Archive | November, 2009

Getting out of the starvation mentality

23 Nov

A couple years ago one couldn’t walk past a book store without being assaulted by a giant display for pop psychology book-du-jour, The Secret. The book and the movement it spawned has its share of ardent fans and detractors alike, so I am not about to wade into that heated debate.  However, a centerpiece of the book’s premise, if I recall, was the notion that positive outcomes are manifested in some way. This is not to say that one’s path to Mercedes S-class ownership is simply to will it into appearing magically in your driveway, pink slip in the glovebox, through intense visualization; rather, the notion is that dwelling disproportionately on problems and obstacles tends to manifest problems and obstacles while focusing on solutions can bring about the kind of thinking and resources that solutions require. If one can put aside some of the gauzy new-age background music to a lot of that, the idea does have merit.

There is a convenient corollary to this idea in the start-up world as well. Almost by definition, start-up endeavors are required to focus on being extremely efficient with capital and resources. As I pointed out in my recent post, Building a Team? Think like a Chef, there is never enough time nor resources to do things optimally, so improvisation becomes the order of the day. This is not altogether a bad thing. Indeed, the management teams of many leading companies often credit what they learned during the lean times with teaching them the fortitude, persistence and efficiencies that helped them become the market leaders that they are today. Correspondingly, there are countless stories of companies that raised enormous sums too easily during the dot-com era, blew their seed capital on Superbowl ads and foosball tables, and were unable to right the ship when the market shifted dramatically toward capital efficiency and resourcefulness. 

However, as we begin to see the proverbial ‘green shoots’ in our broader economy, the question that will become increasingly relevant is how an organization so focused on cost-cutting and economizing for so long can begin to grow again and think like a market leader. As management consultants have loved to say, ‘organizations cannot cut their way to growth.

Legacy cost of a Starvation Mentality. A challenge I am seeing in a number of my portfolio companies is how to change the thinking of an organization to no longer be in starvation and survival mode. In a sense, companies that have been operating on fumes for long periods can become “institutionalized” to those ways of thinking to such an extent that they can’t operate any differently. This can actually present serious issues. To grow a company needs to leverage resources and that can mean hiring outside professionals to support certain functions that the company had previously been doing on its own to save money. It’s important for management teams to wear many hats, but wearing too many hats is sub-optimal. I’ve seen teams spend an entire week on a task that would have taken an outside professional an afternoon to accomplish. A good venture investor and/or board member needs to have the insight and experience to point out these inefficiencies. This is sometimes contradictory for a start-up management team, especially in the current environment when so many venture investors and board members have been pounding on the proverbial table for the past year urging their companies to save, save, save. The mixed message can be unnerving.

Shifting from A Starvation Mentality. No doubt, this current downturn will take with it many start-ups still clinging to life. However, for those companies fortunate enough to make it through this rocky patch and still be standing once the smoke clears, there will be a great deal of opportunity to build significant businesses in markets that are still fairly wide open. What will be critical is that a team adjust its thinking away from a survival and starvation mindset toward one geared for growth and toward seizing market share. Companies will need to loosen the purse strings quickly to add resources and grow their teams. Companies that take too long to make that adjustment will be at a significant disadvantage.  

You’re a market leader. Act like it. A second challenge for a company that survives this downturn will to adopt the notion that it is a market leader and to start acting like it. In truth, many of these surviving companies will be market leaders because there will be no one left in their space. Making this change in thinking is easier said than done, however. Companies that survive will likely have gone through their own catharsis—rounds of layoffs, product launch delays, infighting, etc. This can have a heavy impact on morale. Once a company has gone through the fallout of a downsizing, it’s difficult to shrug it off and exude confidence. Cherished co-workers are gone, offices have been shuttered or reduced in size, friendships have been frayed.

In summary, getting through a downturn is obviously what is foremost in every start-up CEO’s mind. However, it’s important that it not overtake all planning and thinking of what lies beyond the downturn and how to grow again. That will require a shift in attitudes and beliefs.  Adopting a post-downturn mentality should start right away. That shift can start by tearing a page out of the pop psychology canon and embracing a self-image of success, not simply survival.


Building a team? Think like a chef

19 Nov

Earlier today I was speaking with a technology company CEO that I’ve known for years. Ostensibly, the conversation was about building great teams, but we wandered. We flitted between technology, culture, management best practices, and leaders we admired. At one point in the conversation I realized that had someone been eavesdropping he/she could have thought that we were talking about cooking. It got me to thinking.

