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Silicon Valley in Trouble? I Don’t Think So – A New Model Will Arrive January 26, 2009

Posted by John in Technology.
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Comparing Silicon Valley to Detroit is ridiculous, but Dan Lyons does bring up a big issue worth discussing – innovation problem. Silicon Valley is not setup for long term research in a way that made it what it is today. We are seeing institutional research vaporize in front of our eyes. Checking around it’s apparent that there is very little core and applied research going on. If there is research it is controlled by short term horizons like business profits and venture capital horizons. I’ve said before that we need a new approach.

I posted about this before about a new venture development paradigm that will emerge soon – one based upon open principles and collaboration.

Here is a snip of my post from last year – Silicon Valley – The Rebooting Meritocracy

Silicon Valley is a special place for entrepreneurship, and it continues to be. The issue is not that there is a wrench in the machine, but that the machine is broken. It’s rebooting.

One thing I love about Silicon Valley is that there are no handouts. It’s the ultimate entrepreneurial meritocracy. Change happens and it happens both from the bottom up (entrepreneurs) and the top down (capital market). The question is which force is driving the change.

Redistribution of wealth is upon us. The entrepreneurs and investors that move on this current market opportunity will capture the proverbial “chips on the table”. As an entrepreneur, I love this market. Opportunities are everywhere. Unlike the dot com bust, this tech (entrepreneurial) market never really crashed. Everywhere I look I see discounts and new opportunities. Smart money will move around, but in select places. Is the market scary? If you’re an incumbent it sure is scary.

Silicon Valley Web 2.0 is hurting, but not for the obvious reasons. A bigger force is at play here – massive redistribution of wealth is taking place. Some are scared, and some are welcoming the opportunity of possibly acquiring the wealth “on the table”. I think that Facebook and Twitter are great examples of what might be possible. Facebook will become the next Google. The only thing holding them up is that the ‘new revenue’ model that is soon to arrive at the “station”. When that “train” arrives (and it will) Facebook will say Goodbye to all the naysayers.

Research & Development Void?

The bigger picture is more long term and that’s all about research and development. Judy Estrin recently came out to talk about something really important – the innovation gap. Let me translate her thesis – we are screwed if we don’t have steady research unencumbered by short term agendas. Think how important institutions like Stanford, MIT, and SRI have been to Silicon Valley and entrepreneurship. Without these deep research institutions we would not have many innovations that created wealth – hello Ethernet; hello Apple; hello Cisco; hello Google, ..etc.

The lack of institutional research leaves a void in the Silicon Valley ecosystem. John Markoff postulates in his book “What the Dormouse Said” that the culture and research of the 60s drove the PC revolution. The question now is what revolution are we developing and where is the research? Will we miss the next important energy, medical, or tech breakthrough? Where is our modern day moonshot mandate?

Even top HP executives agree with me.  At HP, the concern reaches the very highest levels of the company. Shane Robison, HP’s chief strategy and technology officer, says he’d like to see the following: a permanent research-and-development tax credit, which would encourage tech companies to do more basic science research, which in turn would benefit everyone, not just the company that conducts the research; more government funding for basic science research; more spending on education; and changes in immigration laws to help foreign-born students who study in the United States to stay in this country afterward. “The technology industry is one of the crown jewels of our country,” Robison says. “It’s the one industry where we stand head and shoulders above the rest of the world. We need to protect that.”

Recession Startups: Great Post On Innovation and Entrepreneurship – No Vacation for Entrepreneurs January 21, 2009

Posted by John in social media, Technology.
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5 comments

I love this post from David Hornik.  I guess that I have an addiction because I love starting companies – I can’t help myself.  His real message is simple – many entrepreneur friends are starting companies in this market. Personally, I think that doing startups is like taking a vacation each startup is like a good journey.

The post is worth of a full posting here on Furrier.org.  Thanks David for a great post.

By the end of 2008, Venture Capital had been officially declared dead. Startups were laying people off so fast that even TechCrunch couldn’t manage to keep up. University Endowments and Foundations, the source of the “capital” in Venture Capital, were hemorrhaging so badly from their public company investments that many long-time believers in “alternative assets” declared a moratorium on Venture Capital. And the IPO market was a distant memory. Good times!

Welcome 2009. The public markets remain closed. Venture investors and the investors in venture investors remain “challenged.” Follow on financings have become increasingly difficult, in some instances impossible. And, while there may well be light at the end of the tunnel, it would appear that we haven’t gotten far enough down the tunnel yet to see that light.

So why am I optimistic about investing in 2009? Because entrepreneurship is an addiction, it isn’t a choice. Great entrepreneurs aren’t driven to create companies because it is easy, or because capital is plentiful, or because the public markets are swallowing anything the venture community will throw at them. Great entrepreneurs start companies because they can’t help themselves. They see a problem or a solution or white space or an opportunity and they have to do something about it.

Innovation doesn’t take a vacation during an economic downturn. Innovation is a constant. While the resources an entrepreneur may be able to bring to bear on a problem may vary with the economic climate, the desire — the need — to innovate never goes away. And Venture Capital is the fuel of that innovation. [1]

So I remain excited about the companies that will be started in 2009. There will be great companies started during this economic crisis. Some of them will be born out of the crisis itself. Others will simply be born during the crisis. But, rest assured, there will be important tech companies hatched in the next year or two. And I am certainly hoping to fund them.

Some of you reading this will say to yourselves “starting companies today is so inexpensive that we don’t need no stinkin’ VCs.” More power to you. I don’t mean to suggest that innovation will die without Venture Capital. There are many great ideas that can come to fruition without a meaningfully-large capital infusion. My hat is off to the 37 Signals and Smugmugs of this world. But for those ideas that require investment ahead of revenue to reach their full potential, Venture Capital remains an important resource for company building.

