Monday, December 7, 2009

Valley of Death – Part II

So how do you cross the Valley of Death?

Well it sure helps to have some other people to guide you who have personally made the journey and worked out where the hidden wells are along the way. A key element to carry you is risk capital – but the businesses that are really great to invest in are often the ones that don’t want the money – usually they need it, but they often don’t want it because they don’t want to deal with the crap that comes with it.

Software companies are a great example of how bootstrapping can work really well, and a new idea can be tested and validated, and even sold, well before significant amounts of money are needed. There is still a valley of death for these businesses, because just selling product and having happy customers can make you complacent and fail to recognize that these early adopters are not the whole market, and you have to grow or die. The day you launch your product you start the clock on competition, if in fact they haven’t already got something similar cooking and ready to release already. First mover advantage is a two edged sword and often instead of creating and then owning a market, you simply create it for a competitor to go take it from you. The curse of software is the ease with which it can be replicated by competitors and lack of patent protection. You have to understand how to really scale your business, and differentiate from competitors, and have a clear and focused strategy around that growth to leverage your limited resources for maximum result. Money is a fulcrum--who gives it to you can be the lever, depending on the depth of their experience, personal networks, and commitment as an investor.

For many hardware businesses, it's not possible to boostrap without capital – even if there isn’t money to be had, entrepreneurs have a gift for finding it – a customer who is a real believer in your product is often a great source of needed capital whether it's NRE or advance payment

This applies primarily to deep tech, rather than Internet or execution plays. Early adopters validate your product, fine tune it and provide premium price because they value the unfair advantage you give them – if they are not willing to pay that premium then it's just about price and you shouldn’t play in that game. A good test of the compelling advantage of your technology is to try and raise money by getting a customer to fund your company in exchange for exclusivity (you can limit the term later). Too many companies delude themselves into their value only to find their customer walks them into the purchasing department who has no interest in value other than to get as much of it for as little as possible ;-)

Early adopters let you under the hood of their company engine, and with that inside knowledge you gain deep customer intimacy that begets understanding of their real pain point, which when coupled with your deep technology understanding creates a unique solution that neither of you ever would have thought of alone. The pioneering customers help you prove your value proposition, and later will help evangelize your virtues and enable sales to the broader market where price will become an issue, but armed with the proven business case of your early adopters you can win those sales.

Once you have your clear value proposition and product that supplies it, you need to iterate your sales process many, many times, until you find the right repeatable model that secures recurring revenue. It has always amazed me what happens when a career sales person is brought in to replace the peer-to-peer selling of engineers – don’t underestimate the value of peer-to-peer, it’s the secret sauce of selling to early adopters, but there is an inflection point where the domain experienced sales person can turn up the heat for broader market acceptance and really start to ramp sales. This is the other element of risk capital; its hard to judge when to increase burn in order to capture the market – if you are bootsrapping, you will often miss this point and grow organically, trading time for money. This is usually a bad trade because you can’t win back time – there are many, many bet-the-company decisions an entrepreneur is faced with, it’s a lot easier to seize the opportunity if there is a financial buffer, and ideally people who have made these decisions before for their own businesses.

So if it's so easy, why do we so rarely succeed? (see Part III next time)

Thursday, November 12, 2009

Valley of Death

I am involved in a government thing at present, trying to help innovation in another country. There is a bunch of money available to help startups be successful and to try and solve the “commercialization problem.” I am looking at materials around how that process will work and can't help concluding it’s a jobs program for domestic consultants rather than a fix for startup success. There are lots and lost of inputs and activity, lots of boxes to check--consultants who can handle your taxes, legal, IP, and ugg Marketing--well not real marketing in the sense that an entrepreneur thinks about it, but more marcom or branding.

The problem is that good entrepreneurs self-select out of these programs. They don’t need the government to solve these problems for them. If they did they would have little hope of solving the really hard problems of the marketplace, which is of course where they really need the help. Domestic consultants in that country are ill equipped to navigate a foreign ecosystem because they are living in it currently. Like the entrepreneurs, the entrepreneurial service providers, patent attorneys, lawyers, accountants, real estate brokers, etc who all work for equity here in the Valley, don’t do so in other ecosystems and wouldn’t naturally migrate to a government program because they are entrepreneurial enough to do it themselves.

It's not lack of basic business advice that kills startups, it’s the valley of death, that gulf that separates the first early adopter customers and the mass market that propels a company to revenue growth, scaling and success. Many, many companies survive in purgatory for years, without achieving success, but government programs might label them as successful because they didn’t fail ... in other cultures there's a great fear of failing--but as with skiing, if you don’t fall down, chances are you won’t learn to ski!

The power of networking is an awesome thing to behold, and no one uses it better than a great entrepreneur.

So you have a great technology idea for a laser sheep shearing machine and you want to get it funded; you talk to a few friends, and one of them knows an angel or a VC; they set a meeting. That investor doesn’t like the deal but he knows someone else who does, he makes a call, you meet for a coffee and sketch the business model on a napkin. The second investor laughs and you go through five iterations together, and he sends you away with three more names to vet it out. Next day, you meet those three people, one is a domain market expert who has worked in the sheep shearing market for 15 years. The other is a laser expert, who vets your technology, and the third is a former entrepreneur who has never seen a sheep but built five successful laser companies.

After your business plan has been torn down and rebuilt seven more times, you have a fairly invested group, and a solid plan and you can go back to the VC. You also have the names of three other VCs who invest in laser technologies (which means you have the worldwide market for laser investors ;-) ).

One of those VCs tells the former entrepreneur, looks great idea but there are five of those deals going around the Valley now, and I’m pretty sure X funded one of them--better check it out. The sheep shearing guy knows the customers and verifies, yes in fact VC X did fund them, so we’ll cross that VC off the list--is there an angle here to partner, compete, or should we give up this idea? We still have time to put together a new plan, and it isn’t even the weekend yet …

No cash changed hands in these interactions, no commitments were made. If the company had been funded, chances are some of the people who helped would become advisors or BoD members, maybe the seasoned entrepreneur would have ultimately stepped in as CEO. The people involved will stay connected, the entrepreneur who came up with the idea, will try to find ways to help those who helped him, and pay it forward. Value gets rewarded, any good entrepreneur knows this, and knows how to reward and nurture those who help.

One way to deal with the valley of death is simply to avoid it--when pitching an idea to a VC the second best answer you can get is NO, but with sound reasons. It's awful to spend years trying to build a business, languishing in the valley of death, it's far better to avoid it all together and do something else.

If you are Evil Knievel, then you may be able to jump the valley of death. So how do you cross the valley of death?

Monday, October 26, 2009

Why do you do Hardware?

