Point of view

Every one of the VC blogs out there is written by a human being. This fact might be disputed by some entrepreneurs, but the blogs represent the summation of a person's history, dreams, fears and goals.

You will get conflicting advice on many topics. I'll look at the world through my own lens, and decry the observations of the investor sitting next to me.

The disagreements are where the discussion gets interesting.

My abstraction leads me to believe that every product is actually a physical package for a SERVICE. Hence, this service can be replicated, or satisfied in many different ways. But abstracting it toa service is the only way to be aware of the customer experience, and what it is they are really buying.

In being too simple with this model, I presume that every decision "seemed like a good idea at the time." Even the ones that are known to be wrong, the decision to commit the action was the one that gave satisfaction at that moment. The cry of "I don't know why I did that." Is meaningless and a lie. The guilty pleasure of doing something wrong, the thrill of getting caught, all these things were evaluated or ignored in the moments before committing the act.

Pleasure seeking or Pain Fearing have been cited as the reasons why people do anything. I rephrase it as pleasure, or peace of mind. Sometimes the act of making a decision with incomplete information is more to have peace of mind in having made the decision, instead of what results from the decision. Some folks will actively state, they don't want to think anymore. An argument I never sympathized with, however one I can recognize.

Why does your customer purchase your service to satisfy their need and achieve peace of mind?

If you can't tell why, ask. If you can't get a clear answer, do you actually have a real customer?

Take all the advice

Read it, digest it, and then ignore it.

You’re making a mistake

This is something I hear every so often from a company that I decide not to fund. The truth is, they’re probably right. I make a lot of mistakes, and when their company becomes a headliner in the Fortune 500, I’ll know I could have been an early investor, and have nothing more than a story. But it’s a mistake I can live with, and one I can afford to make.

Investors can’t go around, and run a business trying to avoid every mistake. There are big mistakes, and small mistakes. The key is to avoid making big mistakes right away, and prevent small mistakes from growing into big mistakes.

A mistake in funding isn’t that big a deal at the end of the day. No one dies, no one gets maimed. Everyone can recover from a wrong “no” response.

It’s OK to make that type of mistake.

Optimists are more fun

I quickly tire of people who manage to snatch defeat from the jaws of victory.

In the long run, the universe might be “fair” and balance out all the good with the evil. But infinity is a big number. The short run is what we’ve got to work with. Short in terms of the universe is still a billion years or so.

Going full tilt on either end does no one any good. It’s a difficult balancing act to be optimistic about the future, pessimistic enough to be concerned about the competition, careful enough to keep all the gears running, and cautious enough to make sure the company doesn’t run out of cash. And with your OTHER hand…

The ones who don’t believe can’t succeed.

Of the remaining entrepreneurs who believe whole heartedly, put optimism in the “necessary but not sufficient qualities for success” category.
Skill
Talent
Ability
Tenacity
Wisdom
Knowledge

And then, even with all those, you can still fail.

Or you could be fortunate, and succeed with little or none of the elements listed above. No guarantees, but it doesn’t hurt to stack the odds in your favor.

Cash flow

Great article on cash and 10 rules of cash flow

I agree with most, except his one statement;
No Cash = No Business.

I understand his need for Cash, but it’s proven to be a red herring for some companies I’ve seen. Companies that found ways to raise money, but never really targeted on their customer. These things end up sticking around too long, trying to find ways to justify management’s salaries, and end up with a 0 at the end of the day.

Customers provide CASH for the services of the Company. These are the key guys to satisfy, not users, not eyeballs.

Needs

Earlier I touched on the concept to create new services, for a new market, to satisfy an identifiable need.

Abstracting is one way I have of understanding, or rationalizing the success and failures of products and services.

First, there are no “products”. Only services.
This concept allows me to avoid the technologist’s trap of tweaking to build a better mousetrap. Do people really want a stronger chain, faster plane, better buggy-whip, etc.? Or do they want something else?

Looking at the service these products provide allows you to understand the full competitive market. Recognize substitute goods, and how they will affect the sales of your “new and exciting” product. Recognizing the service they provide will help you understand where you fit in the world.

