Alt energy search is mainstream

Using the general news feeds to get a pulse of what's going on in the country, this artcle from CNN on the quest for energy was nice.

By the time something makes the pages of CNN, it's too late for a venture investor to invest in. At least an early stage investor.

I do think Corn is a red herring in the long run. And that alternate resources need to be used in order to get a true sustainable economy.

It's an overview, and one that's not too far off. But remember, with enough energy, we can convert even natural gas to jetfuel. It's just costs energy.

Sunk costs not my problem

What is the company worth TODAY.

Not, what did it cost to get here? Not, how much time did you spend? Nor the amount of capital raised to date.

Sunk costs is a very simple concept. Ignore what was spent to get to this decision point, and see, is it economically viable to proceed. If not, then stop.

Just because $10 mil was raised and spent by the company to get to where it is today doesn’t mean the company is worth $10 mil. Current investors are more sophisticated than that.

The valuation could be more than $10 mil, it could be much less than $10 mil. For the first round of financing, and the last round of financing, we are supposed to ignore sunk costs, and find the right valuation for a company.

Silicon Valley repeat

This article by Paul Graham is about how to create the next hub of innovation.

He focuses on getting smart people mixed with people with money.

What does this mean for all those cities trying to attract talent with buildings or "regional centers". Well, nothing. They're doomed to fail for many reasons. Does it really matter which one is the final straw?

Pittsburgh has many issues. I've been there, and seen it try many times. Perhaps this will be the one successful time. The more targetted the attempts, the less money is needed. But a generation of start-ups, innovation, and success is needed. Otherwise, people retreat to safe jobs.

Will there be another silicon valley? some place where innovation and risk are rewarded? I hope so. Will it be in the US? I don't know.

Sleep more, weigh less.

Mom was right

Seems that a good night’s rest translates into lost pounds. Better health.

Why is this on a VC blog?

To encourage enetpreneurs to get a good night’s rest.

As investors in early stage companies, we’re putting money into the entrepreneur and the team. If, for any reason, that team is at less than optimal, then it will affect our returns.

It’s no good having a team of zombies, burning the midnight oil, going through and getting reasonable traction, only to lose the company to some bluder-headed signed document.

At an early stage, even the most innocuous bump can derail the company. And with the team asleep at the switch, we’re going to hit a bump.

Green Nano

One of the great things about being in the Washington D.C. area is the ability to hear directly from folks at the EPA, FDA, and other alphabet organizations.

The event sponsored by the Woodrow Wilson Center focused on policy in Green Nano.

The short version. We don’t know.

The long version.

As an investor, or entrepreneur, look to see if the government agencies are in alignment on what they’re looking at in nano, or green nano. This is a field without a long history or established infrastructure. So entrepreneurial companies can be flexible today.

Unfortunately, the long term policy will not be established for a while.

My challenge is, when Wall St. is looking 3 months ahead, and politicians are looking until the next election. What kind of regulations will be written when folks like myself are stuck for 7 years in an investment? Will something I invest in today become illegal in 5 years? There’s no slow slope with VC companies. You’re worth something or you’re not. 0 is a very common valuation in early stage VC. Usually after the company’s torched all the money raised.

Investors want to avoid that nice round valuation. So in order to compensate for the unknown risk, we lower the valuation on any new investments. Without any regulations, with the potential of having our entire company destroyed by the stroke of a pen, we have to make appropriate investment decisions. This is not always to the benefit of the entrepreneur.

Free won’t cost 0

When something has economic value, it’s no longer free.

I’m seeing a lot of yellow grease (used cooking oil) being touted as the feedstock for biodiesel. There are a limited number of Chinese restaurants, fast food places, etc. where they will continue to give away the feedstock for free. The most likely people/groups to use these type of biodiesel plants are the ones who have both a fleet of vehicles, AND access/ownership of the used cooking oil.

These are: School districts and food chains.

Collecting the fryer grease is a problem. It costs money to go out there and pick the stuff up. Unless you’re already out there for another reason. Going out to supply a restaurant with food, and picking up a container of used oil makes sense. If/when the used oil can be converted into biodiesel at the fleet parking lot. Then there are no transportation issues on the fuel, nor will there be any problems in ownership.

