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. :)

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. :-)

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.

IEEE Entrepreneurs talk

I was fortunate enough to be invited to present at the IEEE Forum recently at National Semiconductor in Santa Clara. What’s great about these presentations is that you learn so much from the questions entrepreneurs ask, and there is always a new perspective and ideas to share. Personally, I don’t like success talks, they are always too glib, and too often accompanied by super-sized ego. I prefer to talk about failure and learning, and if possible how the failure was recovered and turned into a modicum of success, maybe God forbid even making a little money along the way ;-)

I really enjoy giving my life by misadventure talk, which basically explains how one can stumble into success despite making a bunch of wrong decisions – if you think about just how many decisions a CEO makes in a day, it's not surprising that many of them turn out to be wrong. What's great about startups is that you can change your mind, and second guess decisions and quickly adapt to correct mistakes. When Mark Hurd decided to cut and consolidate design centers in HP, it took a year to formulate a plan, another year to execute, and believe it or not, there wasn’t much of a chance to change his mind along the way, and even if there was, it would have taken another two years to undo - some more recent things can't be undone and more's the pity ...

As entrepreneurs, we go down a lot of rabbit holes (and not a few ratholes as well) in our search for the right products, solutions, businesses, and opportunities. Many of the rabbit holes are dead ends, or lead to the madhatter’s tea party, rather than the magical growth elixir for which we originated the quest – those failed quests are what temper us for eventual success. I have sat through so many presentations by successful entrepreneurs who did everything right, were geniuses, and had market vision so profound that everything worked out exactly as they planned. I read Alice in Wonderland as a kid, so little need to hear more fairy tales now. Engineers are not afraid of failure, nor do they expect to have clairvoyance enough to see every mishap and engineer it out before it becomes a problem – they twist and turn and always have a backup plan because they know failure is an inevitable part of pushing the envelope.

The other epiphany I had while preparing the talk, is drawing on my Aussie entrepreneur’s talk, I realized if I replaced the words “Australian Entrepreneur” with “Laser Jock” then the talk worked for both groups. It's amazing the similarities with the little Aussie battler entrepreneur, and the US laser engineer. We tend to think with solution or technology looking for a problem, we worry about saving money to success, we don’t understand marketing, and we don’t get just how much harder it is to market and sell a product vs design and build it. On the positive side, the similarities are even ore striking. We never give up, always find a way around any problem, are very straightforward in our dealings (and this is not the case with many other types of entrepreneurs), know how to deliver, can create a lot with a little, and are fueled with the passion of belief in what we are doing that transcends all obstacles.