Every service satisfies a “need”. You can create your own list of needs. Mine tend to be: communications, sustenance, shelter, peace of mind, entertainment, transportation, self actualization, etc.

These needs have been satisfied for many years, in many different ways. As people have progressed, we have developed new ways of satisfying these primary needs. The method, system, process used to satisfy these needs have changed, but the core needs will always exist.

Communication is a good example. HOW we communicate hasn’t been as important as THAT we communicate. (What we communicate has always been of dubious value). After oral history, we had written words. Letters were, for a long time, the best way to communicate over long distances, or time. Today, we still use them. However, after the invention of the telegraph, we were able to communicate more rapidly than physical transportation, and this changed society and business. From the telegraph, we moved to the phone, I’ll ignore the broadcast communication systems in this example. Phones were a good point to point service of communication. But they were tied to a physical place, if you weren’t in your office, then you couldn’t use your phone. Thus, phones were placed in common areas where people could access them (public phone booths). These were around for a while, but became replaced in the 90’s by cell phones. The NEED for communication was always there. But the method of communication changed over time.

Will cellphones continue to exist? Probably in one form or another. But will there always be a need and a way to communicate? Yes.

These needs are core, and will always be there.

Personal History

Washingtonpost Article
The web, and google have conspired to keep a personal history of you and your actions online.

Here’s the amazing part, you do not have control over what other people post about you online. You can’t retract, revise or erase that history. For me, this blog and other writings will long outlast the person I am today.

The path you’ve etched in history will track back to you as well.

Zero Sum Games and simulations

This is a long rant. So I’ll chop it up into a few posts.
1. Business is not a zero sum game.

Carnegie Mellon University was one of the first educational systems to have a business simulation – Management Game. Having gone through this experience twice as a student, and many more times as a board member, there was one secret I would tell my companies (after I figured it out myself). Business is not a zero sum game, and positioning yourself correctly in the market place means everyone could win.

I saw a lot of egos and cowards reduce themselves and their markets to rubble. One ‘company’ would always start a price war. It was amazing how consistent it was over the years. This company was usually run by an ego driven leader who wanted greater marketshare. So prices were slashed, and everyone else would tremble. Then the rest of the field ended up fighting down stream, lowering prices, and quickly creating a commodity market war.

These teams ended up with high stress, little sleep and a lot of angst. Some of the more successful teams I worked with, recognized two aspects. 1. this was a simulation, and 2. the game was not set up as a zero sum. Therefore, you could make money, your competitors could make money, and everyone could be happy working on their own niche. The designers probably needed to do this, in order for companies that were engaged in a price war to not destroy themselves.

Every year, an exogenous event was scheduled to shake things up. More than once, the instructor of the simulation had to soften the blows, because even a simple preventable event, like a tornado hitting your manufacturing plant (buy insurance), would have devastated over half the class. So the government would step in, and allow those groups to continue.

As an entrepreneur, you are not involved in a zero sum game. Correct, and lucky planning and positioning will allow your company to succeed in the market place. This is true creation of wealth. You create a brand new service (product) for a brand new market, to address an ESTABLISHED and KNOWN NEED.

Please, please, don’t waste your time, or mine, by trying to create a brand new need. The myth of marketers creating a need is just that. A myth.

Being Clever

Keep things simple in fund raising. I see more messes with people trying to be clever, instead of fundamentally straight forward investments.

I like keeping things simple on the investment side, because so many things can and will go wrong during the life of the company that agreements made early, will not survive the same scrutiny later.

If you're selling equity, then sell equity. Having work-out agreements, or promises to provide more stock/warrants when milestones are not met will bring new opportunities for trouble. This is a way to have flexibility, and make everyone satisfied when the papers are first signed. Management can go back thinking they got a great pre-money valuation, and a good deal, if they hit the milestones. The investors might think with their claw-back, or ratcheting, they will
have been in a good deal, if management doesn't do everything promised in the b-plan, making the pre-money valuation "reasonable" when everything else is taken into account.

