Water deals

It's been said that water is the new gasoline--I hope not, it will be hard to drink. ;-) I am a big believer in water investments; in the US we pay a fraction of a penny per gallon of water, while in the rest of the world it is priced by market forces--many times higher than here. As it did in telecom, deregulation will hit this industry and fortunes will be lost and made. In my real estate investments I have a partner who has been in bottled water for years, and is seeing a disproportionate escalation of water-related real estate values (i.e., land with springs and no waterfront). About 10 years ago I helped a friend with a European water bottling outfit differentiate his product using laser marking--there’s a stretch of technology. ;-)

In China and India, clean water is on the top-10 list of key infrastructure needs for the future. Coming from Australia, which is almost always in drought, I have a keen appreciation of how critical water is. Israel is a source of exceptional water-related technologies because, as with most things, need drives solutions. So far I have seen quite a few water deals, but I am having trouble finding the killer app/technology. There are membrane technologies that filter the water, specialty plumbing systems that recycle gray water and use it for non-potable applications, and there are software suites that model and optimize flow. It's a really large and fragmented industry; it's hard to make sales and they are usually consultative and long, with slow-moving technology adoption. Sound familiar?

So we laser jocks or telecom experts should be good at this area…maybe.

So many of the areas we plan in have this same characteristic, but the water industry exacerbates all the usual obstacles to selling for a startup: you are small and they take a long time to make a decision (you may burn through two rounds of financing before they put you in a field trial). If you win the field trial, then you have to support it, and if you get a design win, then you have to convince them you can supply and you'll burn through a third round of funding just doing that. But then you can ride the wave. :-)

There are some great, venture-investible technologies that help the water ecosystem, despite its fragmentation and selling difficulties. Acoustic leak detection systems using sonar, fiber-optic pipeline monitoring, unique algaes and chemicals that simplify and improve water purification, and also new electrolytes and electrode materials that make electrolysis easier to separate H₂ out of water driven by solar energy. As with Palm Oil, water may be seriously undervalued--but we had better hope people don’t start turning it into energy for fear of making life's vital quantity-priced like gasoline...

Course correction

One of the key gifts of a great entrepreneur is their ability to execute real-time course correction in response to market changes, team changes, morale changes, and investor and customer sentiment. :)

As a hardware guy, it's fascinating for me to observe the truly real-time nature of management of Internet companies, and the amenability of the data to real-time analysis. For example, a retail web business continually tweaks its Web site -- everything from background color to placement of the buttons and core code -- but they do it in an endless series of micro tweaks, then measure the changes in site metrics to determine whether it was the right tweak or not. I saw the extrapolation of this metrics-based management in a company that sells specialty products to women when they tested a series of "hardware" initiatives in the same way they would test Web. In this case, they tried selling their product through real-world parties with interested women customers and measured the effects of different party structures and formats across multiple events to determine the optimum. When I heard the results and analysis and ultimate conclusions, I was struck with the simple question of "why not just ask someone who has done Tupperware parties or Avon, how they do it, and why?" Especially when some of the conclusions on the formats that didn't work were based on fairly obvious problems like, "if the women in the group didn't know each other, we didn't sell as much…" Fairly obvious, even to a non-Avon user.

Contrasting Internet, software, and hardware highlights to me a fundamental difference and issue in the area of product management, which is always the Achilles' heel of startups. Despite the experiences of VCs, most startups still suffer badly from poor product management -- it's not a well understood discipline, and confused with marketing and sales as much as marcomm is confused with true marketing. Being one of the classic failure points, I am always surprised when investors don't want to spend $ on a solid product management expert before "developing the technology" -- how on earth will you know what to develop? In any hardware company -- take your pick from semi to medical device -- the product is always late because the software isn’t finished. :) The software guys can't really test until the hardware is done. For the hardware guys, the product management and vision had better be perfect. Otherwise, the chip that took over a year to design, tape out, and FAB may work great but have the wrong interface or attributes, or control software that simply doesn't suit the customer -- and another spin takes at least 6 months more. :) These issues are somewhat amenable to analysis (not as in a consumer Web site), but largely the work of a very thoughtful and usually somewhat visionary product manager who understands the customer, the technology, the market, and the likely changes. Good startup CEOs know the fatal error of asking the customer what they want and building the product based solely on that (you get the same product you have today, but at a lower price with more features).

Let's face it, software might be trying to eat the world but if you really know what you are doing, you do it in hardware. :)

Don’t get discouraged

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

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

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

Life is too short

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

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

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

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

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

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

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

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

What kills tech startups

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

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

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

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

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

Ideas are Cheap

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

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

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

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

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

Steve (for Wick)

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

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

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

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

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

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