Anyone else who tries to set up a biodiesel plant using the “free” used cooking oil should start to incorporate a cost with the free feedstock in the future. And as you start to add costs on the front-end, things just get more expensive at the final product cost.

Statistics and VC

In statistics, there are some fundamental principles:
Type I errors, Type II errors
Null hypothesis



Null hypoth true Null hypoth false

Reject Null hypothesis Type I Error Correct

Fail to reject null Correct Type II error


What is the VC'’s null hypothesis upon reading a business plan? This is a bad investment, and pass on it.

So what happens when the null hypothesis is true and we reject? We did the right thing.

What happens when the null hypothesis is false (and this is a good investment)
Then we can have a type II error.

I'’m paid to avoid type I errors. Ones where we make an investment into a bad company

I can make type II errors (missing out on the yahoos, googles, intels, microsofts) and not get roasted too much.

If I make a type I error, and put money into a company that'’s not a good company, then I should polish up my resume.

The type I error is horrible.
The type II error is acceptable.

Type I can be seen as a false alarm, and seeing a good investment where there is none.
Type II error is missing a real effect, not recognizing a good company.

Given that the smaller the sample the more likely you’ll commit a type II error, a type II is almost unavoidable, given the small number of bplans that are out there.

Here'’s the big thing
The null hypothesis is that the company is a bad investment.
We presume that the company is a bad investment from the start.

Then we try to find reasons it’s a good company.
Then reasons to reject.
Until we're confident that an investment is the right thing to do. Otherwise, go with the null hypothesis, presume it'’s a bad investment, and move on with your life.

So when you get a rejection letter. Understand we’re more likely to accept the Type II error, and your company can fall into that category, without an investor feeling bad about the result, or feeling bad about miscategorizing you.

I ate a whole pie!

There was a tv cartoon called “The critic”, where the main character, at a point of trying to do everything he could think of, proclaimed he had even eaten a whole pie!

Just because you ran out of good ideas, doesn’t mean you should try bad ideas. Nor does it indicate that all your ideas have equal value.

Most every decision is taken because "It seemed like a good idea at the time." But when the best idea is to eat pie, maybe you should accept the fact that you don't have any good ideas.

Get new blood, start talking with everyone. Keep at it until you are no longer saying "It's the best I could come up with."

It takes effort, and the willingness to listen. But sometimes it's the only way to keep your company afloat.

Do what it takes

This was a good article from Money on how you don’t have to adopt the BIG OFFICE mentality when you are a young company.

You can make these 1 off deals, or company policy. But in making these types of trade offs, allow other employees to understand what’s going on, and why. When you introduce the idea of bringing babies to work, some of the employees without children might feel slighted.

In this case, 4 top level people leaving at once would sink the company. Any employee who wished to have a job in 12 months, and not be completely overwhelmed can understand the needs of the new moms, and the benefits to the employee.

Has this worked? Yes.
Has this flopped? Yes.

The idea is fine, the execution is important.
Did the company retain people because of the babies and dogs policy. Definitely. Have they lost some people because of the same policy? People who might be allergic to dogs, or hate dogs. Probably.

Talk to the Angels May 06

I've been running the Talk to the Angels program for the MITEF of DC/Baltimore for the past 4 years. Tuesday night's event was very good. A few entrepreneurs had their eyes opened upon what investors would look for. Talk to the Angels is a closed door session for entrepreneurs and investors only. There’s a lot of sharing of information, sometimes stuff that the companies don’t want to let out. But it’s also a place for some honest feedback from investors.

The format is pretty simple, companies get to describe themselves, ask a relevant question and the panelists get to respond. It can be a round table, or a Q&A session, depending upon the feel of the room and the make up of the audience and panelists.

The challenge is keeping everyone on schedule, making sure the questions will be interesting, for both the panelists and the other audience members (companies). Also trying to make sure that the panelists can provide answers within their expertise. Asking an internet expert what to do with a chemical processing plant is not the best use of time for either party.

Not everyone who applies can be invited, nor do all questions make sense. One thing we do try to avoid is the “how do I get financing?” question. Lots of other sources on that around the web, and around town. Similar questions are “What do I need to get financing”, “What do the companies you invest in have in common?”, “What kind of companies do you invest in?” etc.

The format/order of companies and questions, panelists, etc. all matter and can contribute to a good discussion.