And both sides end up fighting and unhappy when any of the protection covenants are triggered.

So stop it.

The Entrepreneurs should be focused on growing their business, not spending 3 months trying to hammer out details on when certain instruments are triggered by other clauses.

And investors, they've got other portfolio companies to worry about, and other deals that they'll need to investigate, ie do their job. Getting a deal term crammed down the throat of an entrepreneur is a pretty good way to lose money. Spending a bunch on legal fees is one way to make sure you'll never see that money again.

Nowhere have I ever seen it stated that putting tricks in the termsheet is where the investor/entrepreneur made money. Wealth creation comes from making a successful company.

Ditherati

Owen Thomas, an old friend, has been writing Ditherati.net for years now. This quote is probably the most honest one on running a business I’ve seen in years.

GOING BEYOND THE CALL, BUT ONLY OUT OF DIRE NECESSITY
"We'll be as competitive as the market forces us to be."
SBC executive Scott Helbing, explaining the company's customer-apathetic philosophy, USA Today, 16 November 2004

Company that's all innovation

They've cut everything but innovation (IP). I'd argue they should have a sales force for the products they create. That's the hardest part of business, the ugliest part of business, the most profitable part of business, and the one these guys probably have the least fun with.

This article on Intellectual Ventures is a start.

Odds are, they'll be around long after some of our tech icons follow Osborne, Wang, and others.

Do your work yourself

There are two activities in every business that are core: Innovation and Sales. Innovation is the brain of the company. Sales is the heart of the company. HR, Finance, strategy, marketing, Customer Service, etc. Anyone or all of these can be outsourced with little harm to the business.

But lose innovation, and there’s no reason for a customer to come back to you, when your prices get undercut by competitors.

Lose control of sales, and you have lost everything. Your revenues are no longer under your control. You have become a slave to the company that maintains contact with your customers, and controls yours sales.

Many young companies I see are run by good technologists, or CFO personnel who dislike the idea of sales. Being able to “partner” with someone, and piggy back on their sales force is a recurring “new” business strategy. It never work, it never will, but like a bad film star, keeps coming back.

The arguments for this bad idea are: it costs less than having our own sales team, our partners will sell our product for us, the product will sell itself, etc.

Execution is where this approach falls to pieces.

The customer has a set amount to spend in his budget. The amount spent in total will not go above this number.

The sales person is trying to get as much of this budget as possible. But more importantly, the sales person is trying to increase their COMISSION to be as large as possible. And the sales person is trying to get the largest commission with as little effort as possible.

The VP of sales, while allowing you to list your product along side hers, will probably want to sell her own products first, since that’s where her bonus comes from. Therefore the commission structure the salespeople get will favor the products of your “partner”. Only when a sale of your product will allow greater sales of theirs will your partner bring you into the deal.

You’ll never be allowed to provide a greater incentive to the sales force, and you will never be able to re-approach the customer without your partner. Given all these shackles, how is partnering up and using someone else’s sales force a good idea?

Creating your own sales force is not easy to do, which is why it is one of the few competitive advantages you’ll have in the business.

Mom was right, do your own homework.

Planning is hard

It's not easy, and it's not supposed to be.

How can you tell when you're making progress, or like Sisyphus, rolling the same stone up the same hill? Look up.
As simple as it sounds, taking a reality check and getting a grasp of what "success" will look like, is important.

Day to day struggles are important, you won't get anywhere if you don't put one foot in front of the other.

But at least have an idea of where you're going when you start. I don't just mean for your company, but yourself personally. Most folks have no plan or idea of what they want to be, or where they want to go. They'll move away, only to get home sick again. Then when they're back, they complain that everything is the same (or different).

Wasted energy, wasted resources, wasted time.

Know when to Quit

We have corporate entities, psuedo citizens, so that when a founder dies, or quits, the entire company is not forced to restart all over again. This has its detractors, some friends have argued for "corporate death penalties" when a corporation acts badly. Others point to Enron and Andersen to demonstrate the speed and fury markets can unleash against corporate criminals.

