This is a two-parter, since its always instructive to compare the ideal with the actual ...
Every company I’ve ever started was done in a recession--you know all the reasons: people are available, your competitors are pulling back giving you a great chance to be ahead of them when the market turns positive again, etc. etc. It's very hard to go to market when there isn’t one--and in this environment customers are scared of the future and are delaying buying decisions. Time to market has become irrelevant--so called first mover advantage (please don’t ever use this in a pitch) never was relevant. So if your company is early, and developing something really revolutionary that may take one or two years to create then ideally VCs should be really interested in this, provided the burn rate is manageable and it doesn’t require a massive infrastructure investment.
When the market inhales,large companies cut R&D projects and really high quality people get bored and become available to start or join new tech startups. VCs need to find these teams and embrace them because they create the next round of Googles and Ciscos. Be under no illusion it's harder today to get funded than ever before, because these great teams are out there and if you are competing with deep domain experts you will likely come up short. Also, VCs are human too (well, almost) and are just as scared and uncertain as everyone else, so making the funding decision will take longer and longer, and each time the market takes another big hit they will be reminded just how tightly closed the IPO exit window is, and that they have to have another round of explanations with their LPs as to why the money should stay in the fund. At the same time, their LPs are hammering on their management fee, and wanting to know why they are paying it if the partners are not investing.
I think there are two basic choices in this market, other than the non-choice of do nothing and sit on the money until things get better. VCs first triage their portfolios to see which investments can and should survive, circle the wagons around the portfolio and make sure they have a low enough burn and enough runway to make it. Then they can either go out in a predatory way and force their way into deals they would otherwise be unable to enter, leveraging the fear factor. There is a natural bias towards later stage deals--i.e., doing series B & C deals at A-round pricing--remember many of these firms need to have an exit soon, and given that public markets are closed the only option for many is to be able to sell a later-stage company to demonstrate a return to LPs who have seen nothing but losses for the past year. The problem with this path is it does not leverage the natural skills of a VC--there is a lot less value to add to a later stage company and it looks more like a banking deal. Also there are a lot of bankers and other VCs also looking for that type of deal ;-)
The other path is to forget revenue and look for highly disruptive plays that may take two years to develop their product but when they do it can really cause order of magnitude changes in the business model. These are extremely risky, and often more like science projects than businesses but they also offer venture scale returns--10 to 100x and it only takes one good one to make an entire fund (one of the Google VCs experienced exactly this win in a portfolio that was otherwise abysmal--and who says we are so smart...)
It’s a shame to waste a good crisis, in good times companies are struggling to meet orders and focus all their efforts on supporting manufacturing and keeping the engine running. They have no time for revolution. In times like this they need aspirin for the pain, not steroids for performance--it is a time for revolution. And a little revolution now and then is usually a good thing ;-)
Next time: What VCs are actually doing in this market (this one might take a while...)
Monday, March 9, 2009
Monday, February 16, 2009
Down Rounds and Valuation
There is a small company here that has just relocated to be in Silicon Valley and it has a Term Sheet from a VC who effectively underwrote its financing on the presumption that the VCs would be able to secure a co-investor here in the Valley. The VCs now want to renege on the term sheet and change the raise and pre-$. Sounds like another "vulture capital" story doesn’t it? Well perhaps ... or perhaps not.
So one of the worst things that can happen to a company and the investors, is a "down round." It's one of the main reasons VCs push back on valuations. If the company cannot create enough value on a funding round to justify a larger pre-$ on the next round, everyone is in serious trouble. The VCs hate down rounds, not because it changes their ownership (this is a common misconception among entrepreneurs)--the VCs are naturally trying to own as much of the company as they reasonably can, but there are simple and reasonable limits to this, which if they are ignored by the VCs will be corrected by the market anyway.
In a down round, what the previous round holders lose they make up for on the next round--net net, they typically end up at the same place--no big deal. But the founders, ouch! The team is usually okay because the new investors boost the ESOP to incentivize the team, taking that boost out of the founders and the previous investors. What VCs hate about down rounds is having to tell their limited partners that they effectively lost money--the value they are carrying the investment at has gone down, and this is never a fun conversation ;-(
Now from the VC side, the company has missed some required accomplishments in order to attract a co-investor, like the new version of its product, which can be sold here vs. the old one which can’t, the building of a team, and others--but as in most cases, communication and misunderstanding are largely behind the issues, and the end result is ... do the VCs stick to the original deal which will almost certainly result in a down round, or do they work with the company to restructure? The company on the other hand, does it wheel out the lawyers and try to force the original deal, or does it have conversation(s)?
Back to my recurring theme of team, team, team--once the VCs have funded, even partially, they are in the same boat as the entrepreneurs, generally they don’t propose deal changes that don’t make sense from a shareholder’s perspective. For VCs deal terms get renegotiated by teams frequently--e.g., management carve out in acquisition overtakes liquidation preference, anti-dilution, and earn out rarely finds its way back to the investors but ends up in the pockets of the team, etc….