I have long found amusing analogies between the act of cooking and that of playing music, particularly jazz. Regardless of how well-trained the practitioner, there is an element of improvisation that exists and the success of that improvisation leans a great deal on talent, pattern recognition, and “animal spirits” that cannot be taught or learned.

Experienced jazz musicians rarely read music; instead, they work from a lead sheet–a page of barely decipherable melody notes and chord changes that “suggest” the outline of a tune. They then make it their own through interpretation. Great musicians can dance on the edge of cacophony and it’s in that dance that magic is made. Similarly, experienced chefs take the framework of a recipe and a notion how something should be executed–say, how a beef bourguignon should classically look, smell and taste–and then they render an interpretation of that dish–sometimes successfully, sometimes not–based upon what’s at their disposal. Not until today had I thought there was much of a lesson there to building start-up teams.

Like cooking or playing jazz, start-up team building usually begins with a framework, often drawn from some best practices handbook, business school text, or from the counsel of experienced advisors. These frameworks are valuable, mind you, but like the most well-conceived battle plans they quickly go out the window the moment the bullets start flying. The “perfect” VP Marketing candidate is never available when it’s time to hire; the CEO who was so cool, calm and impressive in the interviews really can’t give a presentation in front of VCs without breaking into a flop sweat; and, the young programmer who was supposed to just build the basic code until the rock-star VP Engineering came aboard is now building the entire product because there’s no budget for a VP Engineering any longer. Pass the ammunition.

What I think distinguishes a great CEO from a merely competent one is that ability to improvise. It’s trite to say that CEOs should strive to only hire the best candidates, or chefs should only work with the finest ingredients. That’s too easy. Anyone can grill a top-dollar USDA Prime filet mignon; a talented chef can take a cheaper cut–say, a tough, sinewy beef shoulder–and know enough to be able to execute a proper four-hour braise in a gentle bath of wine and aromatic vegetables that will have it falling off the bone and tasting every bit as good as the filet. 

A great chef and a great CEO also learn early that it’s easy to add; it’s much harder to take away. Salt is cheap and plentiful and can always be added later; oversalt a dish too early and it’s ruined. Similarly, talent is always available (especially now) but bringing on resources into a start-up impulsively can shock the system. If those “additions” later turn out to be unnecessary, re-potting them somewhere else in the company or removing them altogether can be extremely painful, costly and destabilizing.

Truth is, there never seems to be the resources to do things the “right way”; and, waiting for the “right” moment to hire that A-list player or the “right” time to launch that marketing plan means waiting so long you miss the window of opportunity, which usually means the company suffers, or fails altogether. A great chef and a great CEO recognize and understand the potential of all the imperfect resources that are available to them at any time and can coax them toward realizing the fullness of their potential.

Finally, a top 100 VC list worthy of Midas

18 Nov

As reported by Dan Primack in PE Hub, Forbes recently announced it would not be compiling a 2009 version of its much-maligned Midas List of Top 100 venture capital investors. And thank goodness for that. I got into a fairly public spat last year with the then-Forbes Editor responsible for the Midas List over my serious criticisms of their version and how they compiled their rankings. My biggest gripe, from my blog post at the time, was that the presence of attorneys, investment bankers and other “service providers” seemed to go against the purpose of the List. The investment banking and venture capital businesses are fundamentally different, so appearing together on a list of “dealmakers” ostensibly “deploying limited partners’ capital to create long-term value” was silly and undermined the value of the List.  Investment bankers provide valuable services and deserve to be recognized, but I submit that there are already plenty of other lists to celebrate their accomplishments; a Top 100 VC list is not it.

Coincidentally or not, Tony Perkins’ AlwaysOn has picked up the mantle and pulled together its own list, and that’s a good thing. The AlwaysOn edition, while not perfect, seems to get a good deal closer to the goal of what a list of top venture investors should be. Gone are service providers, investment bankers, and attorneys. Gone, too, are angel investors who are not full-time investors but were fortunate to have been early investors in some of the biggest tech IPOs of the past decade. [Nothing against that, but if these angels are not active full-time backers of start-ups and managing institutional capital from limited partners then this is not the proper forum to celebrate them.] Finally, teased out of the statistics in this year’s list is the “Google effect” — the impact of the Google exit upon venture returns that so severely skewed the results that past years’ lists were inevitably topped by the investors in Google with little regard to other deals that were done in the preceeding 5 years. The evidence of that effect is clear by the deafening absence from this year’s List of one of Google’s principal venture investors and one of the most august names in the industry.