I'm here to say that sometimes, you should walk away. Leave a company you founded, grew and helped prosper with your efforts, blood/sweat/tears. Why? It comes down to what's more important for you. Do you want your company to continue succeeding? Can you admit that there are other people with different skills, who can guide the company better? Are you facing, or going to be facing a challenge that nothing you've been through will prepare you for?

The skills, emotion, motivation it takes to run a small 8 man company, are different than an 80 person company, or an 800 person shop. While in a start up, you might do things like put the bank account on one spin of the roulette wheel, in order to make payroll. That action is
frowned upon in larger companies. When picking your successor. One word. Don't.

Let someone else pick your successor (Board of Directors). There are many reasons for this, but the overriding one is: hand picked successors rarely do well.

If you're leaving for the right reasons, (the health of the company), then you should let the Board of Directors choose the new leadership for the same reasons.

Note: The 2nd in command may make an excellent lieutenant, but usually is not the right person to lead the charge in the same shop. Too much history exists. However, they are usually an excellent choice to be the commander in another place.

All in all, prepare the company, and yourself for when you're no longer going to be there. Have a succession plan, have well defined roles, and know how to make yourself useless.

Don't read this

This is a Link request.

I hate doing this, because there’s no good way to do this.

In full disclosure, I’m on the board of directors for the I Do foundation, a 501(c)3 non profit. And this is a request for funds/help for them.

--------------------

The I Do Foundation is a finalist for a $25,000 prize from the VISA Ideas Happen competition. There were over 19,000 ideas submitted for the Ideas Happen competition over the past couple of months. Today, I Do was selected as one of 30 finalists (10 in each category - 4 of which will get $25,000 prizes).

With new partnerships with WeddingChannel.com, Google, and Brides and Modern Bride magazines, the I Do Foundation is a critical juncture in trying to make charitable giving at weddings a widespread tradition. This $25,000 will make a huge difference in our ability to build on these partnerships.

So, please VOTE NOW: visit http://www.ideashappen.com/ to vote for our entry – it’s called Weddings that Give Back (unfortunately our video clip got slightly cut off). You’ll need to sign in or create an msn.com account and then vote for us. Here’s a direct link to our entry: http://ideashappen.msn.com/Entries/Default.aspx?id=35091

Everyone is different

Each fund has its own quirks. Some funds like to receive emailed business plans, others want paper documents. Some don’t mind going outside of their firewall to see a demo on your site. Others won’t bother clicking on the link.

Find out all you can about the fund, how it works, what they prefer, and try to follow those guidelines.

Personally, I’m more likely to lose a b-plan if it’s by paper only, than if I have an electronic copy.

I’m more likely to over look a b-plan if it’s sent to my direct inbox, than if it it’s sent to my general inbox.

And yes, if you call my direct line when I’ve blocked off that time for other work, I’ll send you into voice mail.

Why do I do this? Time management. I need to control how my time is spent, otherwise I’ll be putting out fires and chasing documents all day.

Basic Business

Profits = Revenues – Costs

That’s pretty much it.

All business comes down to that.

Money left over = Money in – Money out.

If profits are always going to be negative. Then do yourself a favor and stop the business now.

Let’s stick with the cash equation.

The “economic” equation of

Returns = Benefits – Resources

Should tell you if you want to do any particular activity. Running a business, doing volunteer work, etc. I’m not concerned with this, since it is a much more fundamental question, and if you haven’t resolved it yet, I can’t help you.

Back to cash. Cash is still king. If you don’t know how/why/when you’re going to be making money, who your customers are, and where the right place to position your company is, then find out. Ask people (customers), look to the analysts (recognizing they’re more likely to be wrong then dead-on right), and industry experts. Phone, write, email, investigate. And if all else fails, start the business. Yes, put a stake in the ground and begin. Nothing like experience to make sure you understand what happened.

Good Companies

One more thing….
Good companies are not always good investments.