It will be interesting to revisit this case, and the urban myths it creates over the next several months, because it could go either way. Wheeling out the lawyers rarely works, because (in my experience) the only ones that win are the lawyers and litigation makes you a poor investment risk in the future regardless of whether you are successful or not. Unfortunately, the reality of most situations is that both sides are right, and ironically wrong at the same time. If the entrepreneurs cave, are they opening the door for future renegotiation? Should they argue the case of whether they delivered or not, whether it was miscommunication or not?
At the end of the day its largely irrelevant--it is what it is, deal with it! I suspect the right solution is for everyone to compromise--for the VCs to put up more cash to give the company more runway so it can have the best possible chance of delivering the up round needed (which goes against the post money problem by making it even higher), but at the same time give the VCs a claw back provision or warrants or some other mechanism to turn a Down Round (if there is one) into a flat round, so that everyone wins. For sure, while everyone is arguing the "he said she said," the chances of the company hitting its milestones are getting smaller, and that’s in nobody’s interest!
So one of the worst things that can happen to a company and the investors, is a "down round." It's one of the main reasons VCs push back on valuations. If the company cannot create enough value on a funding round to justify a larger pre-$ on the next round, everyone is in serious trouble. The VCs hate down rounds, not because it changes their ownership (this is a common misconception among entrepreneurs)--the VCs are naturally trying to own as much of the company as they reasonably can, but there are simple and reasonable limits to this, which if they are ignored by the VCs will be corrected by the market anyway.
In a down round, what the previous round holders lose they make up for on the next round--net net, they typically end up at the same place--no big deal. But the founders, ouch! The team is usually okay because the new investors boost the ESOP to incentivize the team, taking that boost out of the founders and the previous investors. What VCs hate about down rounds is having to tell their limited partners that they effectively lost money--the value they are carrying the investment at has gone down, and this is never a fun conversation ;-(
Now from the VC side, the company has missed some required accomplishments in order to attract a co-investor, like the new version of its product, which can be sold here vs. the old one which can’t, the building of a team, and others--but as in most cases, communication and misunderstanding are largely behind the issues, and the end result is ... do the VCs stick to the original deal which will almost certainly result in a down round, or do they work with the company to restructure? The company on the other hand, does it wheel out the lawyers and try to force the original deal, or does it have conversation(s)?
Back to my recurring theme of team, team, team--once the VCs have funded, even partially, they are in the same boat as the entrepreneurs, generally they don’t propose deal changes that don’t make sense from a shareholder’s perspective. For VCs deal terms get renegotiated by teams frequently--e.g., management carve out in acquisition overtakes liquidation preference, anti-dilution, and earn out rarely finds its way back to the investors but ends up in the pockets of the team, etc….
It will be interesting to revisit this case, and the urban myths it creates over the next several months, because it could go either way. Wheeling out the lawyers rarely works, because (in my experience) the only ones that win are the lawyers and litigation makes you a poor investment risk in the future regardless of whether you are successful or not. Unfortunately, the reality of most situations is that both sides are right, and ironically wrong at the same time. If the entrepreneurs cave, are they opening the door for future renegotiation? Should they argue the case of whether they delivered or not, whether it was miscommunication or not?
At the end of the day its largely irrelevant--it is what it is, deal with it! I suspect the right solution is for everyone to compromise--for the VCs to put up more cash to give the company more runway so it can have the best possible chance of delivering the up round needed (which goes against the post money problem by making it even higher), but at the same time give the VCs a claw back provision or warrants or some other mechanism to turn a Down Round (if there is one) into a flat round, so that everyone wins. For sure, while everyone is arguing the "he said she said," the chances of the company hitting its milestones are getting smaller, and that’s in nobody’s interest!
Monday, February 2, 2009
Heading for the exit ...
One of the key criteria that LPs [limited partners] use to evaluate a VC fund is their ability to get exits from deals and return capital. I was doing an interview a while back with a group of LPs who are interviewing entrepreneurs to get a better picture of how entrepreneurs pick VC funds---quite a good idea, I think. One of the questions was how to weigh the VCs ability to get exits vs. other criteria. As I’ve mentioned before, my key criteria is to work with a partner who has personally built a similar company in the same space, or at least has empathy with me as an entrepreneur, so they can add real world experience and actively help me build a successful company. So for me, ability to generate an exit is very low on the VC check list.
Now, as a VC, I should defend that position ;-) I have sold several companies, and the first time, I followed the advice of older, wiser heads, and engaged an advisor--it worked out OK, but the advisor was not so good, and had little experience in our space. The result was an OK exit, but it should have been much better. So this put me off advisors, and the next time I did the deal myself.