New Venture Capital Model Is Coming? Limited Partner Investors Seeking New Avenues January 7, 2009

Posted by John in Technology.
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6 comments

NOTE:  Visit the siliconANGLE blog for a community of bloggers on Social Web and Technology Opinion and Analysis.  THANKS

Is this financial market mess going to put the nail in the venture community? Today’s Venture capital has been struggling for sometime with ony a few small hits and very handful of big returns. The problem is that entrepreneurship is stuck because of venture capital. We need to modernize the venture capital business so entrepreneurs can get busy. I am seeing more early stage creative development then in years past. The entrepreneurial process will never die but it will evolve. These are the pains that we are seeing now with startups. The capital markets are a mess and with no liquidity market today’s venture capital firms are spinning their wheels. The good news is that capital markets are efficient and will work around the bottleneck we are seeing. This NYTimes story is an early indicator that big money will find new homes.

NYTimes has a very interesting story…

Investors in venture capital and private equity funds who want out are discovering that their stakes are worth less than they paid for them.

As returns on venture capital investments sour and investors’ wealth deteriorates, some of these investors — the universities, foundations and pension funds known as limited partners — have been unloading their stakes in the funds. When they decide they can no longer supply the money they had previously committed, they sell their stakes at a discount to what is known as a secondary firm.

In the second half of 2008, as more limited partners tried to sell their stakes, the price they could get for those stakes fell to 61 cents for every dollar of face value, according to a report from Cogent Partners, an investment bank for institutions looking to sell their holdings on the secondary market. That is down from 84.7 cents on the dollar in the first half of the year and a 4 percent premium in 2007.

A stake in an early stage venture capital fund that has already been fully invested, for example, would be worth 10 to 30 cents on the dollar, Mr. Gull said. “It would have relatively young portfolio companies, some number of them will need additional capital so the fund will get diluted and there are not going to be any exits for some number of years.

A 40 percent loss is no different than investments in the public markets, Mr. Gull noted, and investors would prefer to have the cash. They think, “It’s a sure thing that I can redeploy in some other activity I think has a larger chance for return,” he said.

Mr. Gull said he could not predict when pricing would improve, but his firm is betting that it will not see any meaningful returns from private equity and venture funds until late 2010.

New Startup Model – Young Grasshoppers Out There Watch How Andy Bechtolsheim Does It October 23, 2008

Posted by John in Technology.
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UPDATE FROM SUN:  see comments below; Sun PR is saying that Andy will remain at SUN as an employee part-time.  The question is can Andy serve both masters?  Is Andy even needed there or is he a figurehead.  I see know problem with him being two places but the reality is he has to focus on one.  There might be more to this story.  I will talk to SUN and find out the story.

The NY Times is reporting that SUN Cofounder Andy Bechtolsheim is leaving SUN to go to his new startup Arista Networks (which has been building a product for 4 years). Who said this is a bad time to do a startup.  While the web 2.0 flops are bunkering down for the winter and trying to figure out what to do, Andy is developing a real business going after a real market.

I have my take on why Arista will be successful on my Broadband Developments blog – which covers this vertical.

This post is about how to do a startup.  Here I want to highlight a tidbit from the NYTimes story where Andy Bechtolsheim says…”

Lean staffing also helps Arista keep its costs down. The Menlo Park, Calif., company has fewer than 50 employees and started shipping systems a few months ago even though it had no formal chief executive.

“One mistake a lot of start-ups make with the encouragement of venture capitalists is to hire the whole management team upfront,” said Mr. Bechtolsheim. “You have a lot of people twiddling their thumbs and spending money.”

He is right on the money.  Ramping up the management team to early can be dangerous.  Founding CEO of a early or zero stage startup doesn’t have to be “Mr Big” with pedigree.  It has to be “Mr Entrepreneur” who can assemble the right ingredients for the startup – core team, product and product roadmap, key customer activity or early market development, and entry to that market.  Note;  Even tech titans moonlight on their day job before quitting.

To all the young startup “Grasshoopers” out there learn from Andy and his approach.  Build a product for a real market that will pay you money for that value – Now that’s a business model worth investing.

Venture Capital and the Modern Startup – Building a Company is a Team Sport August 28, 2008

Posted by John in social media, Technology.
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20 comments

A post today called Fuck the VCs caught my attention. I’ve been a full time entrepreneurs for over 10 years now and have tons of experience with VCs.  Heck alot of my friends are VCs – “not that there is anything wrong wit that”.

The fact is that VCs have lost their abiity to do early stage deals at scale. My good friend Scott Rafer makes a great point – their behavior is more around the market. VCs are institutional investors – they aren’t a hands on mgt consulting firm. Some firms act like they are mgt consulting firms and that they know better than the founders – stay away from those. My advice on VC firms is to stay away from partners that can’t remember what was discussed at the last board meeting. Then unilaterally run the company from the board. VCs playing entrepreneur is not their job. So stay away from those.

My advice for entrepreneurs is try to own >51% of your company for as long as you can. Scott Rafer had a strong  comment on the F VCs post – Scott says..  “This is good advice packaged but packaged in a terribly destructive way. I certainly try and design my startups to work well on bootstrapping or angel money, delaying institutional VC indefinitely. That MO tends to be much better for founder equity and employee returns, user-responsive product design, growing at a speed that is good for the company, etc.

On the other hand, WTF? Take a cold shower or something. The level of anger being displayed here has no place in this discussion or this community. Every market segment has its bad actors, both at the individual and corporate granularities. VC doesn’t have a greater share of bad actors than the ecommerce or gaming sectors. Large-scale, software VC is simply a formerly great business in decline, and there are a lot of good, smart people who haven’t made in VC yet who are worried about their (and their families’) economic futures. It’s not evil — it’s their job and they may not feel they can switch. This is a group of very smart people who are fighting for ever-fewer capital-intensive deals, and it’s getting ugly. Their economics are clear, and the bigger the fund the worse the problem.