If I do a good job in preparing, the conversations take a life of their own. Topics that are relevant to the audience get brought up, and themes emerge.

What are the incentives for the participants?
Well, for the companies, it’s a way to understand how an investor thinks, and get a more personal answer than a simple rejection letter saying “This is out of our space.” It’s also quite a bit of consulting work that’s given away for free.

For the investors in the room, one benefit is ego. They get to be treated like rockstars. But it’s also a way for them to see what is happening at the earliest stages. Most of the companies don’t have revenue, or customers, so these are raw start-ups. And while I don’t see checks written out at these events, the hope is in a year or two, the companies would have grown enough, developed enough, to get financing from professional institutional investors. And it won’t be a cold call, since the investor has already seen them before.

One final tidbit from the panel:
“VC's produce exits.” raw materials are cash and companies, and the results are exits with more cash.

Energy energy and more energy

I had the pleasure of hearing Lester Lave from Carnegie Mellon on Monday night. He was speaking on energy and fuels.

On fuel: the oil companies are in the business of providing transportation fuel, not gasoline. They'll be the ones in charge the ethanol/bio diesel distribution when it happens. It isn'’t that expensive to make pipelines. And while you can'’t mix ethanol and gasoline in the same pipeline, you can repurpose a gasoline pipe to carry ethanol. The only challenge is the hydrophilic nature (water loving) of ethanol. It won't be efficient to transport by truck, but the plains land can supply ethanol to middle america. And the coasts can be supplied by countries like Brazil, once we get rid of the ethanol tariff.

On electricity, Lave is a nuclear supporter. He did say that CHP was important, as well as coal gasification, and Syn-gas. But most of the discussion was on fuel/ethanol etc.

His answer to how to become sustaining was to go with plug-in hybrids.
Getting 20 miles off batteries allowed most if not all of daily commuter miles to be done off electricity. This requires doubling the battery size. But the technology is available, the auto manufacturers wouldn't need a new discover in order to make this happen.

The rest of the miles would become ethanol based. Not corn, but switchgrass, or wood, etc. He didn'’t like the choice of food or fuel. Instead make a fuel based crop.

He sounded like a big supporter of Vinodh Khosla. One other argument was, with genetic modification, or even simple crossbreeding, a 40 fold increase in the density of switchgrass was possible. Corn production has essentially seen a 40 fold increase in production from the original wild plant that was used by the native American Indians, to what we have today. It's not unreasonable to get a similar benefit from grass, especially when harvesting the switchgrass doesn't destroy the root structure, and keeps the important part of the plant intact.

His point was, the pain wasn't big enough yet for economics to dictate a big shift in consumer behavior. We aren’t spending as much money as a % on energy, and even with the prices rising, it’s still pretty cheap here in the US. So the marketplace wasn't likely to react quickly.

And in anycase, cars last a long time, plants take a long time to build.

HD killing the internet?

No

AP article in USA TODAY

This is a red-herring based upon lousy math, old processes and conflicting business models.

The reason people are worried about the costs of streaming videos, is the attempt to use a broadcast type business model, with a networked infrastructure.

What does this mean? It means trying to price and cost a radio broadcast (TV) business model, over wired/cable infrastructure. TV business models work, because the marginal cost of the 1000th customer is almost negligible. Once you put up the tower, and broadcast the signal, you’re done. The more popular your broad cast is, the lower the marginal cost of consumer becomes.

But with streaming video on the internet, you need to continually build-up your infrastructure to handle an additional viewer. This is a big problem, because the marginal cost of a new viewer does not drop as far or as fast.

Why does media want this? Mostly because streaming allows something that broadcast didn’t. control. In order to make the business model stay the same, the media guys will have to go to a p2p model. Something that will scare them, and cause some lack of control.

But let’s look at the porn industry, and see that they’ve already started the video downloads model. They’ll probably be the first to step away from the expense of streaming video, and go towards a p2p model. Maybe a napster model, where a central hub has information on where to find which bits of content. But something different than what we have now, since the economics don't make sense.

As consumers, people still watch the same thing at about the same time. Making a distributed model can be more profitable. aAso, when something is out of favor, or everyone’s watched it, the volume on that amount goes down. And the number of requests also goes down.

This goes to the advantage of the P2P model. The marginal cost of an additional user is not felt by the media producer. And each additional user actually contributes to the ease of dispersion of the content.