The problems with doing it yourself are many but you should never sell your own baby. You are too close to be effective and are often negotiating with your future employer—and, in a way, against yourself. Having a third party act as the buffer is far more effective, not just from ability to play the missing man scenario but to have an experienced transaction architect look at your deal unemotionally and optimize it for you--and themselves ;-)
I heard a story about a VC who wanted to go with his entrepreneurs to negotiate a trade sale of one of his portfolio companies. The company was about two thirds through the negotiation, and the entrepreneurs didn’t want the VC to come. Now I think the VC getting involved at this stage was a really bad idea too, but not for the same reason as the entrepreneurs who had been told by a trusted advisor that the VC would “try to screw them” and that’s why he wanted in on the negotiations.
This is rubbish, in any transaction in which the team adds value going forward they have the leverage and at an exit there is little percentage in trying to “screw” the entrepreneurs since VCs don’t stay in business long if they damage their wellspring of deals. And the acquirer tends to be more inclined to try to “screw” the VCs ;-) See previous posting.
Interestingly, the VC wanted to be in the negotiations to prevent the entrepreneurs negotiating a better deal for themselves at the expense of the other investors and shareholders, a classic case of hyeung yao to smooth the deal. There is some validity to this concern as its easy for an acquirer to load up fat retention bonuses, option packages, and employment contracts to sweeten the back end of a deal for the entrepreneur that are not shared with the remainder of the shareholders. VCs may have a bunch of magical powers endowed beyond their preference shares, but they also have serious legal obligations to represent the interest of all shareholders, especially the minority common shares and ESOP.
Anyway, I learned from both ends that it's better to find a really good banker who can make the transaction work for you. There are a lot of boutique i-banks that specialize in certain verticals--like telecom, optical, semi, medical, etc--and (not surprisingly) these boutique specialists are usually former entrepreneurs who have founded and sold their own businesses and thereby realized how much better it is to have a third party do it for you. The really good ones I found were serial entrepreneurs who learned firsthand how to build value and transacted that into very solid knowledge of what makes an acquirer want to buy your business. With all due respect to VCs, I think those boutique firms are far better assets for generating an exit than most VCs are. Tech company sales are a highly specialized transaction area and VCs can’t be good at everything ;-)
Answers to questions:
John, Dave, Bill, Judy – thanks for all your various questions around what VCs are funding in this environment. I will write a blog on that next, and follow it with what they are actually doing ;-)
Now, as a VC, I should defend that position ;-) I have sold several companies, and the first time, I followed the advice of older, wiser heads, and engaged an advisor--it worked out OK, but the advisor was not so good, and had little experience in our space. The result was an OK exit, but it should have been much better. So this put me off advisors, and the next time I did the deal myself.
The problems with doing it yourself are many but you should never sell your own baby. You are too close to be effective and are often negotiating with your future employer—and, in a way, against yourself. Having a third party act as the buffer is far more effective, not just from ability to play the missing man scenario but to have an experienced transaction architect look at your deal unemotionally and optimize it for you--and themselves ;-)
I heard a story about a VC who wanted to go with his entrepreneurs to negotiate a trade sale of one of his portfolio companies. The company was about two thirds through the negotiation, and the entrepreneurs didn’t want the VC to come. Now I think the VC getting involved at this stage was a really bad idea too, but not for the same reason as the entrepreneurs who had been told by a trusted advisor that the VC would “try to screw them” and that’s why he wanted in on the negotiations.
This is rubbish, in any transaction in which the team adds value going forward they have the leverage and at an exit there is little percentage in trying to “screw” the entrepreneurs since VCs don’t stay in business long if they damage their wellspring of deals. And the acquirer tends to be more inclined to try to “screw” the VCs ;-) See previous posting.
Interestingly, the VC wanted to be in the negotiations to prevent the entrepreneurs negotiating a better deal for themselves at the expense of the other investors and shareholders, a classic case of hyeung yao to smooth the deal. There is some validity to this concern as its easy for an acquirer to load up fat retention bonuses, option packages, and employment contracts to sweeten the back end of a deal for the entrepreneur that are not shared with the remainder of the shareholders. VCs may have a bunch of magical powers endowed beyond their preference shares, but they also have serious legal obligations to represent the interest of all shareholders, especially the minority common shares and ESOP.
Anyway, I learned from both ends that it's better to find a really good banker who can make the transaction work for you. There are a lot of boutique i-banks that specialize in certain verticals--like telecom, optical, semi, medical, etc--and (not surprisingly) these boutique specialists are usually former entrepreneurs who have founded and sold their own businesses and thereby realized how much better it is to have a third party do it for you. The really good ones I found were serial entrepreneurs who learned firsthand how to build value and transacted that into very solid knowledge of what makes an acquirer want to buy your business. With all due respect to VCs, I think those boutique firms are far better assets for generating an exit than most VCs are. Tech company sales are a highly specialized transaction area and VCs can’t be good at everything ;-)
Answers to questions:
John, Dave, Bill, Judy – thanks for all your various questions around what VCs are funding in this environment. I will write a blog on that next, and follow it with what they are actually doing ;-)
Tuesday, January 20, 2009
Dinner in Beijing
I first went to China in 1987, after Tiananmen Square. We were helping Chinese students get out of China and in to study programs in the west. I had Chinese friends in Australia who marched in protest after the students were killed, were filmed by western media and logged by the government so they could never return. Well, never is a long time, and last year one of them finally did. What a change in China--like the man said, “it's not your grandfather’s China”. Chinese people bring new meaning to the concept of investing for the long term. I had a wonderful dinner in Beijing a few days before the opening ceremony on 8th of the 8, 2008…..there are two sisters you see, who grew up through the cultural revolution and to me they epitomize the new/old China.