Fred Wilson’s been publishing a good series of posts on VC economics. In the latest one [link below], he inadvertently outs one of the main problems with running a VC-backed startup. When your business is doing well, the VCs have have every incentive to push you to take more money you may not need — it’s the only way they can be as profitable as they need to be. Fred’s got a relatively small fund, great empathy with entrepreneurs, and is near the top of the heap for any number of reasons. However, he has that same problem — the interests of the Common Stock held by the founders/employees and the interests of the Preferred Stock held by the VCs is divergent in many, many more cases than the Conventional Wisdom suggests. It’s the reason why the VC asked about 100 iPhone apps, et al.

http://www.avc.com/a_vc/2008/08/venture-fund–3.html

The software VCs are in a different business than we are, but one that is largely dependent on us. It’s a business that used to overlap with ours heavily but where the overlap is decreasing more quickly than capital could ever leave the sector. That leads to market consolidation, market share fights, and VCs requesting startups perform unnatural acts — all of which are ugly, and none of which are evil…

As Scott points out that might be through a series b round. My goals for companies is to bootstrap them to own at least 51% after a b-round. The only way to do that is to bootstrap the seed portion to increase the early value. Then taking money on the business and founders terms makes sense.

VCs are not the problem it’s more of the market. Building companies is a team sport and in some cases you need VCs on the team – some cases you don’t.

Scott Rafer has it correct above – certainly try and design my startups to work well on bootstrapping or angel money, delaying institutional VC indefinitely. That MO tends to be much better for founder equity and employee returns, user-responsive product design, growing at a speed that is good for the company, etc.

Building a company is a team sport and sometimes VCs are on the team  – and there is nothing wrong with taht – just pick the right guys/gals.  When you don’t pick the right teammates everything goes south.

Demo Gods Are Watching – 10 Ways to Demo Your Product August 10, 2008

Posted by John in Technology.
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Over at Techcrunch Mike and Jason are busy guys and they run a new event for hot startups.  They’ve seen their share of demos.  They share their observations on how to demo your product – what to do and what not to do.  This list came from TC’s Mike Arrington who reposted Jason’s email on the topic.  The content is good but only available on Jason’s email list (email list:  how web 0.5).

(off topic:  I find it funny that Jason quit blogging and puts out an email blast instead.  I find it a complete cop out by Jason not to blog, but whats worse is his spin that it’s more intimate to do email…come on Jason just tell us the truth – blogging takes up too much time and you have a company to run or turn around).

Here are 10 ways to demo your product or service:

1. Show your product within the first 60 seconds
——————————————-
Most folks start their presentations with information like the size of the market they are tackling (tens of billions, we only need 1%!), their inflated corporate bios, the philosophical approach they’re
taking, and boring Powerpoint graphics explaining some convoluted workflow of their product.

The longer it takes for you to show your product, the worse your product is. Folks who have a kick-ass product don’t spend five or ten minutes “setting the stage” or “giving the background.” Folks with killer products CAN’T WAIT to show you their product. Their demos start with their homepage and quickly jump into the users experience. If a picture tells a thousand stories, then a product demo tells a million.

Show your product immediately, and if you don’t have a product to show don’t take the meeting.

2. The best products take less than five minutes to demo
——————————————-
The greatest tech products over the past 10 years would take no more than five minutes each to demo. For example:

a) Larry and Sergey could demo Google search in less than five minutes. Here’s a box, type something in and you get a huge reward.

b) Steve Jobs could demo the iPod in less than five minutes. Plug it in, put in your CDs and it syncs your music. Turn it on and use the wheel to select what songs you want to listen to.

c) Chris DeWolfe could demo MySpace in less than five minutes. Sign up, fill out your profile, and add your friends. For bonus points add some widgets to your page.

I think you get the idea: the better the product the LESS time it takes to demo. If your product demo takes more than five minutes to demo, it probably sucks. All the tiny little features that matter to
you are of course important–God is in the details–however, when presenting your company, you don’t have to show them. Larry and Sergey wouldn’t open up the advanced search tab and the list of operators you can use in Google during a demo.

Steve Jobs does take the demo details to a fairly detailed level, but you and I are not Steve Jobs. There is only one Steve Jobs and there is only one Apple. You’re never going to build something as cool as Steve, and as such there is no need for you to talk about your product for five or ten minutes.

3. Leave people wanting more.
——————————————-
If you take my advice in point two, then folks should be either blown away or intrigued by your core product. If they are not somewhere in that spectrum, you need to rebuild your core product.

When I pitched Mahalo to investors, I had five sheets of paper with different search results on each. I put them on a table and said which one is the best. Obviously I knew my result was the best, and that
simple demonstration lead to MASSIVE discussion: how was the page built? how long did it take to build? what would it cost to make that page? how often do you need to update it? how can you scale that business? how many pages can you create before it breaks even?

It’s best for folks to discover the merits of your product for themselves, and it’s up to you to make such a compelling core product that they are intrigued enough to explore it.

4. Talk about what you’ve done, not what you’re going to do.
——————————————-
Weak startups and their leaders seem to immediately start talk about “what’s next,” as opposed to focusing on the core product. Anyone can say we’re going to add: a mobile version, collaborative filtering, an advertising network, visualizations, a marketplace, a browser plugin, a browser and a social network to their product. In fact, given the amount of open source and off the shelf software out there, combined with the large number of developers in the world, anyone can bolt these things on to their service in a week or three.

Who cares what you’re going to bolt on to your startup? What really matters is the core functionality of your startup.

Steve Jobs has become at once the world’s greatest salesman and product developer because he only announces Apple’s achievements. He doesn’t waste time on what Apple’s going to do: he talks about the here and now. Microsoft’s old strategy was to talk about products that were coming and that put them in the horrible position of having to backpedal when they changed their mind about a product.

