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 ;-)
Thursday, July 30, 2009
Tuesday, July 7, 2009
Purgatory
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!
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…..
Comments:
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!
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…..
Comments:
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 ;-)
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
Recovery?
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 ;-)
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 ;-)
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 ;-)
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 ;-)
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