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.”

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. :-)