5. Understand your competitive landscape–current and historical.
——————————————-
This year I’ve had three companies show me group SMS messaging products, and most of them did not know what UPOC.com was (Gordon Gould’s group SMS messaging service that was five years ahead of its time). I’ve had three or four companies over the past two years of TechCrunch50 conferences pitch me on Third Voice–the controversial “web annotation” service from Web 1.0. [Side note: I loved the concept of Third Voice so much I considered starting a company like it and even bought the domain name annotated.com.]

When I pitched the idea for Weblogs, Inc. to Mark Cuban, Yossi Vardi and Jeff Bezos, I understood all the niche email marketing and newsletter companies from the early and mid-nineties cold. I researched why they worked and why they failed, and I knew which ones were sold and bought and by whom. When I pitched Mahalo to Sequoia Capital, I knew the history of human-powered search and directories from DMOZ to Yahoo Directory to LookSmart.

If you don’t know the competitive landscape, and the shoulder’s you’re standing on, folks are not going to be comfortable giving you their money, time or attention.

6. Short answers are best.
——————————————-
When taking questions about your product answer questions shortly. This is a very challenging thing for many people–including myself–to do. If you’re like me, you’ve probably thought out your startup’s
issues a thousand different ways. When I sit at the poker table I play a game where I think out every possible scenario for not only my hands, but the hands of my opponents (this is fairly standard among
advanced poker players from what I understand).

Say I have Ace King and I raised out of position and the button called my raise pre-flop. Then they re-raised me on the flop, which had an Ace. What does that tell me? They could have an ace, they could have two aces and have slow played me, they could have a medium pocket pair and they want to see if I have an ace, maybe they are on a flush or straight draw or maybe they suck at poker. Who the hell knows?!?! You can go insane trying to figure all these things out–that’s why poker
becomes very addictive.

The point is all that inner thinking is chaos when you try to explain it to another person. It’s pure madness after 60 seconds of talking. The best thing to do is answer the question with the most concise answer. For example, when asked “what happens if Google enters your market?” answer quickly and with confidence:

a) Google has entered many markets, but they are only #1 in search and search advertising. They trail in social networking to MySpace and Facebook, in classifieds to Craigslist, in news to Yahoo and AOL, in email to Microsoft, AOL, and Yahoo, and in instant messaging to Microsoft, AOL, and Yahoo.

b) We’re not sure if Google will enter our market, but hopefully we’ll have developed our product enough that it will be a real sustainable business by that time.

c) We think Google might enter our market at some point, and if they do they and their competitors will certainly consider buying us–creating a bidding war for our entrenched position.

d) Google is a very big company right now with a very big cash machine that they have to focus on and protect–they will never do our business with our level of focus. We will out execute them on all
fronts.

These are all amazing answers (I did, after all, come up with them), and you can say them in around a minute. However, if you cram all four of these sentences together you’ve spoken for five minutes.

7. PowerPoint bullet slides are death
——————————————-
Do not make slide after slide explaining your business in bullet points, because it’s really, really boring. Powerpoint/Keynote slides that are not boring include charts, product shots, feature set tables
and the like. Things that explain big concepts with ease and grace are great, but bullet points of obvious facts show that:

a) you don’t have the ability to create a compelling story with data

b) you don’t think that much of the person being presented the information

I’m not a huge fan of “funny slides” or lots of graphics for graphics sake. You’re not pitching your company to get laughs–unless you’re on stage–you’re doing it to raise capital, close a partnership or get on stage at a conference. Keep it focused and to the point.

8. How to use this new device called the phone.
——————————————-
When presenting over the phone use a handset and a land-line… only!

It’s amazing to me that any person doing a business call would conduct it on their mobile phone. Mobile phones sound horrible 95% of the time, and they frequently cut out. If you are presenting your company take it seriously and get yourself to a landline. You have limited time and don’t want folks to miss a single word.

Speakerphones are horrible, and putting the person receiving the demo on speaker phone during a demo is just disrespectful. You can hear all the rustling, side conversations and horrible echos when you’re on speaker phone. When doing a demo pick up the handset and speak. If you go to a Q&A session then use speaker phone. That’s why it exists.

Only use a headset if it is very, very high-fidelity and you have the microphone right up to your mouth. Also, don’t eat, drink or breath heavy into the microphone or you run the risk of sounding like an animal. I use an amazing Plantronics headset, and I like me some Green Matcha tea, but I hit the mute key when I sip!

I know it sounds crazy to have a discussion about how to use the phone, but the majority of these young people actually think it’s acceptable to have two or three drop offs in a call–it’s not. Grow up
and get a land line.

9. How to handle questions you don’t know the answer to
——————————————-
After you do your concise presentation you’re hopefully going to get a lot of questions. Here are some important tips to consider when you don’t know the answer cold:

a) take a moment to think about the question. You can even say “Hmmm… that’s a good question. Let me think about that for a second.” Folks appreciate a little consideration when someone takes a
question.

b) if you don’t have an answer be honest and say you don’t. There are many ways to say this including: “I’m not really sure, I’m going to have to think about that for a bit and get back to you,” or “I’m not sure to be honest. What do you think?”

c) feel free to think out loud and brainstorm with the person. You can do this by saying “I’ve never really considered that. Perhaps you can expand the question a little and we can explore it right now.”

d) if you’re not sure of the answer you can always say you’ll cross that bridge when you come to it. “I’m not sure how we would deal with a sudden spike in the cost of bandwidth, we would have to collect more information and answer that question down the road. It is a manageable risk factor I suppose. ”

The worst thing to do when you don’t have an answer is b.s. the person. No one has an answer for everything, except a b.s. artists. So, feel free to say you don’t know–folks find it refreshingly humble
and honest.

10. Always confirm the time of your meeting/call, and always be 15
minutes early.

“Apples and Googles” More Like “Apples and Pears” – Bad News for Enterpreneurs? Where’s the Halfway House – July 20, 2008

Posted by John in Technology.
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3 comments

All the talk about companies being sold, founders getting ousted, and ventures failing or being killed by VCs. This seems to be the trend in Silicon Valley and around the world. The captial markets are a mess. The Wall Street Journal has a story on it today in a post called “Who’s going to fund the next Steve Jobs?”. James Freeman really nails this story and highlights very accurately the ugly trend being witnessed by many entrepreneurs out there right now. This is a big problem with serious economic implications.

