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. :)

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. :-)

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.