How about the folks who actually layed the cable, at least the ones still in business?

They’re pretty angry about having missed the boat, and seeing billions made over their wires.

Well, the internet has become as important, or more important than the railroads were. If they want to avoid the threat of being considered a utility, then they should start metering out usage.

The main challenge is the “all you can eat” mentality of internet broadband. Something that will be fought for. But if you take a look at usage patterns, it’s probably only a handful who are maxing out their systems. The most bandwidth is used because people are trying to swap files, or stream shows.

You can have speedlimits, and volume amounts so that customers don’t get everything they want, but only what they expect. This will lead to tierd pricing, but also a more rational usage of bandwidth. It's one of the approaches attempted, and something that will probably win out.

Look at metered businesses, like water. When the user pays for amount consumed, you find that leaks get fixed. A danger with all you can eat broadband is the unauthorized use of bandwidth from zombie machines, spyware, etc. There’ll be the initial shock from infected users, but if people are forced to pay per bit, then we should start seeing some additional precautions being taken by the users. And less complaints about installing firewalls.

Thieves will get smarter, and worms will get more destructive. However the simple act of closing the door (not even locking) can stop a decent amount of cybercrime right now.

HD doesn't have to kill the internet, it might even save it.

Green != Smart

Better != Good
Green != Smart

Here's Andrew Kantor's bit on how being green doesn't always mean the smart choice.

I hate to say, I agree with a lot of what he rants on. Ethanol not being the best answer, the use of the grid as this fantastic battery, etc.

However, there's one premise that I disagree with. It is his thought in the 2nd paragraph. There he write "the long term solution is to find more energy, not to use less."

Outside of food, we never DIRECTLY use energy. So finding more, or conserving is a secondary concern when compared to the benefits we get from heat (comfort), or health, or information from the computers, not from having electricty directly. so while it is easy to pour more energy into the system and call it "good". Being able to get the same benefits with fewer resources is the ultimate goal.

Market is never rational, but always right. It'll tell you when the green solution is viable or not.

Simple marketing plans

Kelly’s 1 page marketing plan

Upon reading this chart, you can see it is simple and clear.

However, what was the rationale for the order on this chart?
What, why, when, how, how much, who
Products, price, place, promotion

The first questions to be asked, may not be the most important answers to have (execute) but are vital in the progression and development of the marketing plan.

Who should be the first question asked. It will drive the rest of the discussion.

Why does this population care?
What
How
When
How Much



On the other axis

Product
Place
Promotion
Price

For people who read left to right, and top to bottom, this is the order in which to fill out the boxes.

But on the execution side, the part that deals with keeping your company around for another season, the most important question is cashflow. How Much, and When.

Run out of cash, and there’s no company to worry about.

So the most important question to ask start with why.
The most important answers to execute, begin with how much.

Most groups I see that have sales, got the how much/when answer right. They might have guessed, but they got the answer right, for one cycle. When parameters shifted, they tried using the same answer, or guessing again, and have an incorrect answer.

Asking the Why questions gets you to the right answer, and allows a robust approach for your business model. But failing to get the How answers will doom you no matter what else you do.

The question of “which side of a sphere is most important to keep it rolling?” Only the part of the sphere that’s in contact with the ground.

Guy’s version of the marketing plan.
http://www.guykawasaki.com/downloads/marketingplan.doc

State of VC Q1 2006

Another quarter, another Moneytree Event.

PWC has got their numbers out, and this struck me.

VC in 2002 – 2005 can be summed up as:

$21 Bil / year
3000 deals.

And Q1 of ’06 looks more of the same.

In the DC Metro area, we saw a lot of 1st time investment grab the majority of the deals. But this wasn’t seed stage/early stage investment. The companies had been locked out in the early 2000’s and gone with customer money. So even though it was the first time institutional money was invested into the company, these companies had real customers/revenues, and a higher valuation.

And the good news is, more funds were looking at new deals, exploring out the landscape, instead of trying to bring back the terminally ill companies on lifesupport.

People complained more about seeing overvalued deals. But if these deals still get done, then it could be healthy for the region. It’s not like the late ‘90s where you did a deal that was too pricey, because everyone else was in. Now, deals that are too pricey, people get out.

Hydrogen reality check

Guys at MIT think hydrogen fuel cells won’t be around in the near future.