This post hits home with me because I’m an entrepreneur living in this market with four kids and it ain’t pretty. The capital markets are in the tiolet and founders around the world are working hard to find no buyers of their ideas or products. It’s a bootstrapping market. The entreprenerial market isn’t broken or starved for good ideas and needed innovation. Instead the ecosystem is stuck in the sand. Incubators are clearly seeing the action and see the need for innovation. Some bright lights are shining out there like Y Combinator among others, but overall it’s pretty dark.

What does this mean?
Bad news for entrepreneurs short term and bad news for innovation long term. M&A doesn’t yield innovation. Passionate and skilled entrepreneurs need the runway to make their visions happen. Lack of exit stunts the available growth capital needed for those next big ‘Apples and Googles”. Big ventures take 3-5 years to develop. Problem today is that capital isn’t founder friendly. Founders getting ousted after one year doesn’t make innovation happen. I’m seeing more founders on the street then ever before. There needs to be a new financial model or new incubator model (or halfway house) for founders and entrepreneurs. Y Combinator calls it a startup for startups.

Big problem is that initial public offerings of young companies had become rare. Venture-backed IPOs in 2005 and 2006 were far below the levels of the early 1990s, never mind the boom years that followed. A recovery in the early months of 2007 still didn’t push IPO numbers anywhere close to the number of young companies being acquired by bigger, more established firms.

Love this passage from James Freeman of the WSJ. “This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?”

“Of course we can’t run these experiments. What we do know is that entrepreneurial drive, combined with venture investors’ money and experience, plus access to the public markets, equaled a tech revolution and an industry that is the envy of the world. That model may be collapsing.”

“True, investment in U.S. venture funds is holding up well despite the market downturn, with investors pouring $9 billion into this asset class in the second quarter. But over the long term, venture investments have to result in a healthy number of home-run IPOs to justify the risks and offset the inevitable failures. The industry cannot continue raising the money to fund American innovation if its returns trail the stock market indexes, as they did for the five-year period through 2007.”

“Some have ascribed the broken venture model to the “cheap revolution,” meaning that, thanks to earlier innovations, the tools to create new tech products are so cheap that entrepreneurs don’t even need funding from venture capitalists. That’s great, but we’re not seeing a flood of IPOs of young companies built without venture money, nor the creation of lots of privately held global powerhouses. By and large, founders of Internet startups are not creating companies with the dream of conquering the world, but rather with the intention of selling to Google, eBay, Yahoo or Microsoft.”

“Our society should be encouraging these entrepreneurs to dream big. Instead, they’re looking for the exit before they have to deal with the burdens of our public markets.”

“An acquisition generally means that the founders move on, see projects they championed get axed, and watch old colleagues get fired. How many company founders would aspire to conduct a sale of the business instead of a public offering, absent some bizarre and unnatural conditions in the market?”

Of course I’m biased but founders and entrepreneurs need to be in charge. Never fire the founder in a changing market.

Note: Steve Jobs was ousted by his investors (Venrock Associates) only to come back and change the world a second time. Can you imagine August Capital firing Bill Gates. Good venture capitalists understand the long term value of entrepreneurship not just the quick flip.

Why Startups Fail? Entrepreneurs Perspective – Keep the Founder Around May 23, 2008

Posted by John in Technology.
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17 comments

Why do startups fail? There are many reasons. Here is a post from a VC in Silicon Valley called VCDave – David Feinleib is a partner at MDV – Mohr Davidow Ventures – He invests in Internet-enabled companies.

This is a great post from VCDave, but I would add that the faster the market moves the more the founder needs to be in charge. Finding a founder with vision, product skill, and deal making ability is ideal. Venture capitalists need to let the founder run the ship. If VCs run interference with the founder then the entire venture slows down. Building a startup from nothing is difficult and navigating the market landscape with imperfect information is key. Entrepreneurs are good at dealing with ambiguities.

Once a venture enters the market the venture plan has to be in a constant state of reinvention to ‘hit’ the tipping point for the preferred business model for the proverbial ‘big opportunity’. One thing often over looked is the important objective of getting the new venture in a position in the market to seize the growth opportunity contemplated by the entrepreneur and the investor.

Entrepreneurs and VCs need to deal with change as a positive not a negative. If the ventures position in a growing market is good then the change is a normal characteristic. To me it’s about letting the founder stay in control until the venture hits calmer waters. Founders know best in the early stages. Creative, product, sales, and deal making skills matters the most. VCs shouldn’t just replace founders because a few waves crash on the ship.

If investors want a return remember that the founders know best. Don’t replace the founder to early.

http://www.usatoday.com/money/companies/management/2007-08-21-founder-ceos_N.htm

Update: Donna who tracks the NYC startup scene at StartupAlpha has a post on this. Here is 37Signals Jason Fried’s take at Signal vs Noise on this topic.

Two important points Donna and Jason make: 1) build a good sustainable venture and 2) if the market is slowly developing then there is no market.

Here is a good section from end of Jason’s post “If the entrepreneur finds themselves in a situation they can’t control it’s almost certainly because they put themselves in that position — either by borrowing too much, spending too much, rushing too fast, creating a false sense of urgency, hiring the wrong people, attacking a market that doesn’t exist, or not focusing on generating revenue early enough. Natural disasters are out of our control, bad business decisions are in your control.”

My advice to entrepreneurs: try to maintain control for as long as you can (control > 50%) at all costs. Only go over 50% dilution if you need to scale and never run out of money.

Update 2: An post from last year from Denny Miu who I have met and respect. He writes a great post that has lessons and observations.