I was asked this question by a young VC analyst replete with Stanford Biz school education, attitude, and three months of on-the-job experience. It struck me that perhaps the industry has passed me by and Hardware is so 80s ... so I thought it was time to soul search as follows: the rivalry between hardware and software is akin to that between physicists and chemists. Many would say that when you know what you are doing you do it in hardware and if you don’t [know what you're doing] you chose software ;-)

At Iridex I was stunned at the power of software, particularly with the advent of the touch screen. Suddenly we could change the bezel with code only, we didn’t need to retool or repaint the knobs. It was also incredibly more resilient in nasty places like the OR (well it wasn’t at first but it eventually got there). The difference from the hardware guys is that you can afford to get it wrong because it's easy to fix (compared to messing up the mould for the bezel or display, which could take months to fix). However, to hardware guys, the software is always the gating item in a project because it's always late, and never works properly--in fairness the software can’t be done until the hardware is complete so it’s a shared responsibility for being late.

The logic of doing software deals is that the recipe is fairly well defined. Because there is no manufacturing you can usually see the product or a prototype before you invest, talk with beta customers and a have a clear understanding of the value proposition--but where is the fun in that ;-) In hardware, it's rare to have the product, particularly if it’s a chip, so you have to rely on market vision, trends, and team. The capital expense is much higher in hardware and if you get it wrong it's really hard to recover. On the positive side, hardware begets a lot of IP and if managed properly you will always have a residual value to your investment even if the market fails. This IP barrier is the critical missing piece for me in software deals, unless there are legitimate ways to protect algorithms (like crypto, sequencing, expert systems, etc.). They tend to become execution plays, with tender hearted companies like Microsoft and Google looking over your shoulder ready to step in with a mediocre purchase price based on a make/buy decision. Of course if you can execute, very large companies can be built, which is why there are so many software-centric VCs.

In contrast chip investors seem to be a dying breed--partly because VCs don’t have the firepower to fund $100M deals ... well, unless it's in Cleantech ;-) Yet in medical device or biotech these $ amounts are fairly typical, so what's going on there?

In the medical space, in addition to wonderful IP barriers, you also have the FDA as a blessing and a curse. On the bad side it can take five years to get approval from scratch, but the value of that asset is immense, almost regardless of revenue metrics. To a large company like Medtronic or J&J, it's well worth paying $100M for a “failed” device company that has the platinum of FDA approval--often failed deals turn into great successes when big pharma puts its marketing muscle behind them.

Virtualization and cloud computing are strong trends and important ones--but as a hardware guy I worry about the security of these connections, and the power of software to effectively secure these open network systems.

I have seen a new breed of software guys who make software hook into the silicon itself, which turns out to be a wonderful way to get chip guys who don’t do software to appreciate it, and leverage the hardware to work in concert with the software to make a secure device. I think this is probably a theme.

I guess in the final analysis no matter how virtualized you are, at some point you have to touch the real world so software is pretty useless without the hardware that manifests it, so to me at least they are inextricably linked in a timeless symbiosis ;-)

Responses to comments:
David Wright - Larry - I have had a few successes and one deemed a failure. To me it is beyond doubt that you "can" learn a lot more from a failure than successes - how far can you push yourself, your team what are the warning signs etc but I don't think many will count the scenario you presented as a failure. Timing also is an issue. In my case - I am a better CEO because of my company failure and what I learnt to get it to the heights achieved but this was permanent - the company folded so a genuine failure. Until this happens the scoreboard is still running - will this person still consider it a failure if that company turns up again. If not they should tell Mr Murdoch how much of a failure he is :)

David--Thanks for your thoughts. We invariably learn more from our failures than successes--and how we react when things don’t go as planned really teaches ourselves and others about the quality of our character. Sounds to me like you will have continued success despite some setbacks.

Tuesday, September 22, 2009

Value Added VCs?

One of the hardest things for me as a former CEO is to get used to the idea of not being the CEO anymore. As a VC I imagined working closely with the CEOs of our portfolio companies to help them better manage their business and avoid the pitfalls and mistakes that I had made (there were and still are a lot). Of course, as any father soon realizes, your son never listens, you are an idiot, and you gotta let him make his own mistakes. Classically we want entrepreneurs who are coachable, so we can help them, but, like sons, we don’t want them to be too pliable--we like the vinegar of self worth, and ego, provided it's fueled by passion and true belief.

So what do you do when the CEO won’t listen? With the disclaimer that I am an old-school entrepreneur, I think not listening is a major alarm bell--it usually means the CEO is letting their ego make decisions and there is never a good outcome from this. Now the flip side is that the CEO is better than their VCs and likely more operationally experienced and therefore recognizes bad advice and inexperience and is not willing to do the wrong thing merely to placate the egos of their VCs ;-)

In this scenario, the CEO is actually still wrong; a good experienced CEO with their ego under control knows how to manage their BoD and deal with all types of advice and investors, bad and good. Generally there are nuggets of wisdom in the most unlikely places, and if you can thin slice through the chaff you can find those kernels. Having said this, how much value can an armchair quarterback really bring to a startup?

If you parachute in for BoD meeting once a month, it's unlikely you will have many pearls of wisdom to impart, unless you have built that type of business before in that specific market with those specific customers, and your knowledge is current. It's true, VCs are great at pattern recognition and can spot a flawed business argument, but often a little knowledge is a dangerous thing. I think the error can go too far the other way as well, when the VC wants to micromanage the CEO, because no VC has the time to really add day-to-day value, and let’s face it, we are wrong as often as we are right, like everyone else ...

The best interaction for me is as an auxiliary brain for your CEO, ideally they already have this partner in their management team who can fill this role day to day, but it really helps to have an outside view, uncluttered by the day to day management issues. VCs by virtue of looking at lots of deals and companies, can bring a unique perspective to the strategic planning process.

Investors have to have a healthy respect for their CEOs, but it's surprising to me how some CEOs can allow themselves to get sideways with their VCs. If its truly fueled by passion and not ego (or insecurity) then it's excusable occasionally, but I am stunned at the stupidity of any CEO who wants to fight with their investor. I have seen companies go down simply because of this, sadly driven by big egos on both sides--I once saw an entrepreneur so cleverly structure a deal through nested companies that he achieved the equivalent of antidilution over his investors; even after it was explained step by step it was still hard to understand how it was accomplished--but then the investors stonewalled and refused funding, denying meeting milestones, and killed the company (and their investment). What a stupid waste.

For any investor to do their job for their LPs, they need to have some degree of control over the company, to do this they need complete transparency from the team, and this enables trust in the CEO. Any CEO who refuses to listen, be coached, and leverage their investors is letting his insecurity drive the bus, likely over a cliff. Fortunately there is an easy solution to this problem ...