Their father was a banking executive who suffered through the anomalies of being a successful financial guy when Mao offered his version of the New Deal. Seeing their father disgraced in this way, it's an amazing feat to me how this family turned their fortunes and reaffirms by belief that Chinese people are the greatest entrepreneurs on earth. I have done business with the older sister for many years in China and she has several remarkable gifts, one of which is the ability to look into a person’s heart and predict with great accuracy how they will behave in various circumstances. I have learned that it is pretty much fatal to do a deal in China without that older sister’s viewpoint and judgment.
Another gift is vision, and the ability to bring capital to bear to finance that vision. It's amazing to me that the older sister brings to any deal what Conrad Hilton called the greatest tradition of American business--your word is your bond, a deal is a deal, do what you say you are going to do. I’ve found that when things get really bad, older sister finds a way to keep to the deal, usually by going above and beyond the call of the deal. She expects to do business not just with me, but with future generations of me, and wants to build a trusted relationship--talk about investing for the long term.
And her third gift is the ability to convince large government entities to invest in her vision, which always helps ;-) To be sure she invests not for personal profit but for growth and the benefit of China. You see elder sister is a staunch communist party member and her mission in life is to build a better china than the one she grew up in. It shouldn’t be that much of a surprise to find this dichotomy in a communist country that has a for-profit government--any more than our democracy with the non-profit government ;-)
One of the advantages of being Australian, is you get used to being far away from everything; you understand just how different other cultures are; and you feel a little bit inferior to them, which means its easy to be humble and accepting of new environments. This is a big advantage when it comes to operating in other cultures, and one of the pitfalls suffered by many companies and investors when they tried to join the Chin-dia gold rush--it's critical to have locals on the ground to navigate the minefields for you.
Their father was a banking executive who suffered through the anomalies of being a successful financial guy when Mao offered his version of the New Deal. Seeing their father disgraced in this way, it's an amazing feat to me how this family turned their fortunes and reaffirms by belief that Chinese people are the greatest entrepreneurs on earth. I have done business with the older sister for many years in China and she has several remarkable gifts, one of which is the ability to look into a person’s heart and predict with great accuracy how they will behave in various circumstances. I have learned that it is pretty much fatal to do a deal in China without that older sister’s viewpoint and judgment.
Another gift is vision, and the ability to bring capital to bear to finance that vision. It's amazing to me that the older sister brings to any deal what Conrad Hilton called the greatest tradition of American business--your word is your bond, a deal is a deal, do what you say you are going to do. I’ve found that when things get really bad, older sister finds a way to keep to the deal, usually by going above and beyond the call of the deal. She expects to do business not just with me, but with future generations of me, and wants to build a trusted relationship--talk about investing for the long term.
And her third gift is the ability to convince large government entities to invest in her vision, which always helps ;-) To be sure she invests not for personal profit but for growth and the benefit of China. You see elder sister is a staunch communist party member and her mission in life is to build a better china than the one she grew up in. It shouldn’t be that much of a surprise to find this dichotomy in a communist country that has a for-profit government--any more than our democracy with the non-profit government ;-)
One of the advantages of being Australian, is you get used to being far away from everything; you understand just how different other cultures are; and you feel a little bit inferior to them, which means its easy to be humble and accepting of new environments. This is a big advantage when it comes to operating in other cultures, and one of the pitfalls suffered by many companies and investors when they tried to join the Chin-dia gold rush--it's critical to have locals on the ground to navigate the minefields for you.
Did I mention that their younger brother, the underachiever, spent 13years in Olympic soccer training camp, then after a critical injury did a PhD in Physics while in rehab……then founded a couple of US public companies, then…….but that’s another story ;-)
andmotion has left a new comment on your post "Marketing Power":
Interesting you mention brand, belief, religion and science here, Larry.
Its amazing what can be measured in our brain, there is a child psychology test that monitors frontal lobe activity and it's fascinating to see the neurons sparking in the really active and noisy kids and those quiet in the sedate ones. I just hope that the advertising agencies don’t get the hands on a way to monitor this direct reaction for us and feed us exactly what we want to hear in order to make us buy ;-)
Friday, December 26, 2008
Ghosts of Christmas Past
I gave a talk to the Monte Jade society a few years ago in the midst of the 2002 tech nuclear winter. In Asia, America was often referred to as the land of the golden mountain--hence the jade mountain term evolved for Taiwan although in that case there is actually a mountain (whether or not there is jade to be found remains an undiscovered jewel). I broke the talk up into three segments, and since it was around Christmas, I called them the ghosts of Christmas past, present, and future. This year we are all feeling some déjà vu from that heady time and the subsequent fallout of the last tech bubble, and I was again visited last night by three ghosts--whether it was from the grave or the gravy I’ll leave up to you.