Tech Entrepreneurship Recession – Microsoft Yahoo – Tea Leaves; April 10, 2008

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War! What is it good for! Absolutely nothing! – Say it again!

Are wars really good for business? Is tech entrepreneurship in recession heading toward depression? The battle between Microsoft and Yahoo is reaching it’s climax (if not already). However, there are some very interesting and unique perspectives come from two blog posts that jumped out at me – Kara Swisher and Fred Wilson. Kara has the funniest headline saying “Jesus is coming” with the storyline about the inside scoop on the ‘dance’ between the two. What strikes me with Kara’s post is that Yahoo might already be defeated in the ‘braindrain’ that they have been experiencing. Even if Yahoo survives is it already dead on the vine?

Fred Wilson only draws a reference to the battle in his post about liquidity – saying that with no IPO market we are in trouble and worse the tech giants are playing with assets like toys. I think that Fred is on to something with no liquidity (other than M&A by big firms). Is this really a robust market for innovation where the big guys are doing all the acquiring? Is this the ecosystem that produces good entrepreneurship?

What ties both these posts together is the trend that acquisitions might not be the best for innovation – Kara bluntly states that AOL’s acquisitions aren’t doing well. While Fred says it’s great to get the cash but Yahoo hasn’t done well with their acquisitions. Meanwhile the capital markets are a mess.

As an entrepreneur with four kids I’m concerned about the prospects for all entrepreneurs in this current environment. Maybe I’m just not feeling good today. Startups should have some friction, but not outright frustration. I’ve been doing early stage startups for 10+ years and never seen this much frustration since 2002-03. We are in a tech recession or at least a grinding halt.

I’m one of the most optimistic guys (all entrepreneurs are), but my mood on this startup market: Bear

VC Credibility and Founder Credibility – It’s a Marriage March 29, 2008

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Getting financed by a VC is a marriage.  When it doesn’t work out it’s a divorce.

Josh Kopelman writes a great post on entrepreneurs pitching him.  He talks about Founder Credibility.  It works the other way as well – VC Credibility.  Both parties (the founder and VC) are looking for partnership – founder: money/business partner and VC: investment partner so chemistry is key.

If the VC doesn’t understand or believe in the founders vision then it will never work out.  For VCs they do this all the time- they take hundreds of meeting until they find that chemistry.

Here is Josh’s post.

This past week I had two distinctly different meetings with entrepreneurs.  They both were successful serial entrepreneurs.  Both were exceptionally smart.  Both had good ideas.

The first entrepreneur, however, thought that they were expected to know the answer to every question.  There wasn’t a question I asked that he didn’t have a definitive answer to.  He knew what their pricing model would be.  He knew why Google would never compete with them.  He knew what their consumer churn would be three years out (despite the fact that they hadn’t launched yet).  Whenever I tried to discuss the different risks in the business, he told me why they didn’t exist.

The second entrepreneur, had a different approach.  He definitively stated answers when he had them, but when he didn’t know he said so.  When asked about his pricing model, he said “well, we’re considering a few different options depending on the outcome of some tests we’re running…”  When asked about cost of customer acquisition, he said “well we don’t know what our numbers will be…but here’s our model based on other comparable companies.”  When asked about risks, he identified several — and then we discussed how to reduce/eliminate them.

I’ve come to believe that a key investment criteria is founder credibility.  And, I think the second entrepreneur was far more credible.  No one expects a pre-launch company to have all the answers.  (In fact, we get scared if you think you have them).  As I’ve previously discussed, rather than have an entrepreneur sell me on why they are 100% correct, I’d much rather understand how they are attacking the different risks facing the business.

And, by the way, the same applies for venture capitalists.  I often feel that during company pitches — and board of directors meetings — we’re expected to have an immediate opinion.  Should we double our marketing budget?  Should I hire this person?  Will this strategy work?  While it’s OK to offer opinions and thoughts, I think it is also appropriate to acknowledge uncertainty.    

One point in his post that is worth highlighting is how the second enterpreneur views the market. He looks at the market as a fluid dynamic – “running tests” with “base assumptions”. Many entrepreneurs have been scorned for this view (myself included) in being “not focused”. I hate that word. All early stage entrepreneurs are ‘very focused’ on the fluid market how to enter and plans based upon certain market conditions or scenarios. Key is the focus on the possible scenarios – for that there is no one answer.

Josh’s last point is important: VC Credibility – When VCs sit on 9 boards and shows up once a qtr for board meetings with ‘the answers’ then their credibility is on the line.

Early stage is about entering the market with a narrow value proposition that has the opportunity to take advantage of a massive growth trend when in market. For this the entry strategy should be very clear and the answers to the so called ‘billion dollar’ revenue plan should be scenario based.

Are Web 2.0 Entrepreneur’s Love Affair with Venture Capital Over March 18, 2008

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Cnet has a story headline “Is venture capital’s love affair with Web 2.0 over?”- Ironic??

According to this massive trend 2007 deals are down an amazing amount – total deal numbers down an amazing 5.   “Web 2.0 deals in the Bay Area actually dropped from 74 deals in 2006 to 69 last year” -Wow.

Entrepreneurs are starting companies that require less capital and no venture capital at all.  Maybe entrepreneur’s love affair with venture capital is over.  It’s clear to me that entrepreneurs that I talk to are bootstrapping longer and financing ventures themselves.

I hardly think that a reduction of 5 deals validates a venture capitalist trend.  Most VCs are not that savvy on Web 2.0 and are generally skeptical on web deals.  The ones that do get it are doing many deals.  Jeff Clavier has already pounded out 16+ deals in his new fund.

Social Everything: Interaction and Integration – The Future of Social Networks and Media March 7, 2008

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For the past three years I’ve been working with over 40 corporate advertisers in developing, testing, deploying, and measuring social media. I’ve discovered many things and learning more everyday.  As I am documenting my findings I have to highlight Charline Li’s post from yesterday.

