Tuesday, November 27, 2012

Don’t get discouraged

So the pitch went great, lots of good discussion and Q&A, but still no $...what happens now? Firstly, don’t be put off by a VC not investing in your idea--there are many, many reasons why this happens. Please don’t assume your idea sucks; at the same time, also don’t assume they don’t get it--the fact is, you can’t kiss every girl. VCs (should) only invest in things they can really add value to--so if they don’t understand your technology or haven’t personally built a business in that space, chances are they wont want to fund it because they cant add anything beyond mere $.

A little known fact, VCs love to learn--why did they listen to your pitch if they didn’t really understand the space? Because you can teach them--in return, they will teach you. They will spend some time with you helping you find the right VC through their network, if you seem to have a solid idea. Furthermore, if they do understand the space generally, they will often spend a long period of time helping you iron out the kinks in your plan. I know of one company that Dado spent almost 18 months with before ultimately funding. Some companies take a lot of work before they are investible. This is a really good piece of the ecosystem--now, many entrepreneurs from other places don’t realize or believe how much time a valley VC may be willing to spend to nurture a potentially great idea. So, here is a story--some chip guys came up with a very high risk concept pushing the chip performance envelope almost to its theoretical limits. They were pretty well qualified to do so but while their chip design knowledge was great, their market knowledge was poor. So a very well known chip investor spent about 9 months working with the team, almost turning them into EIRs and letting them work closely with the rest of his team to flesh out their concept. The company was probably 3 months away from being investible, but at that point they secured a term sheet from one of the top 3 firms on Sandhill rd, not well known for syndication of deals--they took the money & ran (per good advice ;-) but failed to get the original VC dialed into the deal--very, very bad...). One of my own companies in the optical space had a similar history where one of the founders had leveraged actually 3 different, small VC firms for almost a year before getting funded. I found out about the history about a year after that and set about mending fences, but hard as it is to believe entrepreneurs are stupid enough to leverage this help and then dump the VCs in favor of another, the emotion is a lot likely being dumped for a prettier girl, and it leaves pretty nasty scars, too. Now, this ususually is a byproduct of heady times of rapid market growth--in poor economic climates, it's far more common for VCs to band together and prefer more people at the table to share the risk.

Getting turned down isn't the end of the world--in fact, let's turn it around to the VC getting jilted by the entrepreneur. In the case of the chip company, the dumped VC now had a very clear perspective of the space and knew what he felt was wrong with the team’s original idea, so was in a great position to evaluate the next 4 groups that pitched him for the same concept and thereby selected the optimal competitor who is now making the original team’s life hell...fun, isn’t it. Every no from a VC is an opportunity to learn. Make sure you ask for a debrief--VCs are optimists and they live by relationships. They want to invest the $ they have; they will work with you to make you investible if you are patient, honest, and have fundamentally a good idea. The more honest they are the more it can hurt, but make it easy for them to be honest; otherwise, all you’ll get is “love the deal, but we are not doing any more in this space.”

Wednesday, August 29, 2012

Life is too short

Larry Ellison has known this for years, as he tries to extend his years ;-), but also in the sense, I mean. I had breakfast with a friend at Kleiner last week and he was bemoaning wasting 3 months on a deal and having to drop it. He was doing a deal with a foreign company in a region known for tough negotiations--and great falafels. So he had done all his diligence, reworked the plan with the team 5 times, secured his tier 1 co-investor (yes, even Kleiner likes to have a co sometimes), and had signed the term sheet. But there was a slight problem: There was a local angel investor who wanted to renegotiate the deal. He wanted blocking rights, veto rights, and the more they talked, the worse it got. Worse, the CEO clearly couldn’t manage the negotiation, and my friend had been negotiating with the wrong person and quickly decided 3 things:

1. If the CEO couldn’t manage his investor, then he couldn’t run the company.
2. The angel investor added no value to the company, and would jeopardize its success.
3. Life is just too short; he had seen this movie before and knew the ending.

There are very few negotiations you will do in your life that are transactions without some form or ongoing relationship. Even when you buy a car--a negotiation that is very adversarial complete with appeal to authority, missing man scenario, even ignoratio allenchi, and all 7 of the classic gambits--there is still a relationship to worry about post-transaction: Someone has to service your car and deal with your warranty.