As the name implies, the AlwaysOne Top 100 VC List is of full-time venture capitalists. No doubt there will be snarky comments from the community in the weeks ahead about who received some of the recognition of the new List, whether that recognition was deserved, whether the exits attributed to the investors recognized were indeed funded by those same investors, and so on and so forth.  This is to be expected, particularly among a group of professionals that is somewhat renown for having a, ahem, healthy self-image.

The most valuable thing about writing a Business Plan

16 Nov


A couple times a week I am approached by an entrepreneur who wants to send me his or her business plan–yes, that 90+page behemoth usually culled from some business plan-creator software that virtually no one in Silicon Valley ever reads. My response rarely varies. “Preferably, I would like to first see an overview (1-2 pages), a detailed Exec Summary (5-7 pages), or a PowerPoint investor deck (15-20 slides).” [Indeed we have a page on our firm’s website dedicated to offering a guideline on what constitutes a well-crafted overview or executive summary.] If there is a reasonable possibility that your company is right for us, then it should be obvious after 10 seconds glancing at a well-written overview. Spare the life of that tree that would otherwise be sacrificed to print, collate and bind your business plan–at least for now.

Business Plans in general get short shrift when it comes to funding technology start-ups. This was not always the case, but it has rapidly become the norm. However, while it is easy to ridicule the Business Plan as a relic and a throwback to a gentler time in corporate finance, some reappraisal is in order.  This is not to say that I want to read 90-page business plans again; I don’t. I have long argued that, as a fundraising tool, business plans are the bluntest of instruments, are overrated and often unnecessary. What I think is of value, however, is the process of writing a business plan. Indeed, the most valuable thing about writing a business plan is writing a business plan.

There is something inherently powerful in the process of sitting down and codifying one’s thoughts about a business opportunity. The rote structure and format of a business plan, while tedious and stifling, is often the best way to methodically tease out all the details of the idea itself. Having to address the blunt questions of market size, competition, funding requirements, customer segmentation, and so forth forces some re-appraisal of earlier assumptions and often fosters new doubts about the viability of the overall idea. All those notions flying around in one’s head about the prospective start-up company are now committed to paper. That starkness of black and white text has a powerful impact: It crystallizes one’s thinking and it forces an entrepreneur to make difficult decisions about what the business will really look like, how it will function, and how successful it can reasonably hope to be. Many start-up ideas are abandoned after the business plan-writing exercise–and this is not necessarily a bad thing. I often wonder whether other ill-fated businesses would have been mercifully smothered in their cribs had the founders taken the time to do a proper business plan drafting session and uncovered all the insurmountable obstacles that they would later face.

In summation, the process of writing a business plan can have the powerful effect of both refining a promising idea and (hopefully, at least) euthanizing a bad one. After the plan is written, and assuming the decision is made to move forward, the plan itself can then serve as the company’s core document from which is rendered the Executive Summary, Overview and all other investor collateral. This ensures that there exists consistency across the documents on the company’s messaging.

Social Networking: Let’s Get Vertical

11 Nov

Apologies to Olivia Newton-John  and her bandana might be in order here for taking such license with this post’s title, but I’ve been getting pretty excited–nay, worked up–about the evolution of the broad social networking/social media meme in the past year. Ever since the promise of social networking platforms began to bear fruit with the growth of MySpace and its followers, a nagging issue among investors in the space has been around (a) long-term, sustainable monetization of the social web and related platforms; and, (b) stickiness. Some time back I took issue in a post with a then-$15B valuation for Facebook imputed by a Microsoft investment and pointed out some of my rationale for why that lofty valuation, at least at that time, seemed wholly unhinged to reality. Yes, I took some flack. That valuation has now floated down to a more palatable $10B range based upon more recent financings and other matters, but the arguments made in that post related to my concerns about long-term utility of most social networking platforms remain fairly relevant today.

Rather than rehash those arguments here, let me point to a company that I suspect might best represent the direction of where a good piece of what we call the social web is actually going–namely, vertically. Briefly, Citron Capital portfolio company Athleon is a web-based team management platform that delivers a suite of elite sports team management applications, previously reserved for professional teams, to the mass market of coaches. These coaches manage some 535,000 high school sports teams and more than 2 million club, youth and intramural teams across the country. Not included in that number are the tens of thousands of junior- and full-time college sports programs that don’t have the budgets of Big Conference universities and, hence, can’t avail themselves of the many point solutions offered to NCAA and professional teams.

Like many start-ups nibbling at the margins of social media, Athleon began life as a social communications platform of sorts focused upon the affinity group of prep school athletes. The usual suite of applications around messaging, calendaring, pix and postings followed. As the applications rolled out by the development team became more robust and customized to the needs of amateur and prep sports teams, however, the market began to take notice. Athleon had begun to win the ‘value’ argument and, in so doing, win over the toughest and most critical decision maker in its ecosystem–namely, coaches.