I first came to the US in the late 80s and landed in search of the gold mountain, but found myself in the middle of a recession. It was a tough time to build business, and that first company we started almost went bankrupt several times. While it was hard to get customers, it was actually easy to get people, space and resources. It was actually a great time to build a startup but we couldn’t raise money because we simply had no idea how to go about it, and perhaps even if we did, no one would have funded two inexperienced entrepreneurs with funny accents--Dan Hogan taught me a huge amount about building business’s. It’s a long story, but that company created a successful Nasdaq IPO in Feb 1996.
In the last crash, here in the Valley we felt it first and worst, while the rest of the country really didn’t get hit all that badly. There was a big swing of assets from equities into real estate, and the rates were so low that it fueled a boom in real estate that ironically could be blamed for a significant part of the current financial meltdown. In 2002, I found this quote:
“America fell into an economic slump. The crisis capped a decade of frantic speculation in [space] securities and land stoked by heavy borrowing. The exuberant boosterism of the [space] was suddenly and dramatically quelled.”
Now if you put telecom or internet in the first space, and 1990s in the second, this quote applied perfectly to the tech nuclear winter of 2002. This quote was actually from Rockefeller, in the 1880s after speculation in railroad securities--you could also substitute mortgage securities for the 2008 recession--the two constants are land, and its all happened before. Telecom interestingly boosted railroad stocks again for the rights-of-way.
In my 2002 talk, the ghosts of Christmas future, predicted that telecom would come back in wireless, had no idea about cleantech, and had visions of optical processors. So the cleantech industry was born in the worst tech recession of all time, and ironically driven by the same people who had shifted from solar in the late 80s into telecom because solar was a dead space, then shifted back to solar when telecom crashed.
This recession's ghost of Christmas future, is simply this--innovation and creativity never die, recessions bring out the best in them, and great companies still get funded even through the decision paralysis of the biggest market meltdown we’ve ever seen (so far….).
To get funded in this market you have to be aspirin for the pain, not steroids for performance. Some VCs would even say you have to be antibiotics or an open heart surgery, rather than aspirin because the latter just covers the pain but doesn’t fix it … if we can't even agree on the right metaphors imagine how hard it is to agree on the right strategy ;-)
In this current recession the feeling in the Valley is somewhat opposite to that in 2002, back then we were badly hit here, and the rest of the country was lightly touched. This time the Valley is somewhat insulated while the rest of the country has been hard hit all year. Have no illusions, wherever you are, we will all be hit by this--the world’s economies are intimately connected as never before, there is no such thing as recession proof. China is hurting, India slowing, there is a wave coming so be ready for it. If you can get funded now, do it, always take the money when you can. At some point, greed will overcome fear again, but first there will be capitulation--my guess is real estate reaches bottom in Q3 next year, equities maybe six months later. You will know when it happens because, just like the taxi driver giving you stock tips signals the peak, when everybody stops caring about the price of a home in the Bay Area and are just sick of hearing about how bad things are we will have hit bottom. Companies that stick together during these times become great. That said, the next wave of great companies will emerge from this downturn, large corporations have more cash than ever there was in 2002, so M&A will be a rich area albeit at tough prices.
So to all a Merry Christmas and to all a goodnight ;-)
I first came to the US in the late 80s and landed in search of the gold mountain, but found myself in the middle of a recession. It was a tough time to build business, and that first company we started almost went bankrupt several times. While it was hard to get customers, it was actually easy to get people, space and resources. It was actually a great time to build a startup but we couldn’t raise money because we simply had no idea how to go about it, and perhaps even if we did, no one would have funded two inexperienced entrepreneurs with funny accents--Dan Hogan taught me a huge amount about building business’s. It’s a long story, but that company created a successful Nasdaq IPO in Feb 1996.
In the last crash, here in the Valley we felt it first and worst, while the rest of the country really didn’t get hit all that badly. There was a big swing of assets from equities into real estate, and the rates were so low that it fueled a boom in real estate that ironically could be blamed for a significant part of the current financial meltdown. In 2002, I found this quote:
“America fell into an economic slump. The crisis capped a decade of frantic speculation in [space] securities and land stoked by heavy borrowing. The exuberant boosterism of the [space] was suddenly and dramatically quelled.”
Now if you put telecom or internet in the first space, and 1990s in the second, this quote applied perfectly to the tech nuclear winter of 2002. This quote was actually from Rockefeller, in the 1880s after speculation in railroad securities--you could also substitute mortgage securities for the 2008 recession--the two constants are land, and its all happened before. Telecom interestingly boosted railroad stocks again for the rights-of-way.