Responses to comments:

Peg has left a new comment on your post "Success or failure":
Thank you for this; you remind me to buck up and try again. My self-funded company failed last year after a bad car accident left me hospitalized for several months followed by five more months of being bed-bound at home. The corp. did not make it with me out of the picture, and at the same time, unable to add more capital to get them through it, though the staff tried valiantly to keep going for the 10 months immediately after the accident. I learned the importance of key man--not only insurance, but to have a person and a plan in place. Thanks for the reminder that failure is a step one would rather not take, but once taken, can be a path to another venture. At times in the last 18 months, I have forgotten that. I'll avidly follow your new blog. Thanks!

Peg – getting up and trying again is what it's all about, anytime you try to create something great the chances of failure are high, but the real failures are the ones that don’t try but criticize those that do, and end with an I told you so ... good luck!

Anonymous has left a new comment on your post "Success or failure":
Larry, By your definition, a Ponzi scheme would be a "successful" business. The true definition of a "success" is a company that creates wealth, rather than simply redistributing it. Was wealth created in your case or only redistributed? R.

R – Perhaps you should re-read – we were defining failure, not success; fear of failure stops too many of us from trying to change our world – failure is where we learn our most valuable lessons – success is great but it doesn’t teach us much – in the case I discussed wealth was created by the company and redistributed to the investors

Friday, August 28, 2009

Success or failure

I was recently confronted by someone who cited the “failure” of one of my past companies as evidence that I don’t know how to run a business, and it kind of shocked me, but I thought it might make a fun blog:

Years ago we built a company, took it public, and everyone made quite a bit of money, the VCs, the underwriters, the brokers, and even us founders ;-) It was an interesting time because Clinton was messing with health-care and markets were tough. Following the IPO which was in a hot cycle of the market, the stock went up by about 3x. the revenues grew fairly rapidly, and then the market stalled, and they flattened. Some new products were released, and growth began again; basically the stock bumped up and down for the next several years.

Firstly, I was shocked to have someone tell me that this company was a “failure” and that this negated any input I could give around business. After all, the company is still going, has substantial revenue, happy customers, and will probably come out of this recession stronger than most. But even if none of that was true, would that constitute failure? It has been through 2 CEOs since I left, the management team has largely turned over, and certainly the BoD has not a single original member. If you ask the VCs who funded it, they see a success, the bankers and underwriters, the initial shareholders. The current CEO and BoD think it’s a success. So what is success?

For an entrepreneur there should be no such word as failure. Failure constitutes not trying, giving up, running away – entrepreneurs don’t do that. When things get tough, hired guns head for the exit, founders and true entrepreneurs roll up their sleeves and find a way to turn dirt into gold ... their investors should take note of this and try to do the same, it would make the process a hell of a lot better for everyone.

Secondly, I wondered why anyone would suggest that “failure” negated experience – surely anyone who has tried to do anything recognizes that “failure” is the greatest teacher – which is of course why entrepreneurs don’t believe in failure – or at least why we define failure as not trying.

Now interestingly, the CEO who replaced me in that company might be also called a failure by my critic, because he was fired by the BoD a few years later when the company wasn’t doing so well. Interestingly, a few years after that, he was brought back in by the Bod to be CEO again, and is actually doing a lot better – the share price is on the rise, and I think he learned a lot from being canned, not the least of which was that he wasn’t responsible for carrying his founding team forever, and that it was OK to bring in new people to help run the company because founders rarely scale ... now there is a lesson.

To me he succeeded because he managed to run a public company (something I hate doing), deal with being termed a failure, and still come back when needed to help the company get back on track. Not to make the obvious comparison to Steve Jobs but sometimes it takes this kind of event to trigger success – although I think in both cases the BoDs were wrong and driven by investor mentality rather than operating. Even more interestingly, is that the BoD that fired him before are now completely replaced ;-)

Thursday, July 30, 2009

Purgatory Part-II

Part one was posted previously.

Getting out of purgatory needs 110% focus. You probably have many, many customers, but they each pay a small amount of your revenue--you may have to fire many of them to focus on a few. If you are in multiple segments, you will need to pick one and focus your marketing and sales efforts on that. Now many say yes but the laser market is a mile wide and only an inch deep, so you can't get enough revenue if you focus.Sure, but what’s the point of being in purgatory? You need to make the bet-the-company decision, and put all your energy behind it.

At Lightbit we could not find a way to make the all optical network happen, let alone create a need for an all-optical wavelength converter, so we switched to blue lasers and JDSU decided to buy us. Then they changed CEOs and stopped all M&A, then we did a biotech product, sold that piece of the business, then used the proceeds to create a wireless product higher up the value chain, and, and, and ... ultimately we took the company public, but that’s another story ;-)

In order to make the segment big enough to feed you, you will need to become more than you are. You will need to provide your customers a whole product solution, not just a component--even if you make a turn key laser system, it will need to do something--Cymer made excimer lasers into stepper systems for SEMI; hard to believe a toxic gas laser could ever get into VLSI but it did, despite the efforts of other companies who had better technology and had been around many years longer. This is a common story.

To get out of purgatory you have to embrace risk--it's very likely that you will not succeed in your first target. You will need to refocus, but this agility is the key unfair advantage of the startup--you can't save your way to success or be stuck forever answering the random needs of a large base of small revenue customers as they jerk you from left to right in search of the killer app. You have to target your own killer app and go make it happen.

Another scary lesson is that customers rarely understand what they really need, so in establishing a new market, gathering large amounts of customer data may fool you into the wrong decisions. Now if it’s a large well-established market you can for sure gather a lot of useful G2 about it, but if you are going in there with a new widget be careful! It's very likely that your new technology is better than what is already being used, but it's also very likely to be irrelevant to the customer’s real problem. We can easily convince ourselves that our technology is better--this inside out approach is common to most tech startups. What’s needed is the outside in. Forget what your technology can do, and start understanding what your customer actually needs to do (despite the fact that they don’t consciously know).

Many tech startups have found gold completely outside their chosen technology. In many cases the company finally gets out of making lasers altogether, as it concentrates its effort on better understanding and developing the applications they serve. It’s a scary transition for you as you give up your unfair technology advantage, but it’s a great feeling to metamorphise from a laser jock into a telecom, or medical device, or semi or whatever vertical market person.

Finally, it's fairly likely that you will kill the company when you make a bet-the-company decision. Get used to it--the alternative is survival at subsistence level waiting until the next killer app comes and you can jump on it. But we have all seen that movie, you get a short term lead but before long your competitors are on it and eat up your lead and you are back to purgatory again. You have to look before you leap, but ultimately you have to leap, and when you leap into the void the outcome is always better than purgatory ;-)

Tuesday, July 7, 2009


This is a two-parter. Those of us who cut our teeth on the laser business have a unique perspective on Purgatory. For VCs it’s the biggest fear in investing--there are three outcomes of any deal: Win, lose, or ... nothing--the company manages to scrape together enough customers to survive and extend for years, and years, … and years, but never grows. In the last tech crash VCs sought to “hibernate” companies but learned too late that technology has a finite shelf life--you grow or you die, you get big or you go home ... like the Roman empire, or the Greeks, or the Persians, or ... the US?