The hydrogen economy is not an immediate solution to the world’s CO2 problem, or the fuel crisis (it is not an energy crisis, we don’t have rolling blackouts in most parts of the states).

In the long run perhaps. But right now, the solution is not in fuelcell cars.

Look for alternatives, and the more immediate/intermediary solutions.

Anyone that can't make payroll today, won't be around to make payroll tomorrow.

5 mistakes in startups

Fortune lists 5 mistakes for startups.

Here’s the quick list

1. Too little Cash
2. Thinking Small
3. Skimping on Tech
4. Underestimating the importance of sales
5. Losing Focus

Yes, these are all the things that can doom a company.

But in reading this article, I can tell one thing, it was written by a writer (which is OK), NOT by an entrepreneur.

The order, and concepts are those most easily grasped by someone on the outside, looking in.

How do you underestimate the importance of sales if you’re running your business? Other than being the only reason why your company has the right to exist, what would you put ahead of sales?

The bit on Too little cash. Yes, eventually every company gets shut down because it ran out of cash. But that’s akin to saying, everyone dies of death.

Read the article, see what it says, and then figure out why it says it. You’ll start to see some omissions and errors. If you end up saying that the order and the process of the mistakes is correct, then I’d question your judgment.

More lies

FastCompany on the top 5 lies in business.

These were amusing, but true. Business is a person to person relationship. My favorite was the “people” remark, especially when touted by the larger consulting companies. The more people you have, the more “average” you become. You can’t possibly have everyone working for you be in the top 1% of the industry. Especially when you’re 30% of the industry!

Who pays for research?

NASA losing funding


Why does this affect a private equity investor?

Because “Dealflow is Destiny” We can’t do any better than the pipeline of investments we see.

Governments, for years, have poured money into technologies before they become useful. Serendipity and luck have been responsible for most of the leaps of progress.

The market rewards incremental progress, and large leaps of technology. However, the market can only plan for incremental improvements. As much as I hound the companies to focus on customers, this is only for investment properties. Governments can and do invest in the common good. Most people can’t afford their own army to protect their boarders. Governments also provide infrastructure and stability. And they can make huge bets, because incrementally the benefits outweigh the cost. Universities, research labs, and exploratory organizations are the way to accomplish this task.

Drying up a source of innovation and technology, like NASA, or NIH, or any of the research organizations affects investment directly. Early stage investors can accept some risk, but not all the risks. Most of the time, we can stomach market risk, or a little technology risk. But to do all the R&D from scratch is not within the realm of most or any professional investor. The group to pay those costs has been the government, research organizations, and the military.

Handicapping a group like NASA, will affect the pipeline of what comes next. For folks like myself, this means a different environment in the future, than the dealflow pattern we experience today.

Got something right!

Hey, someone out there seems to agree with me.
Here's Macworld's article on how the porn industry will pick the winner of Blu-ray vs HD-DVD.

The customer may be king. But with content, the customer buys what's out there. Now the article says Blu-Ray will be the pick of the porn industry when it comes out. But given that Hd-DVD is coming out first, and the cost difference in making the media, I still think HD-DVD will emerge victorious.

It's a big bet for some of the studios, and it could turn out that one group loses in a big way.

Not a techboom

Why we’re not in a techboom from information week.

Frothy, bubble, crazy valuations, and crazy investments.

Bubble? Yes. We see many micro-bubbles where people start jumping in where they have some, but not enough experience. Taking an investment in the next company, because it was like the last company.

These always end up in disappointment. And when the stock price plummets, the carrion crows swoop in, and buy up $10 mil of investment for $2 mil. For all those people asking for one more bubble, ride the wave, cash out when you can. And don't bother to to time the market, take the buyout when offered.

A lot of mini-bubbles will happen, just look at bio-tech, it goes through cycles faster. But we're starting to see crazy companies emerge again. And there will probably be some investors trying to catch the '90s again.

Biofuel or food

MSNBC touches on how biofuels are making an impact over in Asia. It also brings up the concerns of food or fuel when crops are seen to be used in either. It can be a big issue, when a staple crop like corn or wheat is used in ethanol manufacture. When it is a non-edible plant, then the choice comes from land use. And since we are already using what land we can for edible crops, it’s not such a hard choice.