In my 2002 talk, the ghosts of Christmas future, predicted that telecom would come back in wireless, had no idea about cleantech, and had visions of optical processors. So the cleantech industry was born in the worst tech recession of all time, and ironically driven by the same people who had shifted from solar in the late 80s into telecom because solar was a dead space, then shifted back to solar when telecom crashed.
This recession's ghost of Christmas future, is simply this--innovation and creativity never die, recessions bring out the best in them, and great companies still get funded even through the decision paralysis of the biggest market meltdown we’ve ever seen (so far….).
To get funded in this market you have to be aspirin for the pain, not steroids for performance. Some VCs would even say you have to be antibiotics or an open heart surgery, rather than aspirin because the latter just covers the pain but doesn’t fix it … if we can't even agree on the right metaphors imagine how hard it is to agree on the right strategy ;-)
In this current recession the feeling in the Valley is somewhat opposite to that in 2002, back then we were badly hit here, and the rest of the country was lightly touched. This time the Valley is somewhat insulated while the rest of the country has been hard hit all year. Have no illusions, wherever you are, we will all be hit by this--the world’s economies are intimately connected as never before, there is no such thing as recession proof. China is hurting, India slowing, there is a wave coming so be ready for it. If you can get funded now, do it, always take the money when you can. At some point, greed will overcome fear again, but first there will be capitulation--my guess is real estate reaches bottom in Q3 next year, equities maybe six months later. You will know when it happens because, just like the taxi driver giving you stock tips signals the peak, when everybody stops caring about the price of a home in the Bay Area and are just sick of hearing about how bad things are we will have hit bottom. Companies that stick together during these times become great. That said, the next wave of great companies will emerge from this downturn, large corporations have more cash than ever there was in 2002, so M&A will be a rich area albeit at tough prices.
So to all a Merry Christmas and to all a goodnight ;-)
Tuesday, December 16, 2008
How to pick a fund
Somebody has been running around the valley trying to educate entrepreneurs with ways to qualify VC funds. Now it's important to ask questions and show interest in any interview process, but here’s the problem: Asking the VC, How big is your fund? Are you investing currently? Or even the better educated, what percentage of your funds are currently committed? generally causes two reactions--
1. Why didn’t you do your homework on us before you came to pitch us? and
2. Do you think I’d be wasting my time listening to your pitch if I wasn’t actively investing?
Now #2 may not always be true because sometimes VCs hear a pitch out of courtesy to a trusted contact, or a favor to another firm, or just to get better educated. Generally the size of the fund isn’t hard to find, it's usually on the web site. The date it closed is also often mentioned--most funds have a 4-6 year investment period, so if it closed anytime in the past two years you are on safe ground.
More importantly, you should have done your homework on the partner in question, not just the fund. Does that fund do medical device, or lasers, if that’s your deal? What about the specific partner? Have they built a company or done several deals in your space? Are they likely to have deep contacts and domain expertise in it?
These are simple questions, and easy to answer just using basic web research. Leverage your service providers, especially in the Valley. Everyone from your landlord to your lawyer will know a firm or two, and most of them will know who’s investing. Your lawyers will have access to the venture databases, and can fill in the blanks on the questions above on fund size, and so forth.
There are also profiles to partners and funds. The classic profile is replace the CEO with a seasoned exec.--quite a few of the top tier firms have this systematic approach to investing. If you are particularly sensitive to this issue, you had better get over it, or don't pitch those firms.
You want to pick a VC partner who can really be a partner, someone you can build a trusted relationship with and ideally become lifelong friends with. There are a lot of entrepreneurs (and VCs) that are about as sincere as the IRS in trying to “help you.” I’ve said before that raising money is like getting married, so the insincere entrepreur or VC is to be avoided. It takes time to build a lasting relationship, and to build trust. The adversarial approach doesn’t help here, i.e. some VCs expect you to beg for money (and I admit I was always a bit cap in hand when raising capital--it always amazed me that someone would give you millions of dollars to fund just an idea). And on the entrepreneur side, we are looking at all offers and we’ll pick the best one. I don’t want to be part of a competitive bidding process to find a partner (investment or otherwise) I want to invest in things where I can add unique value, and with companies who can create unique value. If valuation is the only metric for fund selection then entrepreneurs should go first to a credit card, then friends and family, then a bank, then high net worths, then angels, but frankly never to VCs.
What’s harder is to guage the spirit of each firm--ideally, you want to talk to entrepreneurs who have taken $ from this fund, especially from the particular partner you are interested in. This is another reason why CEO forums/networks are so powerful, because it provides a great resource to qualify VCs in addition to giving a self help group for first-time CEOs. Fortunately, we have a great benefit from the carnage of the tech bust--because we have a four-year historical perspective on what the VC funds actually did to support their companies during this time vs. what they said they would do ;-)
Answers to questions:
Philip Crowley CEO Market Tech on your post "Picking the right VP Marketing":
Larry,I liked your comment “coming from a place that marketing was confused as marcom”. I think a lot of us in the photonics industry have seen this happen. There are many different and separate marketing functions that are required to have an effective marketing program. In larger organizations these roles, marcom, branding, product management, strategic marketing, can be filled by individuals. Of course in a start up situation this is not possible. What is really difficult is finding a single individual to fill all these roles as they are all important and in fact require different skill sets. I agree with what you pointed out that there really is no substitute for experience. My view is that marketing needs to start at the point of conception, the business plan. How large is the market? Who are the customers? What is the USP? If this information is vetted properly marketing is all about execution for a seasoned individual.