In the laser industry Purgatory was always the status quo: so when the tech bubble burst it actually didn’t feel quite so bad, and interestingly laser industry guys had a unique advantage in how to navigate it ;-)

For the benefit of non-laser people, laser companies are usually driven by technologists who create a wonderful unique new technology (such as a diode-pumped laser producing green or blue, or doubled diode, or direct visible diode): It's amazing, no one can believe it was possible--it's the holy grail. So now, what do you do with it? Initial customers love it, pay big $ to get it, and after a while you figure out that their app is a medical device, or industrial, or mind reading. There is a unique characteristic to your laser that even you didn’t understand and your customer has worked out how to use that to solve a really important problem. So they get paid well for that and grow. You grow too, albeit more slowly, being a components guy.

Now I know that in the telecom bubble things got inverted and components were king for a while--but this is rare (unless you are in semiconductors where all the value is in the chip, not the consumer product). Your customer starts having success, then other really smart technologies jump in and start coming up with other products and technologies to serve him, and you become marginalized. The other unique characteristic of the laser industry, probably because it's so sexy ;-) is that there seem to be way more competitors and small startups for every opportunity than in any other industry--i.e., if a normal vertical can feed five competitors, the laser vertical will have 20 … so you get stuck in the dreaded chasm (Moore).

When we are in the middle of the chasm, we'll do almost anything to try and get to the other side. Raising venture funds can be a good way to do it if you can really scale, but all too often you get stuck in purgatory--get to breakeven but not to the other side. You are still stuck but now you have angry VCs on your body and they are going to hammer you until you succeed … or break. Having suffered through this a few times, I have an idea of what to do.

So how do you get out of Purgatory? Well it involves a lot of Hail Marys … but, at Iridex we integrated up the stack from component to end-user product. We had the unique visible semiconductor laser component that made a unique, and more revenue, and higher margin ophthalmic laser; we had the high-brightness high-power diode subsystem, which made a much better hair removal laser than a component. Clearly, the closer you get to your customer the more of his $ you can earn!

Monday, June 22, 2009

Shooting the CEO

Many investors have a systematic approach to gauging the performance metrics of a startup, and fairly formulaic methods for influencing the company through its various growth phases. One of the most painful phases is the transition from startup CEO (and often founder) to a more experienced "hired gun." This is dangerous because the founding CEO's DNA will have permeated the company’s and the new hired gun will not have the same sense of ownership, responsibility, and DNA around the company. Done well, it can take a company to a whole new level, done poorly it causes cancer.

There is no doubt that the CEO of a Venture-backed startup has a target on his back, far more so than one in a public company. When a CEO misses targets and milestones, they are likely to be replaced. If they start shooting executive team members they will often be seen as shifting blame or be criticized for making bad hires--it's hard to win when you're the boss ;-)

There are generally three sure-fire ways to get fired:

1. Fail to meet plan
2. Don’t follow BoD decisions
3. Make bad hires, or have a lot of exec turnover

These are easy ones to catch, but there is a fourth that's more nebulous, but it's often the question foremost in your investor's minds--can you scale?

Very few CEOs can scale from founder to IPO and beyond--even fewer should! The sign VCs watch for is lack of a decision, which is of course a decision in its own right. If you have a lot of balls in the air chances are you will have trouble deciding which one to play with--indecision; or inability to focus will get you fired and it will look very much like your company simply outgrew your ability. Typically founders like to do everything themselves, and this is a guaranteed way to NOT scale, but it's also a very lovable characteristic of founders.

Now any good entrepreneur knows you succeed by getting others to share your vision and help you succeed by doing what you can’t do yourself. We also know that in order to have one successful strategy we need at least two alternates--sometimes it takes five irons in the fire to get one hot. So a certain amount of parallel processing is necessary--the critical step is quickly culling the paths that won’t work and focusing everything on the one that will. It is this focus that leads to success. It’s the willingness, determination and drive to bet the company on the path that you believe will win. Your VCs can help in this decision. They see a lot of companies and have a perspective on many markets--but beware, if it's not your decision then it's unlikely to be the right decision, and even if you listen to your investors, success has many generals but failure has only you ;-)

Shooting the founding CEO is a very risky move in startups because the company’s DNA is invariably the founder’s. If the company is too embryonic it can stunt or kill the growth or give it cancer. Generally it's better to surround the CEO with strong partners who can overcome shortcomings and build the strongest team from there--maybe the future CEO may be among them, but if not the DNA will be enhanced anyway and a new CEO can come in later if needed. My personal preference is for the first-time CEO, and to find a way to help them find success. Some of my investors did that for me, and I think it's critical that VCs do this in order to nurture the entrepreneur and grow more valuable CEOs and companies. At the same time, it's our job to create superior returns for our LPs so we had better not be teaching on their nickel unless the result is a superior one. I argue that this is more often the case than not, since the founder CEO who gets this treatment forms a far better working relationship with the investors and avoids hiding the ball but shares the problems and weaknesses so they can be fixed.

It’s a shame that entrepreneurs don’t get to shoot their investors, but please don’t shoot me, I’m just the piano player…..


Suhas Krishna said...Hi Larry, Long time reader of your blog. Very interesting and educational. Being part of a startup in this field from ground-up and a budding entrepreneur, your viewpoints present great insight on the bigger picture.

Krishna - Thanks for the comment – please post questions or propose topics anytime!

Monday, June 8, 2009

What makes a good entrepreneur?

Well first don't be good, always be great--if you can't be great, be lucky--and if you can't be lucky then get out of the kitchen and let someone great cook instead!

A few years ago I pitched an IPO to a large institutional investor--now many people say that bankers are dumb--actually they aren’t, they just like looking at things simply. In fact really good operational CEOs succeed because they can break complex problems down into simple forms and make clear decisions. This is a lot like good bankers--which is not to say that there aren’t some dumb bankers, in fact I have a list in my head, but it might look a lot like a list of people who said “no” ;-)

So great entrepreneurs have the following characteristics (as distinct from great CEOs, BTW):

1. They make money for everyone around them.

2. You can’t do it alone--they understand the value of partners: business partners, channel partners, people who shared a common vision and a drive for a common goal.

3. Deep domain expertise in the market they are attacking--clear understanding of the customer and their problem and often invented the solution out of sheer frustration with what was, and could clearly see what should/could be.

4. Shift happens--Understand the mechanics of change, and adapt quickly to market shifts, change plans and be flexible in order to achieve their objectives.

