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….
Tuesday, March 20, 2012
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. :)
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
Cleantech
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!
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!
Tuesday, November 15, 2011
Making Acquisitions
A really hard transition to make for most of us founders is the idea of paying some other entrepreneur our hard-earned cash or even tapping into the lifeblood of our equity in exchange for their inferior product that we could easy make ourselves, and do a better job of it, if we just had the time. This transition to building muscle tissue around the bare bones of a startup trips up most first-time CEOs. VCs often rely on their founders to be market and technical experts for diligencing their other dealflow, but it's often ingrained in the entrepreneur (and should be) that they have the best product and everyone else’s ideas are crap. ;-) This makes such diligence unreliable.
Clearly, it is just not possible to scale at the rate demanded by modern markets through organic growth. Especially demanding is the Internet, where innovation is unrestricted by hardware and can rapidly replicate without fear of IP infringement. I recently sat next to the VP of business development of a large Internet rollup (on a 5 a.m. out of Austin :( ) that owns most of the vacation rental Web sites, including good-old Stayz, which was founded by three of the youngest entrepreneurs in our portfolio, but I guess being in their mid-20s makes them middle-aged for Internet entrepreneurs :). This company was formed entirely to acquire these Web sites and form a conglomerate--it had no IP of its own, and interestingly did little to change the companies it bought. These guys perfected a Web acquisition model and rolled up what turned out to be a large market segment. Their key was overpaying the founders and betting on scale to make it all work. It’s a bit like the supermarket chain buying up the sole proprietorships, except you don’t end up with crap fruit and veg afterwards...
As a startup CEO you don’t think rollups, you think disruption. If you can paint a vision that other entrepreneurs will share, then you have a change to bring them under your banner to fight your cause. A lot of entrepreneurs look for “deals,” distressed assets, or companies that can't get funded, and try to do predatory deals. These usually don’t work--whatever caused the problems for the target company usually permeates the acquirer as well. Unfortunately, you have to pay up to make things happen. Now there are a few examples of companies like Visx whose internal technology failed, but became extremely successful by acquiring the core technology from someone who could not raise money. But assuming you are a successful startup, you should be abel to make 1 & 1 = 5 deals by bolting on the right pieces of product to your existing offering, and integrating them together under the hood to make them more compelling than they were separately.
There is a lot of banker wisdom in this area and a lot of people to help you formulate a financial engineering strategy. There is a lot of wisdom in this area and these guys know what is selling, who is buying, and why so they can in principle help you engineer an exit by making you the prettiest company on the block, By all means hear them out, but remember, you got to this point by focusing on one thing that you do better than anyone else--you leveraged yourself into a niche with your unique technology and you are well on the way to owning and controlling the direction of that market. You had a vision and drove it through the strength of your convictions. If your vision is accurate, you above all others can predict the direction your niche will move, and so you can build or acquire the products and technologies needed to serve that evolution. No banker or advisor can do that for you. Finally, you got here by serving your customer better than the incumbents. Stay focused on them and the acquisition will take care of itself--your company will be bought or IPO’d, not sold.
Clearly, it is just not possible to scale at the rate demanded by modern markets through organic growth. Especially demanding is the Internet, where innovation is unrestricted by hardware and can rapidly replicate without fear of IP infringement. I recently sat next to the VP of business development of a large Internet rollup (on a 5 a.m. out of Austin :( ) that owns most of the vacation rental Web sites, including good-old Stayz, which was founded by three of the youngest entrepreneurs in our portfolio, but I guess being in their mid-20s makes them middle-aged for Internet entrepreneurs :). This company was formed entirely to acquire these Web sites and form a conglomerate--it had no IP of its own, and interestingly did little to change the companies it bought. These guys perfected a Web acquisition model and rolled up what turned out to be a large market segment. Their key was overpaying the founders and betting on scale to make it all work. It’s a bit like the supermarket chain buying up the sole proprietorships, except you don’t end up with crap fruit and veg afterwards...
As a startup CEO you don’t think rollups, you think disruption. If you can paint a vision that other entrepreneurs will share, then you have a change to bring them under your banner to fight your cause. A lot of entrepreneurs look for “deals,” distressed assets, or companies that can't get funded, and try to do predatory deals. These usually don’t work--whatever caused the problems for the target company usually permeates the acquirer as well. Unfortunately, you have to pay up to make things happen. Now there are a few examples of companies like Visx whose internal technology failed, but became extremely successful by acquiring the core technology from someone who could not raise money. But assuming you are a successful startup, you should be abel to make 1 & 1 = 5 deals by bolting on the right pieces of product to your existing offering, and integrating them together under the hood to make them more compelling than they were separately.