Someone who takes a transactional approach to a deal with you is a great example of life’s too short--you should politely bow out and forget the deal, no matter how good it seems. Entrepeneurs have been often been advised to tell the VC that they don’t need or want the money--don’t play this game--you will get "great, then come see me when you do." If it's going to be all about price, go to a bank, a strategic investor, or an angel--the price will inevitably be better, but the value-add will likewise be less. And if it's just a transaction, why would you expect any value after the transaction?

Another classic tell is assignment of blame--in its worst form, the entrepreneur blames you when things go wrong, but generally it's their team or the economy, or the weather. Life is simply too short to work with anyone who won't accept personal responsibility for what they do. This tell usually comes out in the first Q&A session.

First impressions from engineers are difficult because they are almost always geeky--a good friend here in the valley created the first impression with some foreign investors that he would make a lousy CEO. Too much of a techie and a geek--kind of a gangly, dorky guy. Now, he is that, but if you have ever worked with, say, Intel, you will find that they are all a bit that way, but if you listen to what they are saying, you will quickly realize that they are really exceptional business people as well. The culture of semi people is quite unique--to be good, they have to be quirky, and only the paranoid survive. :-) So, I am not talking about superficial first impression--you have to see deeper than that. As dorky as my friend can be, his integrity is without question and his dedication focus and passion for what he does are compelling. He also built 4 tech companies and turned a zero-revenue tech acquisition into a division on Intel generating 100s of millions in revenue--so his business skills aren’t too shabby, either.

A young guy in Sydney caught my admiration dramtically when he argued passionately on a panel of older, more experienced investors, a very controversial point--but he showed passion and belief, and some serious cojones to take the position he did. (And, by the way, against my point of view as well--yet as a first impression--I’ve gotta find a way to work with this guy!)

It's really hard to practice what you preach in this regard. I am working on a project at present where we are literally founding the company around the entrepreneur--which any good VC should do. In this case, it’s the opposite of the first impression--my first impression was "there is something here; this guy is good, but he needs a lot of help." In working with him I have since seen many red flags, but can't get past my first impression--we’ll see if it works out. :-)

Monday, June 11, 2012

What kills tech startups

I have heard visionary or highly technical founders blamed repeatedly for the failure of a company because the technology didn't work--in some countries, they are blacklisted for life for this "failure." I don't believe I have ever seen a company fail because of bad technology (although I have seen one where the founder simply but unintentionally fooled himself). The visionary ideas are the hardest--new materials that will "fix" the memory industry, a new device that will make solar profitable again, or an electric car that will break all the paradigms. These big, bold ideas often represent new platforms or are category-defining companies--technologists love platforms because they can sell their technology to multiple markets and that makes the TAM much bigger than anyone focused on a single vertical. Now some VCs also love platforms, or at least those that can be truly category-creating--but startups should try to sell into multiple verticals. It's too damn hard.

Investors want to find these deals that will change the world, but the perennial problem for tech is finding someone to pay for that change--to do that we need someone who cares, ideally a customer. The company can raise some seed money to flesh out their idea, maybe do some engineering prototypes or simulations to show it "can" work. Then, they will take these to a group of potential customers to try and find the visionary who can share their vision. The investors will go talk to these potential customers and get excited about what could be, but it needs a little more work--it will change the world, but it needs some more cash to get a prototype together and validate it. OK, great--so, Mr. Customer, how much are you willing to pay to be the first to have access to this revolutionary technology? Er...well, we don't do that sort of thing...

Now, there are some big, brassy, bold investors out there who will happily forge ahead and fund these revolutions; you find them a lot on cleantech, healthcare, and semi. Often, it's the only way that these things will change because customers are so terribly conservative and slow to change that they can't see the future until they are thrust into it. But even these investors have a recipe to de-risk these swing-for-the-fences deals.

There is an old adage in physics that to solve a problem you have to turn the problem against itself--put another way, all physics students know in multiple choice the answer that seems least likely is usually the right one. Two companies I co-founded ran into fundamental technology problems where basically the technology didn't work. In one, the material died at any practical operating temperature, so we had to change to a market that was comfortable with high-temperature stuff; in fact, that needed products that could withstand those temperatures. In the other the technology worked, but it required so much unique manufacturing equipment that it could never be practically deployed--the solution there was to sell the company to someone who was awesome at manufacturing so they could get it "inside," and they did about 7 years later. Death for a startup, but just a single design cycle for them. :-)

Elon Musk made the electric car revolution work by partnering with everyone who was best-of-breed in making the critical elements he needed--Panasonic for batteries, Toyota for engines and their parts chain, etc. He also had them write the big checks to finance the idea --so a crazy (who in their right mind would try to compete with Detroit? Japan...) idea became a stellar IPO. Of course, you don't hear about the other 5 startups that preceded Tesla and failed...