5. Comfortable with ambiguity--as distinct from CEOs who want to make a clear and final decision, entrepreneurs like to leave their options open and remain flexible to optimize their outcome. If not done correctly this can also be a fatal flaw.

6. Integrity--entrepreneurs are not game show hosts or promoters (there is another name for these people). True entrepreneurs are open, direct, honest (albeit with a great flair to see the good in any situation and spin any event). Honesty in pitching does not usually get you funded this time, but it has a way of getting you funded next time ...

7. LUCK, LUCK, and more LUCK. Don’t underestimate the power of luck. Most great entrepreneurs have this X-factor in abundance, and instead of ego, they have luck, and luck is better at turning lead into gold than any business alchemy.

Now in other countries entrepreneurs are spurned, and sometimes despised--many bankers who act as early stage investors end up suing the entrepreneurs because they “lied.” At best they may destroy their reputations and ensure they can never raise money again. Generally this is because the investor's ego is bruised and they want to prove that they were in fact not wrong in investing, they were misled. Perhaps they also want to claw back some of their money. Creating massive penalties for failure is bad for any ecosystem, clearly if someone lies and misleads investors deliberately there should be penalties to discourage such behavior (I'm thinking Enron here)--but most times what is clear in hindsight was by no means obvious at the time. When an entrepreneur plans to change an industry with a revolutionary new idea, chances are overwhelmingly high that they will fail. Change is difficult and very very risky, which is why the rewards of success are so massive (Google). Because they are so rare, 1 in 10 VC investments are winners, and these are by people who focus entirely on this high risk area, not bankers or angels.

To many bankers when an entrepreneur presents a financial plan, it's etched in stone and when they miss it’s a grave sin. Missing numbers is of course a sin, but when you are creating a new market the financial analyst approach is to work out your production capacity and determine how many products you can produce, then validate that against comparable companies and their sales capability to see if you can meet the expected market needs, thereby defining the boundary conditions for revenue. This approach works in a commodity business, if you are selling fish from a fish farm--there is a defined market for all commodities, a production cost and a market price--but if you are creating something new or different, none of this works--the market has to buy into the vision, your technology has to work in the way the customer wants it to, and you have to be lucky. Did I mention luck?

Any CEO who has had a great success will then face a bifurcation point--his ego will try to dominate his humility. If he keeps ego in check and credits the power of his team and luck, he will likely succeed again. If he lets ego dominate, he is unlikely to be a good repeat CEO ... perhaps he will become a VC instead or something that rhymes with banker ... ;-) Being the least experienced investor in the group, I thought I’d opine on the market ;-)

Tuesday, May 26, 2009


So there is a feeling of light at the end of the tunnel at present, some even have a "phew, its over" kind of feel. The Open Table IPO with its 60% rise made Rosetta Stone not just a flash in the pan, and the market is sensing that maybe it's not as bad as we thought. This reminds me of 2002 when the Nasdaq had collapsed from over 5,000 to around 3,400 and we all dived back into the market thinking it was just an adjustment, then over the following months it slowly but surely slid all the way down to 1300 ...

I don’t think that is happening here, i.e., the “dead cat” bounce, but it's going to be very rocky when Q2 and Q3 numbers come out and are pretty flat. I think the market has gotten ahead of itself. There are some positive indicators; FAB utilization is flat to up slightly in some niches, and generally slowing to flattening in the broader market. The real estate market has stopped collapsing and seems to be stabilizing after an average 40% loss; sales are moving again and not just foreclosure driven short sales. But a lot of this is because interest rates have moved so low. This looks like a long slow flat, not a recovery. There is an economic theory that predicts a massive recession in 2012 and I’m wondering if this was just a test; it's astounding how quickly the markets can unravel and it feels like the sky is falling in.

The underlying economic problems have not been solved here--there is a massive imbalance of trade, deficit, and the US dollar is being artificially propped up as a reserve currency. We are printing money to feed stimulus which should lead to substantial inflation but instead interest rates are falling again due to artificial pressures to try and stabilize the housing market. There are a lot of VCs here who badly need exits, there is a backlog of companies, and the rest of the financial services industry badly needs the work ... this could restart the engine and drive confidence.

If this happens I think we should take advantage of itwhile we can and try to raise funds sooner rather than later--despite brutal terms I’m sensing regaining confidence here or at least greed overcoming fear again. My concern is that this will all be short lived because the fundamentals haven’t actually been fixed, and we will see another crash or a continuation of the current one ...

So for entrepreneurs, don’t rush out expecting great terms again, you’ll get creamed--but perhaps this is hope to hang in there and don’t give up on getting funded just yet. What’s good about any recession is that it highlights a bunch of genuine pain points in the system and true entrepreneurs jump in to fix them; their customers are more receptive because they badly need the fixes and this tends to get the ecosystem moving again. Even VCs can help ;-)

What’s interesting is that VC focus gets shifted away from incremental changes to order of magnitude changes--i.e., a solar company in a bubble would have been funded if they could increase efficiency by 1%, but now its gotta be 10% ... but the solar ecosystem badly needs all these incremental improvements because there are a lot of (little) inefficiencies that together add up to a lot. What’s truly great about entrepreneurs is that despite the reluctance/fear/inability for VCs to share/fund their vision, they somehow, someway get through, keep the company going and flourish in the recovery (some even in the downturn).

The key for the ecosystem is for exits to start happening again, especially the big splashy IPO kind, because then the VC LPs will start believing in the VC model again and funding the VCs, and then they will fund you. I’m writing another blog about the (much needed) culling of the VC industry, assuming I don’t get culled ;-)

Monday, May 4, 2009

So how bad is it really ...

Despite the temptation of saying, yet again, it’s the worst I can remember, I’d really rather focus on the positive. Besides, as is known by anyone who served in the military, the human body fortunately has no long-term memory of pain (or pleasure for that matter, more's the pity ...).

Remembering waking up one September morning in California to the radio saying something about a plane accident, and later getting a call from a Buddy in DC working at the Pentagon ... its hard to imagine anything worse than that. For sure in Silicon Valley we were plunged into Tech nuclear winter--you couldn’t fund a gold mine let alone a tech startup. But we managed to raise money and survive--and cleantech and a new generation of biotech were born out of that disaster.

Half a dozen chip companies started shipping in 2002, ramped revenues to $100M by 2004 and went public with stellar returns. Is this now worse? Sure, but it's still just part of the cycle. Having lived and managed startups through three of these things already, I was hoping I might be able to spot the next one coming ;-) fat chance! But in hindsight, when all things are clear, I can remember some common elements. First, at the top as we were unknowingly racing towards the precipice, taxi drivers, airport luggage handlers, and bellhops were giving stock tips. Everyone was in the market, and companies that probably had no right going public managed to do it. Underwriters were having a drunken orgy of fees and pumping everything they could into the market, and big hedge funds were driving the IPOs to generate stellar returns, and then shorting the stocks to profit even more on the way down--and that’s just the Australian market, which is one of the more conservative! There is a cycle of disbelief, anger and blame, endless lawsuits as shoddy underwriters try to find someone else to blame for their mistakes, audit firms fall for failing to properly report numbers, and weak BoD members are crushed because they believed what inconsistent management teams told them.