There is a lot of banker wisdom in this area and a lot of people to help you formulate a financial engineering strategy. There is a lot of wisdom in this area and these guys know what is selling, who is buying, and why so they can in principle help you engineer an exit by making you the prettiest company on the block, By all means hear them out, but remember, you got to this point by focusing on one thing that you do better than anyone else--you leveraged yourself into a niche with your unique technology and you are well on the way to owning and controlling the direction of that market. You had a vision and drove it through the strength of your convictions. If your vision is accurate, you above all others can predict the direction your niche will move, and so you can build or acquire the products and technologies needed to serve that evolution. No banker or advisor can do that for you. Finally, you got here by serving your customer better than the incumbents. Stay focused on them and the acquisition will take care of itself--your company will be bought or IPO’d, not sold.
Friday, September 23, 2011
The Troll
I've written before about the obsession with IP, and the feeling, especially among academic institutions that 90% of the value of a company is in the idea and related IP - having sweated bullets like most entrepreneurs in order to get an idea to market and scrape a few of them together to form a self-sustaining business, it’s a little frustrating to have someone tell you after the fact that it was all their brilliant idea.
Years ago I went to visit the patent office in Arlington, and walked into the examiners office with my little box containing laser, optical delivery system and power supply, turned it on and showed him how it worked (surprising that there weren’t metal detectors back then...). The examiner was so stunned, not so much at the invention, which I thought was pretty cool, but at the fact that it was the physical embodiment of what was described in my self-drafted patent application. He pulled out a few other patent wrappers to illustrate his point, on one there were 57 separate office actions, the front page was littered with rejections, but it kept coming back - this patent, he said, will eventually issue with severely limited claims but sadly the paper its written on is as close as it will come to any form of physical embodiment.
Now when I first started studying patents I distinctly remember one of the key requirements for something to be patentable was that it be reduced to practice but it seems this is no longer a priority in inventions which has become something more in the province of lawyers and accountants than engineers, scientists, and inventors. I know that this is largely how it has to be, but after doing a lot of business in China, there is a certain satisfaction in the Chinese attitude of who cares, let's just build it and sell it in China anyway, and not worry about the US patents. Innovation knows no borders, so hopefully as China continues to grow they will begin to value IP and level the playing field.
I actually think what is worse than the patent degradation of late, is the emergence of so many trolls - i.e., those who sit on a patent for years waiting for it to ripen so they can sue anyone and everyone who is using it. As with most things there are 2 sides to this story - CSIRO recently won a landmark patent lawsuit because they invented WiFi and others used it - to date they have won $200M in back royalties - the WiFi market just for chips was over $3B in 2008 - I would have preferred that a bunch of companies span out of CSIRO and they developed the products. Now it’s a lot harder to build a company than it is to have an idea, and for sure there is an economic model for patent licensing.
In the CSIRO case they tried to license, and in some cases did license, and then some of the companies stopped licensing. Personally, I don’t want to see more of this, I would much prefer to see entrepreneurs try to build companies. CSIRO at least is dedicated a portion of the win to starting a fund specifically for the purpose of spinning out high-risk high potential return ideas like WiFi.
The other side of course, is the Troll, who has no intention of developing anything but a bank balance, often a consortium of lawyers who buy up the IP of others and sit quietly on the until the stakes are highest to pounce on startups. To me these groups are as bad as litigation funds who band together to try and extract money from public companies by suing directors - sometimes it's legit, but most cases I have seen have been pure profiteering. These business practices do not create anything, rather they tear down what has been created or at least debilitate it like a parasitic organism we can't quite flush from the system.
There is of course yet another case - a little company in San Jose invented an optical interface which is exactly what is used in the Wii. Their patent predates anything Nintendo had by at least a year, and they honestly tried to commercialize it - in fact they created a wonderful interface for Media Center, which enables gestures to navigate the screen, zoom, pan, and twist all by hand movements. They sold a few thousand of these devices, and then Wii came out - they wrote a letter and sent copy of the patent, and were told to go pound sand. In this case, I would love to see these guys come out on top, assuming that the facts are all correct...
Years ago I went to visit the patent office in Arlington, and walked into the examiners office with my little box containing laser, optical delivery system and power supply, turned it on and showed him how it worked (surprising that there weren’t metal detectors back then...). The examiner was so stunned, not so much at the invention, which I thought was pretty cool, but at the fact that it was the physical embodiment of what was described in my self-drafted patent application. He pulled out a few other patent wrappers to illustrate his point, on one there were 57 separate office actions, the front page was littered with rejections, but it kept coming back - this patent, he said, will eventually issue with severely limited claims but sadly the paper its written on is as close as it will come to any form of physical embodiment.