Yes, there is often a mistaken idea amoung investors that we should have a pure engineering team first, run it lean and defer bringing in the big guns in marketing and sales until the product is developed. Clearly this is partly right, but without a clear market vision even if the product gets invented it will likely be wrong….
1. Why didn’t you do your homework on us before you came to pitch us? and
2. Do you think I’d be wasting my time listening to your pitch if I wasn’t actively investing?
Now #2 may not always be true because sometimes VCs hear a pitch out of courtesy to a trusted contact, or a favor to another firm, or just to get better educated. Generally the size of the fund isn’t hard to find, it's usually on the web site. The date it closed is also often mentioned--most funds have a 4-6 year investment period, so if it closed anytime in the past two years you are on safe ground.
More importantly, you should have done your homework on the partner in question, not just the fund. Does that fund do medical device, or lasers, if that’s your deal? What about the specific partner? Have they built a company or done several deals in your space? Are they likely to have deep contacts and domain expertise in it?
These are simple questions, and easy to answer just using basic web research. Leverage your service providers, especially in the Valley. Everyone from your landlord to your lawyer will know a firm or two, and most of them will know who’s investing. Your lawyers will have access to the venture databases, and can fill in the blanks on the questions above on fund size, and so forth.
There are also profiles to partners and funds. The classic profile is replace the CEO with a seasoned exec.--quite a few of the top tier firms have this systematic approach to investing. If you are particularly sensitive to this issue, you had better get over it, or don't pitch those firms.
You want to pick a VC partner who can really be a partner, someone you can build a trusted relationship with and ideally become lifelong friends with. There are a lot of entrepreneurs (and VCs) that are about as sincere as the IRS in trying to “help you.” I’ve said before that raising money is like getting married, so the insincere entrepreur or VC is to be avoided. It takes time to build a lasting relationship, and to build trust. The adversarial approach doesn’t help here, i.e. some VCs expect you to beg for money (and I admit I was always a bit cap in hand when raising capital--it always amazed me that someone would give you millions of dollars to fund just an idea). And on the entrepreneur side, we are looking at all offers and we’ll pick the best one. I don’t want to be part of a competitive bidding process to find a partner (investment or otherwise) I want to invest in things where I can add unique value, and with companies who can create unique value. If valuation is the only metric for fund selection then entrepreneurs should go first to a credit card, then friends and family, then a bank, then high net worths, then angels, but frankly never to VCs.
What’s harder is to guage the spirit of each firm--ideally, you want to talk to entrepreneurs who have taken $ from this fund, especially from the particular partner you are interested in. This is another reason why CEO forums/networks are so powerful, because it provides a great resource to qualify VCs in addition to giving a self help group for first-time CEOs. Fortunately, we have a great benefit from the carnage of the tech bust--because we have a four-year historical perspective on what the VC funds actually did to support their companies during this time vs. what they said they would do ;-)
Answers to questions:
Philip Crowley CEO Market Tech on your post "Picking the right VP Marketing":
Larry,I liked your comment “coming from a place that marketing was confused as marcom”. I think a lot of us in the photonics industry have seen this happen. There are many different and separate marketing functions that are required to have an effective marketing program. In larger organizations these roles, marcom, branding, product management, strategic marketing, can be filled by individuals. Of course in a start up situation this is not possible. What is really difficult is finding a single individual to fill all these roles as they are all important and in fact require different skill sets. I agree with what you pointed out that there really is no substitute for experience. My view is that marketing needs to start at the point of conception, the business plan. How large is the market? Who are the customers? What is the USP? If this information is vetted properly marketing is all about execution for a seasoned individual.
Yes, there is often a mistaken idea amoung investors that we should have a pure engineering team first, run it lean and defer bringing in the big guns in marketing and sales until the product is developed. Clearly this is partly right, but without a clear market vision even if the product gets invented it will likely be wrong….
Monday, December 1, 2008
Picking the right VP Marketing
This is a tough one and probably the one thing I can say with authority is, as an engineer I've always found it really hard to find a really good VP marketing. I’ve learned to be really tough on this position, like VP Sales, because it's so hard to see the results of a bad one until its too late. I also grew up in a place where marketing was confused with marcom, and sales & marketing were confused as the same thing. My other confusion on venture backed companies is why they so often look like science projects with bloated engineering teams but really thin marketing (and sales). The defense for this is that the product hasn’t been invented yet so what’s the use of (sales and) marketing? Obviously marketing is more valuable before the product is invented, and ideally before the company has been funded.
