with some business seasoning is pretty hard to beat.

One of my friends, Tony Surtees who ran a division of Yahoo, is one of the best consumer marketing people I know and caused some controversy when he first graduated by marketing himself a little too effectively and taking out a full page ad in a major newspaper--apparently no one from that prestigious marketing school had ever done something like that before; it's somewhat ironic that Tony quickly got out of print and into digital media ;-) Tony dazzles tech startups with his creative guerilla marketing plays. And this is another pet peeve of mine; marketing needs to spend money, often more than anyone else in the organization, but really good marketing people can do a lot with a little, and in the early stages of a startup it's better to build up a mystique and stay in stealth longer than to try to make a splash by brute force. It's more credible to be viral, less expensive, and keeps you out of the gun sights of large competitors.

However, as a lesson from the Telco era, and laser startups--you should never be in stealth from customers! Many, many, were ... ;-(