Friday, April 27, 2012

Ideas are Cheap

I know the guys that invented the Internet--no really, and he wasn’t even the Vice President--but seriously, in 1980 a good friend made the observation that the intranet at our university should be the basis of a global communication system. After a few more beers, he had painted a vision of IP telephony, e-commerce, and many of the other innovations we now take for granted. He had a brilliant vision, but limited ability to execute on it; in fact, no real desire to do the work necessary to execute on it. Not to criticize Dave; after all, I was renowned in my University days for always saying "Just shut up and do it"--imagine if I'd bothered to TM that. ;-)

I also spent a lot of time in my first company writing my own patents because I couldn't afford to pay an attorney--I highly value IP, but it's a love-hate relationship because IP fools you into thinking you have invented something. To me, invention, or rather innovation, is all about executing on the vision and delivering the change. Now, clearly, there are instances where someone invents something clever, tries to commercialize it, and another company does it better and a IP lawsuit results. Ultimately, products must be born of innovation, but unfortunately IP is more often used by Trolls to stifle innovation and competition. Sure, there are times when a company refuses a fair license agreement and get what they deserve as a result, but as an investor it's rare to find an inventor, especially in a university that has a realistic perspective on the value of an idea. If you have ever negotiated with a university to license IP, you will likely share this feeling about IP.

I had an interesting experience recently with a university outside the valley; the meeting started with reading the riot act about what the university wouldn't put up with, and then went into a diatribe around knowing all about how VCs operate. Now I admit my brethren in other countries to operate quite differently to those in the valley, and there is probably justification for considerable negativity. Anyway, it was an interesting opening negotiating position. It stemmed from a bunch of things--but recognizing that I had already spent a lot of time with the inventors and worked with them in arranging investor meetings, customer meetings, diligence, getting market data, and creating the plan, the assumption was that I was already half-pregnant so I had a lot to lose.

The problem with this adversarial approach, aside from the fact that life is just too short (see earlier blog), is that early-stage investing is a partnership--if it's being done right, the VC is part of the founding team and gets their hands dirty in the trenches alongside the founders. When someone starts trying to use the work you did to help them against you, it's indicative of a zero-sum gain mindset--clearly, it's one form of business leverage, but it's a transactional view that burns the relationship for short-term gain. You don't ever want to work with people like that--even if you are just doing a transaction. Many, many people live and thrive in zero-sum gain ecosystems, but they rarely create anything, so why bother?

Having walked away from the deal I had helped create, I then experienced the irony of having a series of players from the original investors, independent BoD members, and some of the founders come back over the next year and pitch me my idea It still sounded pretty good, but they were so busy competing with each other to steal the idea that none of them actually delivered it. Lawsuits were threatened, sabers rattled, and ultimately everyone walked and the original company died. Which is the other problem with a zero-sum gain mindset--there isn’t anything left to go around. :-)

Tuesday, March 20, 2012

Steve (for Wick)

Many years ago, I had the great pleasure of showing Steve Jobs a laser projector prototype in our suite at a major tradeshow. When I brought him into the room wearing the customary jeans and T-shirt, my chairman tried to tell him it was a private suite, and who was he and why wasn’t he wearing a suit like everyone else? Interestingly, none of this seemed to bother him, as he was obsessing on the projection system at the time.

I had met Steve 3 times in 23 years and while I doubt he ever remembered me, I was always stunned by his perception, vision, and imagination tempered by ability to focus (obsess) on core over context. He lived next door to a fellow CEO Wick Goodspeed near downtown Palo Alto for many years, and because he didn’t have a pool (his yard was an orchard) he and his family often used Wick's. Wick was a wonderful friend to many people, a role model, and he is sadly missed. I asked Steve once if he was left- or right-handed (so many of the original Apple team were lefties)--and without missing a beat he said ambidextrous. :)

Now, while many people will tell you the stores are all true, I would observe that all visionaries can be difficult because they are obsessed--I'm sure Gandhi was a pain at weddings, too. My limited observations of him were augmented by working with a lot of his close co-workers and meeting a lot of the classic Apple alumni, including one of my portfolio CEOs and my current business partner Scull, who had the dubious pleasure of channeling go-to market strategies to Steve’s ideas...you can imagine!