Charlene Li has a great post on her views of Social Graphs and business models. It’s about “Social Everything”.

The big trend in Charlene’s post is that social individuals, groups, networks, graphs are great, but they still don’t connect to real world value. This linchpin to real world benefits is where I have the vision for social everything – it’s about collaboration. Virtual activity is highly productive, but seems to dead end when translating and scaling to real world offline benefits.

If you have been one of the 10k people following my blog you know where I stand and have a sense of what I’m working on for my next venture- Social Advertising, Social Media, Social Graph, Social Everything.   Charlene’s post reasonated with alot of my findings and the direction that I’m heading.  Here are some nice gems in Charlene’s post:

“.. the idea of social graphs being “owned” by different social networks makes no sense. Yet, all of today’s social networks build their business model and competitive advantage on having the largest, most complete social graph. The result: I have a close colleague who enjoys exploring all of the new social networks and “friends” me on all of them, figuring I’m a pretty good person to have in his new network. In a world with a single social graph, he would be able to import his existing personal, social graph into any new service, and immediately begin enjoying the new service without having to wait for his friends to catch up. And I would be spared the insanity of having to accept his umpteenth “friend” invitation!….In a world of a single social graph, social networks will have to compete on the basis of creating the best experience for its members – not because it controls a unique social graph.”….

…”The brilliance of Facebook Platform is that it greatly expanded what people could do on social networks. The problem is that what people do is still pretty limited. Take a look at the top applications on Facebook – they can be roughly grouped into 1) managing/comparing/interacting with friends in a general context; 2) self-expression (FunWall, Bumper Sticker); 3) games; and 4) media preferences (iLike, Flikster). These are all fun and interesting, but they only begin to scratch the surface of what I do every day.”….

…”A business model where social influence defines marketing value. Today’s advertising models don’t work on social networking sites – that’s because simply targeting better on profile or social graph details is still the same old media model of CPM and CPC pricing. What’s missing is marketing value based on how valuable I am in the context of my influence. For example, Steve Rubel is a highly influential person because he is an authority on social media, the people in his social graph tend to interested in his views, and they in turn have a great deal of authority as well. (Several people came up to me after the speech and said that this is similar to a “PageRank of people”, a very easy way to crystallize the idea.)

This means that each person will have their own “personal CPM”, an idea I heard JWT‘s Marian Salzman discuss at a private event in February (here are more details on the JWT’s Top Trends for 2008). The idea is that marketers want to reach highly influential people, and hopefully curry their endorsements. This has traditionally been the province of public relations, where they reach out to key influencers. But in the world of social networks, this is influence writ large and wide – every person has their own network of influence, and hence, their own personal CPM or value that they contribute to a social network.

..”There are several start-ups as well as established agencies that are already looking at marketing, brokering, measuring, etc. social influence, so you can expect to hear more about this topic soon. But don’t expect advertising spending to quickly embrace social influence – after all, the vast majority of ad budgets are spent by media buyers who still cleave to the tried and true reach and frequency, CPM models.”

Why is this relevant? Because as pointed out yesterday by industry visionaries, the iPhone SDK announcement represents the biggest trend since the PC revolution – socially connected individuals, groups, and media are at the heart of this new revolution.

Social Everything includes devices (iphone) to connect to networks (open social + social graphs) to consume media and information (social media). Users love it and so advertisers will soon have solutions – hopefully provided by us entrepreneurs.

HP Trying to Leverage HP Labs – A Good Strategy March 7, 2008

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Eric Savitz has a great blog post on HP Labs new focus.  According to a release the company is issuing today, HP Labs will zero in on 20-30 large research projects, rather than the 150 or smaller projects which marked the company’s approach previously.

This interests me because way back in the day when I spent 9 years at HP I interviewed for a job to commercialize new technology out of the labs.  My supporter was Dwayne Zitner who ran the server group at the time, but corporate development poo pooed it.  At that time HP Labs was out of touch with how innovation got done.  Now it looks like HP has a great vision. 

This announcment makes me think that HP could implement an ‘Amazon’ model of leveraging their core assets in IP and open it up.  Key to success is how they work with entrepreneurs like me.  If they can help me I’m interested in embedding their technologies in my ventures. 

Here is what I think are important points made today:

  • They have a plan to sharpen the focus on 20-30 big bets, away from the smaller projects they used to work on. Place entire resources of HP Labs on these big bets. Target is solving most pressing problems facing customers in the next decade.
  • Dynamic cloud service: based on location, preferences, calendar and communities. One approach: Cloud Print: store documents in the cloud and then retrieve and print on any printer in the world. Also Cloud View, which allows you view stock quotes, weather, sports scores without a browser on a mobile phone.
  • Content transformation: transforming analog to digital, from device to device, from digital to physical. Researchers working on technology to seamlessly transfer information from device to device. Also digital content to physical products.
  • Intelligent infrastructure: designing smarter, more secure devices, networks and architectures, that connect to rich content and services.
  • HP Labs is committed to “open innovation,” to work with VCs, startups, partner companies, etc. “We realize that not all the smart people work for HP Labs,”
  • Another: an entrepreneur-in-residence program. VCs in touch with the marketplace. Form partnerships with VCs. Know what the business trends and market development opportunities are.
  • “Everything as a Service.”
  • Merger between business intelligence and the Web. BI not just for top executive anymore. Prediction systems will be common places. Challenge is getting right information into the right hands. Business will use a radically different approach to reach business decisions. They have an approach they call BRAIN to make business predictions.
  • Speed is everything.

Kudos to HP for this approach.  Like Eric Savitz says “speed is everything”.  Lets see if HP can walk the talk.

Entrepreneur Psychoanalysis Report from INSEAD February 20, 2008

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Human Resource Management, INSEAD, Fontainebleau, France; The European Institute for Business Administration (INSEAD), Boulevard de Constance, 77305 Fontainebleau Cedex, France.