Now when I first started studying patents I distinctly remember one of the key requirements for something to be patentable was that it be reduced to practice but it seems this is no longer a priority in inventions which has become something more in the province of lawyers and accountants than engineers, scientists, and inventors. I know that this is largely how it has to be, but after doing a lot of business in China, there is a certain satisfaction in the Chinese attitude of who cares, let's just build it and sell it in China anyway, and not worry about the US patents. Innovation knows no borders, so hopefully as China continues to grow they will begin to value IP and level the playing field.
I actually think what is worse than the patent degradation of late, is the emergence of so many trolls - i.e., those who sit on a patent for years waiting for it to ripen so they can sue anyone and everyone who is using it. As with most things there are 2 sides to this story - CSIRO recently won a landmark patent lawsuit because they invented WiFi and others used it - to date they have won $200M in back royalties - the WiFi market just for chips was over $3B in 2008 - I would have preferred that a bunch of companies span out of CSIRO and they developed the products. Now it’s a lot harder to build a company than it is to have an idea, and for sure there is an economic model for patent licensing.
In the CSIRO case they tried to license, and in some cases did license, and then some of the companies stopped licensing. Personally, I don’t want to see more of this, I would much prefer to see entrepreneurs try to build companies. CSIRO at least is dedicated a portion of the win to starting a fund specifically for the purpose of spinning out high-risk high potential return ideas like WiFi.
The other side of course, is the Troll, who has no intention of developing anything but a bank balance, often a consortium of lawyers who buy up the IP of others and sit quietly on the until the stakes are highest to pounce on startups. To me these groups are as bad as litigation funds who band together to try and extract money from public companies by suing directors - sometimes it's legit, but most cases I have seen have been pure profiteering. These business practices do not create anything, rather they tear down what has been created or at least debilitate it like a parasitic organism we can't quite flush from the system.
There is of course yet another case - a little company in San Jose invented an optical interface which is exactly what is used in the Wii. Their patent predates anything Nintendo had by at least a year, and they honestly tried to commercialize it - in fact they created a wonderful interface for Media Center, which enables gestures to navigate the screen, zoom, pan, and twist all by hand movements. They sold a few thousand of these devices, and then Wii came out - they wrote a letter and sent copy of the patent, and were told to go pound sand. In this case, I would love to see these guys come out on top, assuming that the facts are all correct...
Friday, August 26, 2011
Go big or go home
This phrase was very popular in the Valley 10 years ago, and has recently surfaced again -- unfortunately with respect to cleantech deals masquerading as early stage ventures when they are in fact infrastructure financing nightmares waiting to happen. ;-) However, "go big or go home" has always been a mantra of Silicon Valley. When I first came to the US in the late 80s, I feared the inability to compete in this market, academically and business wise. I certainly thought of a company as a startup that made a few million dollars (well, one million was a lot to me), and dreamed of one day being able to pay myself a 100k salary...imagine that. The idea that a big company might like my inventions and products enough that they would consider buying the company was almost inconceivable to me, and if by some strange chance it happened... wouldn't that be wonderful? The first time you sell a company it's a wonderful elation: It's a validation of you, your business, your team, and your vision. It's also supposed to deliver real value to the acquirer and build a long term relationship between the two of you.
I invariably sold companies too early, for many reasons: difficult investors (VCs with fins in their backs among them), bad market conditions or changes, problems with co-founders, and occasionally because I felt it was a local maximum in value and feared the market changes I imagined were coming. To me the cardinal sin was losing the investors' money, which I managed never to do. However, Valley VCs view that as "lame" -- it's losing the opportunity that is the cardinal sin. Losing a $5M investment, to them, is nowhere near as bad as losing a $500M opportunity. This, by the way, is one of the reasons that skin in the game (founders having personal cash in a deal) is often not viewed positively by VCs.
I also sold companies too late, going from $1B in 2000 to $100M in 2001, then to 50M at the end of 2001. And anyone who has sold a company for stock knows that you sell the stock ASAP -- except often when you do, the stock goes up a lot after you sell it. In one case of mine, it was a factor of 10, which was inconceivable at the time, but I can assure you that losing that money I never made actually felt a lot worse and completely overshadowed the money I made in the transaction in the first place.
