Steve Jurvetson in J-Curve describes the next drastic innovation after Moore's law is totally consumed in the current silicon based semiconductors - the future is for molecular electronics. Ray Kurzwei puts the progress in to perspective by The Law of Accelerating Returns.
Jeff Nolan provides valuable advice about different VC types and their working methods - check it out . AVC adds some good comments for Jeff's post.
I visited Skype today and found out that they have reach a staggering 25m downloads in a year!
Last week I was a bit concerned of the professionalism of some VCs regarding disclosure. This week I attended a VC conference with some 230 attendants from top notch private equity firms and growth phase entrepreneurs who usually had already one or two rounds of financing under their belt. My concern might have been a bit overrated compared to the disclosure found from the seminar material. How comfortable would you be to disclosure this information in public?
- Current shareholder structure (name & amout of shares)
- previous rounds of financing (round date, stage, company valuation, total amount)
- Key figures for 2002-2006 (turnover, EVIT, equity, employment)
The sad part is that many of the companies gave almost all the info. I would not like to be the poor VC who did the previous round and sat in the room surrounded by collegues figuring out your deal details. Open door policy is OK to a point but this much information does not help to get the next round of financing. While making your initial sales pitch no one is interested of the financial details and shareholder structure per se. They come later if the overall value proposition is in place. If nothing else this information is very valuable to a company's competitors and clients.
One should also be consistent with the sales pitch. It is not convincing to tell first your profit margin and explain to a question about how to keep the high rate in the future by answering that we do not reveal our margin to our clients. But you just did it, in public. A real case is not missed by revealing too much info early in the financing process but way too much in a wrong place can be a serious deal breaker.
Often start-up companies are less structured and organised than their owners. This is natural since a young company has to achieve a lot during the early days of its operations. No one gives any rewards for having the top class internal processes and structures. Early results are the ones from which you're measured. Of course it helps the earlier you have implemented the processes and business conducts that enable to scale the organisation with ease together with the growth.
But how to deal with a case where the investors are the less structured ones? Usually owners can imply certain practices but how can a company to teach its shareholders? Mainly this is the issue with company secrets and handling of its proprietary information. Recently I found out a case where an investor made an offer for investment and the term sheet was exactly as discussed. However, the big surprise came from the fact that the term sheet was made by Word using the 'track changes' feature. The term sheet template had been used in the past for the previous deal and the deal terms were still readable... The immediate reaction is to expect that your deal terms will be distributed to the next potential deals the investor is doing. Very nice. Fortunately in the term sheet phase one can still consider alternative investors who can be more discreet with their investments.
Two of the most important tools a manager needs are:
1) (Huge) Tolerance for stupidity
2) No expectations policy - just take things as they come. (Second rule could be a corollary to the first one.)
Following these simple rules make life so much easier. Of course they were made up tongue in cheek but I must admit that they really work...
During the years I have had the chance to meet lots of different business people from different industries and cultures around the world.
Somehow all the brilliant minds seem to have some characteristics in common. Usually they are humble and open for any new opportunities. They know that the only way to stay in top is to change and earn the success again and again. Similarly they are approachable and give you a chance to present your case. Naturally this might be only 30 sec or so but still it's enough to validate your standing. Their open-door policy allows them to get feedback and be in the pulse.
One of my favourite examples of renewal and being on the top is Madonna. She has evolved a lot as a singer since the early 80's. Madonna has successfully avoided not to cling on her proven hits and the early day success formula like so many other artists. This has made her interesting and people have started to expect something new and different from her.
The same applies to business. The great types have usually earned their reputation by hard work. They know that it can be done again. They do not have to show off or be arrogant. It's just enough to be. They love new ideas and are willing to take risks. Innovative thinking and new approaches are possible. Unconventional solutions and new talented people are usually around these types.
Most of all the great types are fun to work with. Doing business is relaxed and easy going even thought it can be on the same time demanding and tough. It is a pleasure to work with intelligent people who can focus on the issues and get things done. Almost all these types have a great sense of humour and broad range of interests, not talking about their wild stories and experiences... The key question is just how to meet more of these people? My personal hunch is that one has to meet at least a thousand people to pick up one great type. Or then you have to move to Monaco and hang out in the right places. And still your odds are not much better…
There is a great new weblog for entrepreneurial insight by Joe Kraus (Bnooby), a founder of Excite. I especially enjoyed the story where Vinod Khosla jumped up after ten minutes in their first meeting and ordered a 10gig hard drive for $10.000. Also persistence pays 2 is worth reading.