All of us who grew up in the laser business are painfully familiar with the solution looking for a problem syndrome ... a great marketing person is deep enough in the space to have a vision for where the market is going, what it needs, and can therefore determine what product to create, and when it will be needed. Also what groups will want to buy it, and what value it will be to them in order to create a model for sales. This understanding is key to success--often the CEO has this vision already, so can get away with a weaker VP marketing, which is why this position is often filled with a great marcom person with little or no strategic vision.
The other critical element is the ability to point sales, to target the right verticals and user groups within those verticals, and to create the leads that sales can go try to close. The Internet has created many new tools to accomplish these goals and most capable marketing people should do well in this area. A finer filter is the quality of lead generation, and targeting--which again requires a pretty clear vision of the market. The next piece is analytic--how well can the marketing VP analyze the data coming back from the market, sales, engineering, etc ... and course correct accordingly?
The most arduous issue is that even a mediocre marketing person is great at marketing themselves, so it's really hard to tell how good they really are. Reference checks are absolutely critical here, and especially back channel i.e., not the references listed in the resume but ideally the boss they reported to and people around them in the companies they worked at.
Unfortunately it's not an area where you can afford to hire someone who does not have domain experience; you can’t afford to have them learn on the job--they have to already have a vision of your market. I have had a couple of cases where I was able to take a promising engineer, or sales person and combine them with an experienced marketing person to create a great marketing team, and put the inexperienced person on the right marketing track for their career, but it's rare.
Being an engineer I have a personal bias towards marketing people who have come from the technical track, but really, a well trained marketing graduate, with some business seasoning is pretty hard to beat.
One of my friends, Tony Surtees who ran a division of Yahoo, is one of the best consumer marketing people I know and caused some controversy when he first graduated by marketing himself a little too effectively and taking out a full page ad in a major newspaper--apparently no one from that prestigious marketing school had ever done something like that before; it's somewhat ironic that Tony quickly got out of print and into digital media ;-) Tony dazzles tech startups with his creative guerilla marketing plays. And this is another pet peeve of mine; marketing needs to spend money, often more than anyone else in the organization, but really good marketing people can do a lot with a little, and in the early stages of a startup it's better to build up a mystique and stay in stealth longer than to try to make a splash by brute force. It's more credible to be viral, less expensive, and keeps you out of the gun sights of large competitors.
However, as a lesson from the Telco era, and laser startups--you should never be in stealth from customers! Many, many, were ... ;-(
All of us who grew up in the laser business are painfully familiar with the solution looking for a problem syndrome ... a great marketing person is deep enough in the space to have a vision for where the market is going, what it needs, and can therefore determine what product to create, and when it will be needed. Also what groups will want to buy it, and what value it will be to them in order to create a model for sales. This understanding is key to success--often the CEO has this vision already, so can get away with a weaker VP marketing, which is why this position is often filled with a great marcom person with little or no strategic vision.
The other critical element is the ability to point sales, to target the right verticals and user groups within those verticals, and to create the leads that sales can go try to close. The Internet has created many new tools to accomplish these goals and most capable marketing people should do well in this area. A finer filter is the quality of lead generation, and targeting--which again requires a pretty clear vision of the market. The next piece is analytic--how well can the marketing VP analyze the data coming back from the market, sales, engineering, etc ... and course correct accordingly?
The most arduous issue is that even a mediocre marketing person is great at marketing themselves, so it's really hard to tell how good they really are. Reference checks are absolutely critical here, and especially back channel i.e., not the references listed in the resume but ideally the boss they reported to and people around them in the companies they worked at.
Unfortunately it's not an area where you can afford to hire someone who does not have domain experience; you can’t afford to have them learn on the job--they have to already have a vision of your market. I have had a couple of cases where I was able to take a promising engineer, or sales person and combine them with an experienced marketing person to create a great marketing team, and put the inexperienced person on the right marketing track for their career, but it's rare.
Being an engineer I have a personal bias towards marketing people who have come from the technical track, but really, a well trained marketing graduate, with some business seasoning is pretty hard to beat.
One of my friends, Tony Surtees who ran a division of Yahoo, is one of the best consumer marketing people I know and caused some controversy when he first graduated by marketing himself a little too effectively and taking out a full page ad in a major newspaper--apparently no one from that prestigious marketing school had ever done something like that before; it's somewhat ironic that Tony quickly got out of print and into digital media ;-) Tony dazzles tech startups with his creative guerilla marketing plays. And this is another pet peeve of mine; marketing needs to spend money, often more than anyone else in the organization, but really good marketing people can do a lot with a little, and in the early stages of a startup it's better to build up a mystique and stay in stealth longer than to try to make a splash by brute force. It's more credible to be viral, less expensive, and keeps you out of the gun sights of large competitors.
However, as a lesson from the Telco era, and laser startups--you should never be in stealth from customers! Many, many, were ... ;-(
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