While we are very excited with what Athleon has built and with the clear value proposition that they are delivering to their users–better communication, integration, greater time efficiency for coaches, cost-savings, information and media sharing– that all lead to improved team performance on the field, we are also excited about the impact that these solutions will have on the greater social web. Our view is that vertical markets have unique and idiosyncratic needs that broad-based social networking platforms are ill-suited to address. Athleon founders Brent Lamphier and Ryan Kosai have built a potentially game-changing company at the edge of a new wave of social media platforms that we feel has tremendous promise and we are privileged that they have invited us to take this ride with them.

When Angel capital is not so ‘angelic’

5 Nov

Angel capital can save a company. They can also sink it.Skimming the recent spate of somewhat rosy newspaper and magazine articles touting the resurgence and benefits of angel investing, I was persuaded to dig through some of my older posts on the subject to examine whether my somewhat caveat emptor position on raising angel capital had been swayed. With a few exceptions, it hadn’t. This is not to say that I am a critic of the practice of start-up teams chasing investment dollars from individuals. Capital coming from private individuals is still how many, if not most, start-ups initially get off the ground. Additionally, in a challenging funding environment like the one we currently inhabit, finding individuals ready and able to “top off” institutional investment rounds is often a key element in getting those rounds closed at all. Indeed, one of my more popular posts over the last couple years, The Rise of the Pledge Fund, focused upon the emergence of “fundless” or non-committed funds that were targeting seed stage deals and offering individual angels the administrative, post-investment supervisory and deal flow benefits of a traditional venture fund without some of the drawbacks of being in a committed fund. On balance, I was a fan.

First, let’s define our terms: Most on the venture side prefer to delineate capital raised from well-meaning friends and family from capital being sourced from sophisticated private investors or assorted “angel funds” where there is no pre-existing personal relationship with the entrepreneurs to rely upon. While the money coming from either source may still be green, what it tells a professional (i.e. venture) investor about the opportunity is quite different. Your Aunt Bea putting $25k toward the development of your first prototype tells me she’s a pretty great Aunt and loves her nephew, but tells me nothing about how compelling your opportunity is and whether it’s right for venture capital– now or ever. That same $25k (or better, $250k) coming from well-recognized angel groups like Band of Angels and Tech Coast Angels, or from individual angels like Google backers Ron Conway or Andy Bechtolsheim, however, carries with it some significant gravitas. This is not simply because these groups and individuals have been highly successful and have been investing for many years, but also because each has a highly competitive screening and deal selection process which has the effect of winnowing mediocre deals from consideration. Whether I should admit it or not, all things being equal, a Ron Conway- or Band of Angels-backed venture will simply rise higher in the stack of Exec Summaries on my desk than will the summary of a company that did not secure capital from such recognizable investors. I would expect that to be case with most in the venture community. 

What I am referring to in this post are friends, family and fairly unsophisticated investors where, in my experience, the greatest pitfalls lie. Recognized, sophisticated angel investors aside, where things get a bit tricky is around how, when and upon what terms a young company should accept capital from these well-meaning investors. Generally speaking, the traditional investment path is that a young company collects anywhere from $25,000 to $1mm in friends and family funding to get through Version 0.0 and toward an offering demonstrating enough early validation that it can attract a respected professional investor that can put greater sums to work, open up its extensive rolodex of contacts, and accelerate the company’s growth. Of course, in the current environment these notions of what constitutes “traditional investment paths” are being widely re-evaluated and re-assessed as companies are confronting a particularly tight funding market and being forced to go back to early investors–often angels–and new potential angels to extend the runway, get the product/service further along, and hope the institutional funding market will open up in the months ahead. For those such companies, some pointers to consider:

1. Keep the Cap Table clean. I cannot stress enough to young management teams to do everything in their power to do things right the first time. Put bluntly, there’s rarely the time (or even the chance) to fix it later. Upon incorporation, hire good counsel, and get proper advice on how best to manage the early financings. Despite the best of intentions, it can get hairy fast. The $10k and $15k investments you might be receiving from your Uncle Ted and your college roommate could be the difference in getting things going in the early days, but make sure you have a clear, consistent way of recognizing those investments. There is also the likelihood that, being a cash-starved start-up, in addition to the stock options grants you will need to make to early employees you will need to compensate attorneys, landlords and other professional services providers with some combination of cash, stock, warrants and/or other derivatives. Be careful. Early stage VCs expect to see some small commitments from friends and family but if your Cap Table starts to look like the starting roster for the New York Mets with bits and pieces doled out to every Tom, Dick and Harry you’ve met since junior high school along with different pricing and different vesting schedules it can cause a deal to stall….or to fall apart completely. Cleaning up a compromised Cap Table is at the top of most “I hate to do” lists for many VCs. It tends to cast a pall on a potential funding because, apart from the headaches of cleaning up a messy Cap Table, it also implies a start-up team that is either desperate for funding, or unsophisticated, or likely both.