It's amazing to see the differences in thinking among VCs. Totally opposite schools of thought can be present and we are not talking about some decades in time between the ideas.
What's the purpose of committing the management in an early stage deal?
The first line of thought is to tie the guys in as deep as possible. Demand a relatively large personal investment and keep it as the collateral that the management will do all they can to keep the thing afloat.
The second approach is to take the standing where risk-investing means dedicating money by the investor and a management means dedicating work to the deal. This means that since the management is earning their living from the venture there is enough risk exposure for them already. Naturally if one has created wealth already and has no mortgage loan on the line a small invest would not do any harm as a sign of commitment.
The first 'old school' counts on the fear and threat factor more than anything. The management cannot afford to mess up with the venture or at least it will have serious consequences for the personal situation. The other approach usually believes on positive incentives instead. It's more worthwhile to make the venture and the perks so appealing that it makes no sense to jump off the venture any time soon. Incentive metrics could include benchmark to profitability, growth and other important milestones as stated in the biz plan. In another words they look for the future and try to maximise the chances for the optimal outcome.
From the risk management perspective startup investing is anyhow risky. It's less than one third of all deals that are worthwhile even for the management. Portfolio management methods scream red when considering the case of a CEO & founder in a startup. First of all, the person has dedicated considerable amount of time and effort for the case from 0-2 years before the seed investment. When the seed investor comes in the founder can be required to invest some more personal wealth for the case. In this phase the entrepreneur earns the living from the venture, has invested additional money for the case (or taken another mortgage for the house) and is required to keep the company in the very steep growth track for several years for the optimal growth. All eggs are nicely in the same basket. (Life is risky and it is not necessary to become an entrepreneur...)
How about from the investors point of view? You get what you measure. If you are loading the management with high personal risks you are getting most likely what you ordered. This means that the management becomes extra cautions not to rock the boat. They prefer to take the safer route in order not to jeopardize the whole venture and become personally liable for the losses. This means that the startup cannot be geared optimally for the growth and targeted for the highest possible valuation alternative.
Similarly when the times are bad it takes a lot of courage from the management to keep calm and make the right choices and fight for the survival of the venture. I doubt it is possible to give 100% performance if one's own job is on the line together with the extra money committed to the venture by personal loans and second mortgage among others. If one has to worry about where to get the next month's living its difficult to be objective and positive about the future.
Finally it's interesting to think about the management cash commitment from the point of view of sunk costs. How much does it really matter how much money you have really committed to the deal? It's done already. No matter what you do or which way the venture is going, you still have to pay off the personal loans anyhow. Your thinking is guided by the thought that one has to secure the monthly loan payments in all the circumstances.
Those of you how loved Liar's Poker there might be something similar to have fun with: Running Money by Andy Kessler. AO has made a peek for the book. I haven't read the book yet but it's on my agenda.
This is unconfirmed but the source was quite a reliable.
A few years back management of Ericsson changed their bonus structure from the option scheme to something more appealing and realistic - to cash flow basis. This was a few years back when Ericsson was really down and the stock options were naturally worthless.
The shareholder meeting accepted the change of the scheme for cash flow based system. Guess what happened quite a soon afterwards? Ericsson announced the sale of their London HQ's property. It had very nice cash flow impact and the management got their hefty bonuses. Needless to say that the business side of the company was still making losses and the sale was just an extraordinary one-time sale which should not have been taken into account even in the cash flow metrics. Well, never mind the details. Cash flow is king!
I had today an interesting valuation meeting. Mainly it was about the terms of the equity investment but for me it shed more light to the VC than anything else.
It's not very convincing to claim first that the business plan is not focused enough and then after a while start to talk about the terms of the investment. It was good enough for the investment?? In this case the analogy would be that a VC would ask from Edison about the light bulb market by stating that sorry your focus is too broad. You cannot offer your invention to all of lighting market. Where are you going to focus - on houses, stables, offices or factories? You have to find a niche... Yeah, right. Still the same bulbs for all the places.
HBS Working Knowledge has a good piece about negotiating. According to their research it pays off to start the process by setting an agressive first bid. I agree but where is the fine line between aggressive enough and way to aggressive that turns the deal off?
I found a new VC and entrepreneurship focused blog called Dispatches. Its latest post reveals some interesting tricks of IRR with different cash flows.