Paul Kedrosky twittered about the Ananomy of an Entrepreneur today.  I found this article facinating because there has always been a debate “are you born an entrepreneur .. or can it be taught”.  This research suggests that you are born with it.   This was Paul’s comment which I had the same reaction …“Gosh, sounds like most of my friends — okay, and me for that matter. I’m particularly fond of the line about “difficulties in the regulation of self-esteem”. You mean we entrepreneurial sorts are often preening, irritating blowhards? What a surprise.”   

Here is the entire intro paragraph from the report written by Manfred F.R. Kets de Vries 

In psychoanalytic theory, studies of work behavior have been relatively scarce. Most of the existing literature concerns itself with cases of work inhibition or compulsion. Occasionally, one finds a discussion of people in the creative professions. No attention has been paid, however, to a major contributor to economic development in society, the entrepreneur. This contrasts sharply with the amount of attention given to entrepreneurs by other disciplines. The object of this study is to better understand the dynamics of entrepreneurship, and in particular the work behavior of entrepreneurs. First, there is a brief overview of the role of work in psychoanalytic theory. Then a number of factors important to entrepreneurship are reviewed from the perspective of economic, sociological, anthropological, psychological, and organizational theory. A case history is presented of one entrepreneur who chose to be treated through psychoanalysis. The intensity of this type of treatment means that continuity in observation is provided. This case study therefore offers a unique insight into the complex “inner theater” of one particular entrepreneur.

Previous research on entrepreneurship has identified a number of themes common among some entrepreneurs. In the entrepreneurial theater a need for control, a sense of distrust, a desire for applause, and resorting to primitive defensive mechanisms such as splitting, projection, denial, and the flight into action (“the manic defense”) appear to be common. The behavior of a number of entrepreneurs also seems to have a cyclothymic quality. Moreover, for many of them, their narcissistic development tends to be of a “reactive” nature reflecting difficulties in the regulation of self-esteem. This case history illustrates these themes, and furthermore, shows that running a business is not necessarily a rational process. On the contrary, in many instances, the process seems to be more a question of retrospective “rationalizing” of decisions already made. Finally, inferences are made about the person-organization interface by identifying some of the characteristics of the dramatic organization, a configuration typically created by a number of entrepreneurs.

Wanted: Any Yahoo Social Networking and Social Graph Product Mgrs and Engineers February 13, 2008

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Attention Fresh Ex-Yahoo employees or future Ex Yahoo employees.

I am looking for product and engineering startup employees for my upcoming startup. This is a pure startup opportunity in Palo Alto. I’ve been working on this new opportunity with my wife Linda.

Consider this an open call for Yahoo entrepreneurs who know social networks and social graph technology: I’m looking for product managers and engineers for my new social advertising startup.

For more information read through some of the posts here at Furrier.org

I also posted on Techcrunch comments as well.

Update:

I saw Susan Mernit at the Yahoo campus today while I was attending the SDForum Social Graph Search Developer Event.  She was bummed.  Wait I’d say more stunned.  Susan blogged about it here.  Susan is a good person who takes pride in her work.  It must have been a surprise.  Susan: lets get together next week.  I’m happy to share with you the months of research on the landscape.  Ping me if you need anything.

Another employee named Ryan twittered the layoff.   Randy Farmer who I met when Yahoo launched Yahoo 360 (their social network beta) blogged the surprise layoff.  

Hello Web 2.0 Real Time Communication.  I hope that we can use these same tools for Real Time Collaboration and get people back to doing great work.

Techonomics During War Time = Expansion – Impact on Entrepreneurs February 5, 2008

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Marc Andreessen wrote a post on the impact to Silicon Valley if Microsoft and Yahoo buyout happens.    I believe that this massive war is changing the landscape but in a positive way.   This tech war becomes a catalyst the urgency is now.   Marc has experience living the last war when he was a Netscape.  Some might have forgot but the Microsoft assault on Netscape actually validated the market and created the wave and bubble of Web 1.0. 

What Marc is trying to say is that this war might actually propel Web 2.0 up in a big way.   Nice post Marc – it’s a must read – inside baseball – post. 

I agree with his post that it will be a net positive in that other companies will have to ‘shore up’ their positions.  I like how he put it..Marc says “if the Microsoft/Yahoo deal does go through, those same companies in many cases will be looking down a very scary double-barreled shotgun of an ascendant Google and an armored-up Microsoft”.   

As I mentioned in my previous posts, entrepreneurs and big companies have to understand the mentality in a war time venture.   If a business big or small gets caught in the battle during wartime, they need to be a supplier or arms dealer.  

Here are a few strategies for business during tech war time:  1) be a supplier or arm dealer, 2) build value and cash flow positive and stay out of the way – bunker away, 3) pick a side and join their mission.  

Entrepreneurs Beware. Yahoo Buyout Could Kill Technology Startups? Advice: Be an Arms Dealer. February 2, 2008

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Entrepreneurs beware Microsoft buying Yahoo could shut down the tech startup scene.  It could send the startup climate back to 2001 levels – nuclear winter shut down.  I lived through 2001-2004.  It was ugly.  

Brad Burnham has hit on a narrow topic about the downside of the Yahoo buyout for Silicon Valley.  Brad’s story is very relevant with ‘macro’ implications to the tech world not just Silicon Valley.   This deal could cripple startup activity.

Efficiency for Microsoft means leverage with suppliers.  Translation:  Startups are suppliers and Microsoft just became Walmart.  This could have a chilling effect on the VC and tech investment community.  This new industry structure puts even more of an emphasis on ‘hits’ or category specific deals.   If the Venture Capitalists are confused today can you imaging what they will do going forward.   This could get ugly. 

Advice for Technology Startups and VCs:  Understand where your company is in the pecking order in this war.  If you’re not an arms dealer then you might want to rethink your strategy. 

Update:   others are thinking the same….  A VC -Fred Wilson; Opportunity for another big player to bid:   News Corp. 

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