My final meeting with him was a few years back, still related to the cell phone projector idea--I was in big trouble with my family because it was my birthday and the only time I could meet him was at night, so I was missing my cake. I waited in the lobby for quite a while, and since no one was there I started playing the Bosendorfer piano, which surprisingly wasn't locked (normally in the US, playing the piano in a big hotel gets the "may I help you?" and dirty look), so I figured this might accelerate my meeting so I could get back to my birthday cake. After another 10 minutes or so I realized he was listening, so I stopped and figured I was in big trouble, but apparently not. I discovered later that he loved art and artists--he wasn't artistic himself, at least not in the traditional sense, but that made art even more important to him, as evidenced in Apple's designs.

Apple, even with Steve's vision, is impossible for a startup to do business with--they pay well, they have massive volumes, and they value performance and quality over price, but they are relentless in their pursuit of excellence. And startups beware--they will suck you dry like any big company, only worse. So, excited as I was, I really didn't want to get into bed with them, but I wanted to see if the idea really had legs or was crazy. What intrigued Steve was not the projector or the laser or the cool tech, but the key issue that a laser is always in focus, so when you project a beam the image is always in focus, even if its on an irregular surface like a sphere, cylinder, or someone's T-shirt. He immediately leapt to the idea of projecting clothes onto people, and structural drawings on old buildings and at least 20 other "apps." The other amazing thing about him, was his willingness to take a big bet early on--he bought the little startup that invented the multi-touch technology, ploughed years of resources and cash into it, and made it the key selling point of the iPhone. He did the same thing many years before with a crazy idea completely computer animated movies buying the property from George Lucas after Lucas' financial advisors insisted he sell the dog that was draining his cash--10 years of pouring money into it made Steve CEO of 2 public companies simultaneously.

Love him, hate him (and the same people did both), he was truly a national treasure, and an inspiration to us hardware guys who struggle for attention against the white noise of the Internet. In my final meeting, I made the mistake of answering his "how important are we to you" question by saying "I’m giving up my birthday with my family to be here with you at night, isn’t that a good start?"--he ignored that and moved on. I found out later that it was his birthday, too--oops….

Thursday, February 2, 2012

Aussie 'Gold Rush' in SV?

Aussies have been coming to the States for 30 years -- actually, longer if you think about Ugg and others, but for sure Peter Farel founding Resmed.

There's a misconception that if you come here, everything is solved and the streets are paved with gold. It's a little like the scientist I started out to be saying naively it's such great technology; build it and they will come.

I think the real story is Aussies who are building these companies back home; that's really new. I think Atlassian, Stayz, Bislr, Freelancer, Spreets, 99 designs, OzForex, and the prior generation Seek and Looksmart are the real heroes because they proved it could be done on shore in Oz [Editor's note: Australia]. Dave Skellern and Neil Weste went against all odds and proved you could build a big semi company in Oz with the first Wi-Fi chip company, despite the absence of any domestic chip market. Dave made a massive exit to Cisco.

What's also new is that the current generation got US private equity firms (not VCs, yet) to do later stage deals domestically. It would be great if local PE firms would get into these deals. I would much rather see Aussie funds supporting Aussie companies -- there is over a trillion dollars under management in Oz and it's a shame that most of the tech money goes into US tech.

Web deals are inexpensive to start and to fund -- so easy to bootstrap, and less constrained by geography. But they still need serious dollars if they start to get traction, because competition is so fierce they need to market like crazy and that costs big money. Sometimes they get lucky and go viral, but it's rare. With hardware deals, you need to have money to build the prototypes to get started; this is the area that Aussie entrepreneurs really need help with. It's also the area where the most sustainable and value-creating companies can be built. According to the World Economic Forum, Australian startups are strongest in the new to region category, not new to market or new to world -- this means we are good at copying successful ideas from overseas and exiting them in Oz. That's not sustainable. The same is true of many, many, other countries, and in general mercenaries make money far more easily than missionaries.

On the invention side Australia is disproportionately strong; there is massive government support of research -- we invented Wi-Fi, the photocopier, plastic money :) ...but we are weak on the rest of the innovation value chain. We are also more often visionary or missionary entrepreneurs when we do technology, rather than mercenary. Atlassian had a vision of collaboration rather than e-mail. Resmed proved the existence of a lethal disease no one ever knew existed but affected many, many people, then built a multibillion dollar company to cure it.