3. Be smart about who’s on your Board. Sun Tzu might have been right when he said, “Keep your friends close, but your enemies closer,” but he probably wouldn’t have made a very good venture capitalist. Building a well-assembled, complementary and collegial Board of Directors (BoD) is critical, but especially so in the early days when things are happening very rapidly, capital is scarce or non-existant, and everyone needs to grab an oar and help in any capacity they can–early customer meetings, investor introductions, crafting and gaining alignment on product strategy, recruiting, legal, etc. Dysfunctional BoDs are a disaster. Be cautious of an angel who is demanding a Board seat as a condition of his or her investment but cannot really bring germane operating experience, investor relationships, or more capital to the table. Early stage investors also become very leery if they perceive that upon investing in a company they will be inheriting a bad BoD or a problematic, unsophisticated or obstructionist Director that they will be tangling with to get things done. For many VCs, there aren’t that many “I have to do this deal” deals, so most will simply shrug and move on to another opportunity that doesn’t present itself with so many wrinkles that the VC will need to iron out once he or she joins the company’s BoD post-investment.

3. Insist on a No Bully policy. This is not quite the same as the No Jackass Policy I referred to sometime back in a recent blog piece of the same title. That piece was concerned primarily with bad hires. Bullies, on the other hand, tend to appear in the form of angel investors during difficult times. This is one of those times when the term “angel” could hardly be more of a misnomer. When there appears to be blood in the water with a young company, an “angel” can appear that seems willing to fund the company through the rocky patch until the markets improve, but the terms get more and more onerous each time an investment is discussed.  At first, the angel seems excited and willing to be part of the business. Correspondingly, the other Board members and investors are excited at the prospect of fresh outside capital coming into the company to help accelerate the business and get through the rough patch. In time, however, the angel perceives that there is no real competition for the deal and begins to insist on more term concessions until the ‘death by a thousand cuts’ phrase begins to get quoted and re-quoted at the BoD meetings when the investment prospect is discussed. Paired with the increasingly onerous investment terms coming from the angel prospect is often new demands on altering the company’s strategy or its mission, or even the principal business it is in. As company management perceives they could be losing the angel prospect, they often make the mistake of “single-tracking” the investment discussion at the risk of other, more promising prospects and investing hundreds of man-hours responding to document demands, diligence requests, and consuming thousands in legal fees. Inevitably, the terms get progressively worse: The new angel now wants a BoD seat, when that was never a deal point to begin with. Now the angel wants to demand the removal of another BoD member he perceives as “not on board” with the new strategy. Now the angel wants sweeteners and more warrants and a lower valuation and pro-rata investment rights and…and…and. It becomes the proverbial onion that stinks all the more with every layer that’s removed. Once that happens, it becomes a death spiral. Accepting the investment with all the new dreadful terms might buy the company some short-term runway but virtually cripples the business, substantially dilutes everyone’s ownership, saps enthusiasm and motivation from the team, and sets the stage for fights at the monthly BoD meetings where everything happens but the exchange of gunfire. Adding insult to injury, even if the business continues to grow and execute with this unwelcome dynamic at the company, should a professional investor show interest in the company for the next round of funding, that investor will almost undoubtedly lose that interest once he realizes that this less-than-angel investor crammed down the company severely at the last funding and now owns a significant percent of the company for his modest investment. Any experienced VC will sense that something is amiss at the company, that the “angel” and not the management team is driving the business decisions, and he will simply Control-Alt-Delete on participating in the investment.

In summary, capital from friends, family and outsiders still has a critical role to play in start-up development. It fills a key void that, even with venture fund sizes falling and more firms focusing on earlier stage companies, will not likely be filled by the institutional class anytime soon. Properly leveraged, it can fill essential gaps in a company’s development and pave the way for follow-on financings led by institutional class investors or, in some cases, even pave the way for long-term commercialization of a product or service. What is paramount, however, is to not let financial stress force the management team to compromise on the core values and mission of the business or to partner with someone whose brief capital support might only serve to damage the company’s long-term survival.

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