Most entrepreneurs sell their company too early simply because they are faced with the risk of growing a company to the next level, taking on new investors (or changing from bootstrapped self-funded to VC investors) and suffering dilution. Most startups don't scale big: Ironically it's relatively easy to do $1M in revenue (there are usually enough early adopters to fill a niche); it's really, really hard to turn that into $10M, and somewhat easier to turn that into $30M. Then you do a trade sale because you are not sure if you can do $100M! I am told that once you break $100M it's easier to do $500M, but I don't believe that.
There are multiple dimensions to this conundrum of when to sell, but another thorny aspect is the make vs. buy decision when a company like Google or Microsoft decides they like your product and want to buy you, provided the price is reasonable...
VCs don't want you to sell -- not yet. They want to make the company as big as it possibly can be, drive profits as high as they can possibly get, and then make an acquisition feel like passing a kidney stone, or open heart surgery for the acquirer.
I invariably sold companies too early, for many reasons: difficult investors (VCs with fins in their backs among them), bad market conditions or changes, problems with co-founders, and occasionally because I felt it was a local maximum in value and feared the market changes I imagined were coming. To me the cardinal sin was losing the investors' money, which I managed never to do. However, Valley VCs view that as "lame" -- it's losing the opportunity that is the cardinal sin. Losing a $5M investment, to them, is nowhere near as bad as losing a $500M opportunity. This, by the way, is one of the reasons that skin in the game (founders having personal cash in a deal) is often not viewed positively by VCs.
I also sold companies too late, going from $1B in 2000 to $100M in 2001, then to 50M at the end of 2001. And anyone who has sold a company for stock knows that you sell the stock ASAP -- except often when you do, the stock goes up a lot after you sell it. In one case of mine, it was a factor of 10, which was inconceivable at the time, but I can assure you that losing that money I never made actually felt a lot worse and completely overshadowed the money I made in the transaction in the first place.
Most entrepreneurs sell their company too early simply because they are faced with the risk of growing a company to the next level, taking on new investors (or changing from bootstrapped self-funded to VC investors) and suffering dilution. Most startups don't scale big: Ironically it's relatively easy to do $1M in revenue (there are usually enough early adopters to fill a niche); it's really, really hard to turn that into $10M, and somewhat easier to turn that into $30M. Then you do a trade sale because you are not sure if you can do $100M! I am told that once you break $100M it's easier to do $500M, but I don't believe that.
There are multiple dimensions to this conundrum of when to sell, but another thorny aspect is the make vs. buy decision when a company like Google or Microsoft decides they like your product and want to buy you, provided the price is reasonable...
VCs don't want you to sell -- not yet. They want to make the company as big as it possibly can be, drive profits as high as they can possibly get, and then make an acquisition feel like passing a kidney stone, or open heart surgery for the acquirer.
Monday, June 6, 2011
Behavioral change deals
Patrick Boucousis posted a great comment last month, which stimulated this posting, so thanks for his insightful comments. Patrick said “Many of the new Apps will enable and in fact require fundamental behavioral change in how people work. The business (read investment) potential of these Apps won't be THAT obvious up front ... just like Facebook wasn't before it was invented.”
So, at the risk of being too much of a hardware guy, and so 90s, or is it 00s ... I still don’t get the value of Facebook even though it is invented ;-) Actually was it invented, or something else?
Fundamental change is the stuff than Venture dreams are made of--think telecom deregulation and the optical communications bubble that resulted. Or for that matter, the crazy idea of a husband and wife from Stanford who built the first Cisco router.
Behavioral change can also be a great value creator, but beware that fundamental change in how people behave is hard to predict and very difficult to influence--being creatures of habit we don’t change that readily and it's not a problem money can solve (see earlier posting on throwing $ to try and create a market).
The fundamental change of shopping on the Internet, which some of us adopted very rapidly (because we hate shopping and love the ability of the Internet to give us access to all information needed to make an educated purchase at the best price, without a sales person getting in the way) took a lot longer for mass market adoption that I would ever have thought. Remember that first wave of Webvan? Safeway came in a few years later (with the Webvan assets) and slowly built out a small niche in online groceries. I believe part of the problem here is that a lot of people, really enjoy the shopping experience--it's social, and interactive in a way that the Internet isn’t ... yet.