Another generational change: In the prior generations, there were few serial entrepreneurs in Oz; mostly they win once then go into something easier like property development. If they invest in tech, they tend to be pretty tough on terms like the older generation of family offices. Rather like toughened school boys, they do to the new kids what was done to them and it becomes self-perpetuating. The new generation are more accepting of risk, I think, because they tended to make money faster and easier through the evolution of the web. This is a really good thing for the country because they are willing to re-invest both in themselves (repeat entrepreneurs) and in each other. That's smart money and it's ecosystem creating; with that catalyst we could see a real tech investment ecosystem form Down Under….there certainly is enough beach for a silicon something. :)

Friday, January 6, 2012


When I left Australia in the late '80s, "entrepreneur" was a dirty word; it had all manner of negative connotations. In Silicon Valley, I became a serial entrepreneur, which is even worse, and after six tech startups with two IPOs and four successful trade sales, in 2007 I was asked by an Aussie fund manager what my problem was and why I couldn't keep a job! ;-)

I have run venture-backed startups through three recessions, and as many bubbles. For the past few years I have been an early-stage venture investor -- literally on the other side of the table from by entrepreneurial brethren. I don't like the term "cleantech"... Like the preceding bubbles, nanotech, telecom, Internet, laser, and the previous wave of solar in 1989 -- they are all just tech. Many were driven by government regulation or deregulation, and all were overdriven by excessive investment. These bubbles opened Pandora's box of technologies and created a new breed of entrepreneur, more like a showman or game show host to promote them -- rather like the perception of an entrepreneur I left in Australia 23 years ago.

VCs like entrepreneurs who are deep in the space, ideally those who tried to build their idea within their jobs but got so frustrated that they were forced to leave and go it alone. They may want to get rich, but more than that they want to change the way things are because they have a clear vision of a better way. Greed is OK, but it doesn't carry you through the tough times that plague any startup. Sergei & Brin had a great vision, ironically are only executing on that vision in the past 18 months, and after finally succeeding on Plan E, it wasn't greed that carried them through the near-shutdown of their yet-another-search-engine company...but it sure paid off. It's hard to find the diamonds among the showmen and promoters, but they are out there, especially in Australia and especially in deep tech organizations like CSIRO and NICTA.

A second fundamental tenet of venture is to find white space (more recently called "blue ocean"), and it's very hard to find white space in a bubble where 20 companies are funded to do essentially the same thing. One or two will survive. Most of cleantech is ICT: Smartgrid is ICT; solar is optical and semi; wind is optical, mechanical, and ICT; bioFuels is biotech, materials, ICT-- there is a common theme here that is endemic to early-stage technology companies, and VCs are very good at making these bets work. We are not a cleantech fund; we are a typical early-stage tech venture fund, but if you look at our portfolio you will find we have a wireless company that provides near Gbit/s broadband for last mile and drops 80% of the cost and power from fiber solutions; a chip co that enables processors that consume 1/10 the power in data centers; a sensing company that measures flow in water, oil and gas, and wind to increase energy efficiency; a superconductor company that reduces power, increases range, and decreases the number of base stations needed for cellular phones; and a coatings company that increases the efficiency of solar panels.

Some of cleantech is energy generation -- it's an old established industry that moves slowly and is dramatically affected by government. Most of the projects in that space are infrastructure financing projects masquerading as early-stage ventures, meaning that instead of needing about $10M to carry a fund through three rounds of financing, you need $100M, as several of the recent "exits" in that space have shown. However, it is still possible to nibble around the edges of energy and leverage the second order effects like increased efficiency technologies that add a few percentage points to the total power output and translate to low-cost, high-return investments.

I think the key to success in the cleantech space is more related to geography than technology. Unlike the telecom bubble whose market driver faded as bandwidth needs were satisfied (saturated), the market driver for cleantech started as politics, then moved to public perception, and is not driven by genuine need. That need is not going away. The geography determines the politics and the need. If investors can really align with the politics and the genuine need of a geographic area, truly locally, then win-win deals can be made.

I have recently put my money where my mouth is, by raising a $200M clean energy fund partnering with Australia and China, two geographies with unique needs. So time will tell if I am right. Please feel welcome to make any suggestions or advice; we need all the help we can get!