Some of the lawsuits from the last downturn are still going on. Happily the JDSU one just ended a few months back and Kevin (former CEO) emerged victorious--it’s a shame he couldn’t countersue those that drove that ridiculous claim. Anyway, one difference this time is that in addition to the stock tips, those same people were also giving property advice--a friend bought 19 properties over a two-year period. When I asked him if they were financed on full recourse loans he said “what’s that?” Frothiness shows, but the trouble is you can keep riding it as long as you are not the last one to the exit.

There is a similar pattern in recovery--we never know we have hit the bottom until about six months later. But again in hindsight, we have some clear signs--last time, as the Nasdaq tumbled from over 5,000 down to 1,400 (where it is now) it had been dropping at 100 points per day when it hit 1400 and a well known fund manager friend told me, well at least it will be all over in two weeks ... capitulation. There is a point where we all just get sick of it--even the newspapers get sick of publishing doom and gloom, and start looking for something else. We don’t care how cheap a house is in Stockton, we just aren’t going to buy it, and things stop. We take a breath, look around and amazingly the sun comes up again. We are still alive, the world still turns, and eventually we go back to work and stop worrying about it. At least 50% of any recession is in our minds--once we get sick and tired of being afraid, the engine starts again and things get better. There is also a point where greed overcomes fear again, and people start thinking that the market really is on sale and this is a once in a lifetime chance to buy blue chips at bargain basement prices.

I do think this one is bad, but it will get better, and there are some remarkable opportunities out there for all ;-)

Wednesday, April 15, 2009

Title inflation

Many early stage VCs let this happen, and as startup CEOs we are often guilty of it too. One large company success is enough to convince you that title inflation is really, really bad. In the early stages titles are cheap and all of us are focued on preserving cash--its oxygen, so we often weaken and hand out titles that are too big to wear. Now a startup is great because it gives people a shot at exceeding their capacity and then growing to fill it--it's an incubator for great C-level people. As a startup CEO you are always in the crosshairs of everyone. The best thing you can do to build success is surround yourself with the strongest executive team you can--especially people who can make up for your blindspots. Now there is a chance that one of this team will be able to replace you as CEO--this is critically important--you can’t build an organization without this (see another Blog on the indispensible founder & nutcase ...).

I’ve known a number of startup CEOs (and come to think of it two or three public company ones as well!) that surrounded themselves with mediocre people that they can control, seemingly thinking that that insured their job. In a VC backed company it will just ensure a new CEO to replace all the dead wood.

One of the single most powerful things you can do to convince your Board that you are the right CEO is demonstrate an ability to attract top quality people. Who cares if the VP marketing runs rings around you in marketing, or if the VP sales is a 10x better closer than you are--this is what you want. For some inexplicable reason, many startup CEOs think this makes them look bad--no, no, no, it's exactly the opposite. Team is everything. You build the team, you raise the money, use it to build a great company.

When companies grow larger, the founders often jealoisuly guard their titles--they were great in building the company--it's “their” company and it owes them a living ... I know one Nasdaq company that recruited a new CEO to replace the old one when the stock ceased to perform, but the old CEO insisted on holding the chairman position, and remaining “actively involved” with the management. The end result, the new CEO had to create two layers of management; they recruited a new executive team who could actually do the jobs, and kept the old founding team in place who tended to get in the way of executing anything, despite their exceptional track record of executing nothing. In the end the new CEO was replaced by the old one, and things reverted more or less back to normal ... ugg.

When you sell a company, there is apt to be a preliminary assumption that, as a startup CEO, you have pretty bad title inflation--if the acquirer quickly notices that, actually your Director of Engineering, would normally be titled VP of Engineering, but really is a solid director level guy on track to VP, then it's likely he’ll retain that position post deal, and be well respected in the new organization. This opinion will carry over to the rest of the team in the same way the negative opinion would have. I've had this argument many times with team members who felt I was pushing them down and preventing them having a solid VP slot on their resume, but again, a VP slot that isn’t real usually has the reverse effect. You also probably want to do another startup, and having industry colleagues question your personnel judgment or hiring skills wont help that ;-)

Monday, March 30, 2009

What VCs actually do in a down market

So, last time I said that seed deals on really disruptive risky technology that can be game changing when the market recovers should go for early stage VCs ... Well, some are rubbing their hands together--either in excitement over predatory deals they can do to struggling entrepreneurs (or at cramming down their hated VC rivals), or in apprehension over how they will raise the next fund. Sadly, most have their hands in their pockets, or are sitting on them pretty firmly, reluctant to put them into their pockets for fear of having to take cash out.

We are seeing financings fall apart in literally the 11½ hour, when all the existing investors have transferred money, and the new lead lobs in a last minute call to say sorry our partners have decided we aren’t doing these type of deals anymore. This begs the question, "so what type of deals are you doing then?" Simple, they are doing C-round deals at A round prices--VCs trying to do later stage deals--I think that’s an OK strategy but there are already a lot of late stage firms out there who are better at that than early stage VCs are, so suddenly you end up with a competitive environment (albeit a weak one) and your bargain deals aren’t that much of a bargain anymore.

VCs are largely in decision paralysis, they triaged their portfolios, forgeting the companies that are likely to fail and reserving as much cash as they can for those they think can still win even in this market. If you are portfolio CEO don’t worry most of them went through this exercise back in Sept (but they do it monthly or at least quarterly too). Now they are wondering just how bad it will be--they certainly aren’t excited to fund chip deals, or medical devices. Anything that is going to need $50M+ and then mezzanine financing is out for now. (Personally I think this is actually a good place to invest if it’s the right deal). Anything consumer is largely out--and thank God no more social networking or internet dating deals (at least for a while)--sorry Web 2.0 guys but you had a great run. Cleantech is still OK, but no panacea--there is a lot of hype that still has to clear the system before anyone will make real money in that area, and the lack of later stage financing will kill many of those deals.

Syndication is back in, even in A rounds many VCs are wanting to get two and even three firms around the table so there is enough dry powder to carry the company through. The behaviors of VCs is often driven by their Limited Partners' behavior, and many LPs are telling their General Partners “don’t put us in a position to say no to you.” In other words don’t call any more capital for a while until we can sort out this mess--so no deals. Other LPs are saying, "why is your fund so big when you are not doing any deals--give us our money back." Many VCs are increasing their reserves for existing portfolio companies both to extend their ability to support the companies and to keep the money away from their LPs. The worst case scenario is the VC who is almost at the end of their investment period--they need to reserve more cash but have little chance of raising a new fund until they get some exits, and the IPO window is firmly closed.