Mobile payments are another area that's experiencing the 3rd or 4th re-try. This should be a great space, but there are a lot of the same issues that seem to come up every time we think this area is set to explode. Security is my biggest, simply because no one is incented to fix the problem, no one wants to own the problem, and no one wants to admit there is a problem. But beyond that, just the behavioral change is tricky. It works with a Starbucks card giving you a virtual bar code on your phone (and United letting you fly with one too, but don’t forget to charge your phone….). It's definitely quicker, you can order and pay in 3 seconds, instead of the 5 seconds it takes to pull out your credit card … maybe this matters? The phone company has been the other big problem, with customer service about as good as the IRS ... they aren’t well equipped to handle a bunch of micro-payments, and the additional customer service it requires.
The other classic behavioral change question is Cleantech--whether it's remembering to turn off the light, or pay >10x for a CFL (compact fluorescent light) that is five times more efficient, or get used to an electric car that needs to be recharged every 200 miles.
Suddenly something that was cheap and abundant is now getting expensive and politically important. A lot of money has been bet on various forms of clean energy in a way that for me is reminiscent of the telco bubble, albeit with far more resilient market pull. Will the auto industry shift to battery replacement at the gas station? Will someone invent capacitance gel that can exchange vast amounts of energy quickly like we do currently with gasoline? Will people adjust to change their cars at home each night, and perhaps at work during the day use them to feed energy into the grid?
Something that sobers me when thinking about these changes: I am told that its easy to drive to and from work and charge the car each night – and electric vehicles have promising specs to meet that simple need – so it just takes a small change to accommodate – right? But, I am told by others, that if you run the A/C or heat in an electric car, you may only get 30-40 miles ... so perhaps not such an easy accommodation after all. It's funny, because having grown up in Australia there was little A/C available and I’ve never really adjusted to it or broken from just winding down the window when its hot, or wearing a sweater when its cold :-)
So, at the risk of being too much of a hardware guy, and so 90s, or is it 00s ... I still don’t get the value of Facebook even though it is invented ;-) Actually was it invented, or something else?
Fundamental change is the stuff than Venture dreams are made of--think telecom deregulation and the optical communications bubble that resulted. Or for that matter, the crazy idea of a husband and wife from Stanford who built the first Cisco router.
Behavioral change can also be a great value creator, but beware that fundamental change in how people behave is hard to predict and very difficult to influence--being creatures of habit we don’t change that readily and it's not a problem money can solve (see earlier posting on throwing $ to try and create a market).
The fundamental change of shopping on the Internet, which some of us adopted very rapidly (because we hate shopping and love the ability of the Internet to give us access to all information needed to make an educated purchase at the best price, without a sales person getting in the way) took a lot longer for mass market adoption that I would ever have thought. Remember that first wave of Webvan? Safeway came in a few years later (with the Webvan assets) and slowly built out a small niche in online groceries. I believe part of the problem here is that a lot of people, really enjoy the shopping experience--it's social, and interactive in a way that the Internet isn’t ... yet.
Mobile payments are another area that's experiencing the 3rd or 4th re-try. This should be a great space, but there are a lot of the same issues that seem to come up every time we think this area is set to explode. Security is my biggest, simply because no one is incented to fix the problem, no one wants to own the problem, and no one wants to admit there is a problem. But beyond that, just the behavioral change is tricky. It works with a Starbucks card giving you a virtual bar code on your phone (and United letting you fly with one too, but don’t forget to charge your phone….). It's definitely quicker, you can order and pay in 3 seconds, instead of the 5 seconds it takes to pull out your credit card … maybe this matters? The phone company has been the other big problem, with customer service about as good as the IRS ... they aren’t well equipped to handle a bunch of micro-payments, and the additional customer service it requires.
The other classic behavioral change question is Cleantech--whether it's remembering to turn off the light, or pay >10x for a CFL (compact fluorescent light) that is five times more efficient, or get used to an electric car that needs to be recharged every 200 miles.
Suddenly something that was cheap and abundant is now getting expensive and politically important. A lot of money has been bet on various forms of clean energy in a way that for me is reminiscent of the telco bubble, albeit with far more resilient market pull. Will the auto industry shift to battery replacement at the gas station? Will someone invent capacitance gel that can exchange vast amounts of energy quickly like we do currently with gasoline? Will people adjust to change their cars at home each night, and perhaps at work during the day use them to feed energy into the grid?
Something that sobers me when thinking about these changes: I am told that its easy to drive to and from work and charge the car each night – and electric vehicles have promising specs to meet that simple need – so it just takes a small change to accommodate – right? But, I am told by others, that if you run the A/C or heat in an electric car, you may only get 30-40 miles ... so perhaps not such an easy accommodation after all. It's funny, because having grown up in Australia there was little A/C available and I’ve never really adjusted to it or broken from just winding down the window when its hot, or wearing a sweater when its cold :-)
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