When push comes to shove, I’m supposed to make money for my investors.
I do this in VC because “I can get the greatest benefit from the resources I expend.” I could be wrong; there might be other activities I could do that bring a greater benefit from the same resources. But I’m not aware of them, and thus, they are not an option.
I’m supposed to get the benefits by investing in good investments. Not just in good companies.

In my job, I get to see a lot of great companies, profitable, well run, who should never take a dime from a professional investor. Getting VC money is not necessary for these groups. The money is not necessary, the contacts/sales they might get are negligible. They only want peace of mind, and the self-gratification that other people think they’re a good company. And these companies are willing to pay a lot of money for that pat on the back.
Other times, it’s a good company that wouldn’t know what to do with the investment money when they got it. They sell a sizable portion of the business, and then do nothing useful with the cash.
Just because an investor says “no” doesn’t mean you’re a bad company. Just because an investor says “yes” doesn’t mean you’re a good investment.
We’ve been known to make mistakes once in a while.

On making mistakes

Atom

Avoid making “rookie mistakes”: Running out of cash, ignoring customers (they’re the ones who pay you cash), getting into a bad contract, chasing ‘bad’ money, etc.
These are errors that you should avoid, and can avoid with some guidance, a good board, some books, and blogs.

Things that can happen to you which are acceptable: Big Bad Company deciding they’re going to switch gears and take over your space.
Legislation from an unknown and unheard of representative railroaded through and crushing your business.
Economic shock destroying your business because of a crimp in spending from customers.
Some risks are acceptable to investors. Others are not.

Philosophies

Atom

When you’re the best,
Everything is your fault.

It’s not easy being the best. It’s not easy staying on top. But when you are there, when you’ve reached the pinnacle, you must maintain your expertise of the field. There should be no surprises. You should know all possible attacks, defenses, feints, and maneuvers. It’s up to you to come up with innovation in your responses.

Fight one battle at a time.
Or, don’t outrun the bear, just the camper behind you.

It doesn’t take a much to be known as better than the rest. Do a bit more, stand out one more time, and you’ll be in the highlights. Repetition and consistency are what will help remind others you’re ahead of the pack. But quality and substance are the elements that remain after stripping away the fluff. If there’s nothing “there” then you lose.

There’s a bit of pessimism in the above statements. Don’t let it get you down.
Everyone needs a reality check now and again. Especially in a field with high flying egos and confidence like VC. Everyone’s smarter than average, everyone works harder than most. We are all fortunate to be in the top 1% of the world population. So enjoy it, and put your talents to best use.

This really is a great job.

Congrats

Atom

An old friend of mine has finally closed in on his first fund.

Here’s the announcement.

See, it is possible to start up a new fund in today’s environment. And it’s also possible to get funding as well.

The first time

Atom

Why do entrepreneurs believe they will do everything perfectly with the first company? We generally don’t marry the first person we kiss, buy the first car we test drive, or buy the first house we view.

Many entrepreneurs who are doing it the first time believe their first (only) company will be the one where they hit it big. The ones who have made it big realize the first company was the one where they made most of their mistakes. In planning, deal making, investors, partners, etc. Lots of mistakes are made with the first company. Most of the time, one of those mistakes can be seen as the last straw, but the entire weight of those ‘learning experiences’ is what caused the demise of the company. However, whether or not the first company survived or failed, it’s the NEXT company where the entrepreneur has learned from his earlier mistakes. That’s where the real money is, and that’s the easier one to get funding for. If you were able to get a decent return on the initial investment, then getting money for the 2nd one will be easier.

Don’t try and be perfect the first time. Make mistakes, learn from them, and cash in on the next one.

Value of Planning

Atom

Business plans are not a map towards success. No plan ever survives contact with reality. However, a good business plan shows the thought behind the business. And demonstrates the ability of the team/entrepreneur to communicate their dream and vision. What the concerns are, and how aggressive their dream scenario is.

Who you hire, when you hire them, the financial projections, and the growth plan, are all indications of your thinking. This is especially important when the investor is trying to sell your concept to others. Communication is key. The less we know, the worse things get.