The LP perspective on this is, "don’t complain to me about the IPO window, where are my returns?" This is not an unfair ask, actually, as VCs we always expect our CEOs to take personal responsibility for everything, so why shouldn’t we hold ourselves accountable to the same standard? Also, Venture is supposed to be key to any portfolio in order to “flatten out the beta.” Well there sure is a lot of beta to flatten right now ;-)

Monday, March 9, 2009

What VCs should be doing in a down market

This is a two-parter, since its always instructive to compare the ideal with the actual ...

Every company I’ve ever started was done in a recession--you know all the reasons: people are available, your competitors are pulling back giving you a great chance to be ahead of them when the market turns positive again, etc. etc. It's very hard to go to market when there isn’t one--and in this environment customers are scared of the future and are delaying buying decisions. Time to market has become irrelevant--so called first mover advantage (please don’t ever use this in a pitch) never was relevant. So if your company is early, and developing something really revolutionary that may take one or two years to create then ideally VCs should be really interested in this, provided the burn rate is manageable and it doesn’t require a massive infrastructure investment.

When the market inhales,large companies cut R&D projects and really high quality people get bored and become available to start or join new tech startups. VCs need to find these teams and embrace them because they create the next round of Googles and Ciscos. Be under no illusion it's harder today to get funded than ever before, because these great teams are out there and if you are competing with deep domain experts you will likely come up short. Also, VCs are human too (well, almost) and are just as scared and uncertain as everyone else, so making the funding decision will take longer and longer, and each time the market takes another big hit they will be reminded just how tightly closed the IPO exit window is, and that they have to have another round of explanations with their LPs as to why the money should stay in the fund. At the same time, their LPs are hammering on their management fee, and wanting to know why they are paying it if the partners are not investing.

I think there are two basic choices in this market, other than the non-choice of do nothing and sit on the money until things get better. VCs first triage their portfolios to see which investments can and should survive, circle the wagons around the portfolio and make sure they have a low enough burn and enough runway to make it. Then they can either go out in a predatory way and force their way into deals they would otherwise be unable to enter, leveraging the fear factor. There is a natural bias towards later stage deals--i.e., doing series B & C deals at A-round pricing--remember many of these firms need to have an exit soon, and given that public markets are closed the only option for many is to be able to sell a later-stage company to demonstrate a return to LPs who have seen nothing but losses for the past year. The problem with this path is it does not leverage the natural skills of a VC--there is a lot less value to add to a later stage company and it looks more like a banking deal. Also there are a lot of bankers and other VCs also looking for that type of deal ;-)

The other path is to forget revenue and look for highly disruptive plays that may take two years to develop their product but when they do it can really cause order of magnitude changes in the business model. These are extremely risky, and often more like science projects than businesses but they also offer venture scale returns--10 to 100x and it only takes one good one to make an entire fund (one of the Google VCs experienced exactly this win in a portfolio that was otherwise abysmal--and who says we are so smart...)

It’s a shame to waste a good crisis, in good times companies are struggling to meet orders and focus all their efforts on supporting manufacturing and keeping the engine running. They have no time for revolution. In times like this they need aspirin for the pain, not steroids for performance--it is a time for revolution. And a little revolution now and then is usually a good thing ;-)

Next time: What VCs are actually doing in this market (this one might take a while...)

Monday, February 16, 2009

Down Rounds and Valuation

There is a small company here that has just relocated to be in Silicon Valley and it has a Term Sheet from a VC who effectively underwrote its financing on the presumption that the VCs would be able to secure a co-investor here in the Valley. The VCs now want to renege on the term sheet and change the raise and pre-$. Sounds like another "vulture capital" story doesn’t it? Well perhaps ... or perhaps not.

So one of the worst things that can happen to a company and the investors, is a "down round." It's one of the main reasons VCs push back on valuations. If the company cannot create enough value on a funding round to justify a larger pre-$ on the next round, everyone is in serious trouble. The VCs hate down rounds, not because it changes their ownership (this is a common misconception among entrepreneurs)--the VCs are naturally trying to own as much of the company as they reasonably can, but there are simple and reasonable limits to this, which if they are ignored by the VCs will be corrected by the market anyway.

In a down round, what the previous round holders lose they make up for on the next round--net net, they typically end up at the same place--no big deal. But the founders, ouch! The team is usually okay because the new investors boost the ESOP to incentivize the team, taking that boost out of the founders and the previous investors. What VCs hate about down rounds is having to tell their limited partners that they effectively lost money--the value they are carrying the investment at has gone down, and this is never a fun conversation ;-(

Now from the VC side, the company has missed some required accomplishments in order to attract a co-investor, like the new version of its product, which can be sold here vs. the old one which can’t, the building of a team, and others--but as in most cases, communication and misunderstanding are largely behind the issues, and the end result is ... do the VCs stick to the original deal which will almost certainly result in a down round, or do they work with the company to restructure? The company on the other hand, does it wheel out the lawyers and try to force the original deal, or does it have conversation(s)?

Back to my recurring theme of team, team, team--once the VCs have funded, even partially, they are in the same boat as the entrepreneurs, generally they don’t propose deal changes that don’t make sense from a shareholder’s perspective. For VCs deal terms get renegotiated by teams frequently--e.g., management carve out in acquisition overtakes liquidation preference, anti-dilution, and earn out rarely finds its way back to the investors but ends up in the pockets of the team, etc….

It will be interesting to revisit this case, and the urban myths it creates over the next several months, because it could go either way. Wheeling out the lawyers rarely works, because (in my experience) the only ones that win are the lawyers and litigation makes you a poor investment risk in the future regardless of whether you are successful or not. Unfortunately, the reality of most situations is that both sides are right, and ironically wrong at the same time. If the entrepreneurs cave, are they opening the door for future renegotiation? Should they argue the case of whether they delivered or not, whether it was miscommunication or not?

At the end of the day its largely irrelevant--it is what it is, deal with it! I suspect the right solution is for everyone to compromise--for the VCs to put up more cash to give the company more runway so it can have the best possible chance of delivering the up round needed (which goes against the post money problem by making it even higher), but at the same time give the VCs a claw back provision or warrants or some other mechanism to turn a Down Round (if there is one) into a flat round, so that everyone wins. For sure, while everyone is arguing the "he said she said," the chances of the company hitting its milestones are getting smaller, and that’s in nobody’s interest!

Monday, February 2, 2009

Heading for the exit ...

One of the key criteria that LPs [limited partners] use to evaluate a VC fund is their ability to get exits from deals and return capital. I was doing an interview a while back with a group of LPs who are interviewing entrepreneurs to get a better picture of how entrepreneurs pick VC funds---quite a good idea, I think. One of the questions was how to weigh the VCs ability to get exits vs. other criteria. As I’ve mentioned before, my key criteria is to work with a partner who has personally built a similar company in the same space, or at least has empathy with me as an entrepreneur, so they can add real world experience and actively help me build a successful company. So for me, ability to generate an exit is very low on the VC check list.

Now, as a VC, I should defend that position ;-) I have sold several companies, and the first time, I followed the advice of older, wiser heads, and engaged an advisor--it worked out OK, but the advisor was not so good, and had little experience in our space. The result was an OK exit, but it should have been much better. So this put me off advisors, and the next time I did the deal myself.

The problems with doing it yourself are many but you should never sell your own baby. You are too close to be effective and are often negotiating with your future employer—and, in a way, against yourself. Having a third party act as the buffer is far more effective, not just from ability to play the missing man scenario but to have an experienced transaction architect look at your deal unemotionally and optimize it for you--and themselves ;-)

I heard a story about a VC who wanted to go with his entrepreneurs to negotiate a trade sale of one of his portfolio companies. The company was about two thirds through the negotiation, and the entrepreneurs didn’t want the VC to come. Now I think the VC getting involved at this stage was a really bad idea too, but not for the same reason as the entrepreneurs who had been told by a trusted advisor that the VC would “try to screw them” and that’s why he wanted in on the negotiations.

This is rubbish, in any transaction in which the team adds value going forward they have the leverage and at an exit there is little percentage in trying to “screw” the entrepreneurs since VCs don’t stay in business long if they damage their wellspring of deals. And the acquirer tends to be more inclined to try to “screw” the VCs ;-) See previous posting.

Interestingly, the VC wanted to be in the negotiations to prevent the entrepreneurs negotiating a better deal for themselves at the expense of the other investors and shareholders, a classic case of hyeung yao to smooth the deal. There is some validity to this concern as its easy for an acquirer to load up fat retention bonuses, option packages, and employment contracts to sweeten the back end of a deal for the entrepreneur that are not shared with the remainder of the shareholders. VCs may have a bunch of magical powers endowed beyond their preference shares, but they also have serious legal obligations to represent the interest of all shareholders, especially the minority common shares and ESOP.

Anyway, I learned from both ends that it's better to find a really good banker who can make the transaction work for you. There are a lot of boutique i-banks that specialize in certain verticals--like telecom, optical, semi, medical, etc--and (not surprisingly) these boutique specialists are usually former entrepreneurs who have founded and sold their own businesses and thereby realized how much better it is to have a third party do it for you. The really good ones I found were serial entrepreneurs who learned firsthand how to build value and transacted that into very solid knowledge of what makes an acquirer want to buy your business. With all due respect to VCs, I think those boutique firms are far better assets for generating an exit than most VCs are. Tech company sales are a highly specialized transaction area and VCs can’t be good at everything ;-)

Answers to questions:

John, Dave, Bill, Judy – thanks for all your various questions around what VCs are funding in this environment. I will write a blog on that next, and follow it with what they are actually doing ;-)

Tuesday, January 20, 2009

Dinner in Beijing

I first went to China in 1987, after Tiananmen Square. We were helping Chinese students get out of China and in to study programs in the west. I had Chinese friends in Australia who marched in protest after the students were killed, were filmed by western media and logged by the government so they could never return. Well, never is a long time, and last year one of them finally did. What a change in China--like the man said, “it's not your grandfather’s China”. Chinese people bring new meaning to the concept of investing for the long term. I had a wonderful dinner in Beijing a few days before the opening ceremony on 8th of the 8, 2008…..there are two sisters you see, who grew up through the cultural revolution and to me they epitomize the new/old China.

Their father was a banking executive who suffered through the anomalies of being a successful financial guy when Mao offered his version of the New Deal. Seeing their father disgraced in this way, it's an amazing feat to me how this family turned their fortunes and reaffirms by belief that Chinese people are the greatest entrepreneurs on earth. I have done business with the older sister for many years in China and she has several remarkable gifts, one of which is the ability to look into a person’s heart and predict with great accuracy how they will behave in various circumstances. I have learned that it is pretty much fatal to do a deal in China without that older sister’s viewpoint and judgment.

Another gift is vision, and the ability to bring capital to bear to finance that vision. It's amazing to me that the older sister brings to any deal what Conrad Hilton called the greatest tradition of American business--your word is your bond, a deal is a deal, do what you say you are going to do. I’ve found that when things get really bad, older sister finds a way to keep to the deal, usually by going above and beyond the call of the deal. She expects to do business not just with me, but with future generations of me, and wants to build a trusted relationship--talk about investing for the long term.

And her third gift is the ability to convince large government entities to invest in her vision, which always helps ;-) To be sure she invests not for personal profit but for growth and the benefit of China. You see elder sister is a staunch communist party member and her mission in life is to build a better china than the one she grew up in. It shouldn’t be that much of a surprise to find this dichotomy in a communist country that has a for-profit government--any more than our democracy with the non-profit government ;-)

One of the advantages of being Australian, is you get used to being far away from everything; you understand just how different other cultures are; and you feel a little bit inferior to them, which means its easy to be humble and accepting of new environments. This is a big advantage when it comes to operating in other cultures, and one of the pitfalls suffered by many companies and investors when they tried to join the Chin-dia gold rush--it's critical to have locals on the ground to navigate the minefields for you.

Did I mention that their younger brother, the underachiever, spent 13years in Olympic soccer training camp, then after a critical injury did a PhD in Physics while in rehab……then founded a couple of US public companies, then…….but that’s another story ;-)

Answers to questions:

andmotion has left a new comment on your post "Marketing Power":

Interesting you mention brand, belief, religion and science here, Larry. Martin Lindstrom in his newish book "Buy.ology" brings brand, belief and religion together in a scientific way. Very interesting research using MRI and other scanning techniques to measure people's reactions (some in real time) to different stimuli such as advertisements, in terms of their effect on different parts of the brain. As we know, industries like cosmetics and perfume are masters at crafting 'beliefs' about product efficacy etc in their marketing. The research quantifies this effect, and the role of things like mirror neurons and somatic markers in forming our impressions of different products and brands. And how these impressions drive purchase behavior.

Its amazing what can be measured in our brain, there is a child psychology test that monitors frontal lobe activity and it's fascinating to see the neurons sparking in the really active and noisy kids and those quiet in the sedate ones. I just hope that the advertising agencies don’t get the hands on a way to monitor this direct reaction for us and feed us exactly what we want to hear in order to make us buy ;-)