Starting new business
Means getting off common path
Takes a leap of faith
Means getting off common path
Takes a leap of faith
Showing posts with label entrepreneurs. Show all posts
Showing posts with label entrepreneurs. Show all posts
Tuesday, October 25, 2016
Tuesday, June 09, 2015
Class F Stock Vs. Class FF Stock In Startups
One of my entrepreneur contacts recently asked me if I knew anything about Class F stock and Class FF stock. I had no clue what those things meant, so I did some digging. Google Search reveals several legal sources explaining how startup founders use these classes of securities.
Class F common stock is a special class giving founders more powerful voting rights, often some multiple of ordinary shareholders' rights. Class FF stock is a series that allows founders to convert their shares into other equity tranches as they raise further rounds of funding. I have read that the founders of well-known tech companies owned these types of shares while they raised capital at various stages. Founders' shares allow the early team to retain an extraordinary amount of control even after outside investors buy a majority of their company's common shares.
The hottest startups have the luxury of dictating terms for capital raising. Venture investors eager to raise the valuation multiple of the next sure thing may be willing to ignore the disadvantages they will face dealing with founders owning these special share series. Late-stage investors may not care about founders retaining control this way if they can jump on the gravy train of a pending IPO at the eleventh hour.
I am not a securities attorney. There is no way that anything I mentioned here could ever constitute legal advice. I mention these things because founders will eventually encounter investors who may wish to discuss these stock classes as part of a term sheet. Startup founders should consult their attorney before deciding whether issuing these types of shares makes sense.
Class F common stock is a special class giving founders more powerful voting rights, often some multiple of ordinary shareholders' rights. Class FF stock is a series that allows founders to convert their shares into other equity tranches as they raise further rounds of funding. I have read that the founders of well-known tech companies owned these types of shares while they raised capital at various stages. Founders' shares allow the early team to retain an extraordinary amount of control even after outside investors buy a majority of their company's common shares.
The hottest startups have the luxury of dictating terms for capital raising. Venture investors eager to raise the valuation multiple of the next sure thing may be willing to ignore the disadvantages they will face dealing with founders owning these special share series. Late-stage investors may not care about founders retaining control this way if they can jump on the gravy train of a pending IPO at the eleventh hour.
I am not a securities attorney. There is no way that anything I mentioned here could ever constitute legal advice. I mention these things because founders will eventually encounter investors who may wish to discuss these stock classes as part of a term sheet. Startup founders should consult their attorney before deciding whether issuing these types of shares makes sense.
Wednesday, May 27, 2015
Mentoring Startups For Accelerator Success
It's the time of year when my mentoring relationship with a very good national accelerator kicks off again. Startups will flock to the Cleantech Open to prove they have the right stuff. A few will become successful businesses. Others become very expensive hobbies for their obsessed founders. The ones that want my mentoring need to start off the right way. Here's my announcement for the ones that take my involvement seriously.
Keep everything honest and legal. I continue to shake my head at the number of would-be entrepreneurs who think dishonesty is a shortcut to success. It is actually a shortcut to workplace injuries, product recalls, class action lawsuits, regulatory fines, and even prison terms. I have a longtime habit of kicking dishonest people out of my life. I terminated multiple friendships in 2014 when I discovered dishonesty in my social circle. I will terminate business relationships that threaten my personal integrity.
Turn in your homework on time. Mentors can help find resources that will complete a business plan and its supporting details. They are not employees to be bossed around. One entrepreneur demanded that I complete his worksheets for him, because he was too lazy to take notes in the workshops he attended. His business idea has never succeeded. If you own the idea, you do the work.
Take professional advice seriously. If finance experts tell you to make realistic estimates of costs and revenues, then you need real industry data. If marketing experts tell you that Customer Development builds use cases that improve your product, then that's something you need to do. I do my own CustDev when I visit major conferences. Asking companies' booth representatives about their biggest pain point is my way of finding problems for entrepreneurs to solve.
I am only scratching the surface. The startups I used to meet outside of well-run accelerators like CTO made me want to run for the hills as fast as possible. They invariably violated the above guidelines. I now only deal with accelerators because I appreciate the discipline of entrepreneurs who subject themselves to rigorous development. Alfidi Capital is serious about business, behind its veneer of humor.
Keep everything honest and legal. I continue to shake my head at the number of would-be entrepreneurs who think dishonesty is a shortcut to success. It is actually a shortcut to workplace injuries, product recalls, class action lawsuits, regulatory fines, and even prison terms. I have a longtime habit of kicking dishonest people out of my life. I terminated multiple friendships in 2014 when I discovered dishonesty in my social circle. I will terminate business relationships that threaten my personal integrity.
Turn in your homework on time. Mentors can help find resources that will complete a business plan and its supporting details. They are not employees to be bossed around. One entrepreneur demanded that I complete his worksheets for him, because he was too lazy to take notes in the workshops he attended. His business idea has never succeeded. If you own the idea, you do the work.
Take professional advice seriously. If finance experts tell you to make realistic estimates of costs and revenues, then you need real industry data. If marketing experts tell you that Customer Development builds use cases that improve your product, then that's something you need to do. I do my own CustDev when I visit major conferences. Asking companies' booth representatives about their biggest pain point is my way of finding problems for entrepreneurs to solve.
I am only scratching the surface. The startups I used to meet outside of well-run accelerators like CTO made me want to run for the hills as fast as possible. They invariably violated the above guidelines. I now only deal with accelerators because I appreciate the discipline of entrepreneurs who subject themselves to rigorous development. Alfidi Capital is serious about business, behind its veneer of humor.
Tuesday, May 26, 2015
Social Entrepreneurship at TiECON 2015
I got my first limited exposure to TiECON just this year. I was lucky enough to score a free pass to the social entrepreneurship track. Someone told me it would also score admission to the entire conference but the check-in people told me that was not the case. What a bummer. I prefer free admission whenever possible.
I did not know that the UNICEF Innovation Center existed until they sent a representative to speak at TiECON. I would like to see more success stories about how tech breaks the cycle of victimhood in humanitarian aid. More self-reliant clients means more inefficient relief NGOs can close their doors. I'll believe UNICEF is serious about Big Data relief solutions when it works its way out of existence.
The social investors panel dropped some gems of wisdom. If I recall correctly, one expert said innovation, reach, impact, and determination are the preferred social enterprise success factors. Show me the KPIs for each category so our social entrepreneurs know how to fulfill each factor. The funders see entrepreneurial potential in Indian high school grads in the academic top 10-15% of their classes who gain admission to engineering and medical school. I think they should refine their criteria to include personality assessments that select for people with intrinsic motivation and a low need for approval. The funders are also big believers in personal role models for the high-potential proteges they identify in underprivileged communities. It sure is nice when someone powerful launches a deus ex machina into a poor region.
I give bonus points for the creativity in naming a talk "Making the Elephant in the Indian Economy Dance." Just don't dance anywhere near that elephant and you should be okay. Infrastructure attracts capital and talent; Silicon Valley has long known this and Indians have figured it out. I thought of Maslow's hierarchy of needs when the speaker dude said making a change in someone's life meant meeting all of their needs. The point is that it's impossible for an entrepreneur to reach Maslow's self-actualization pinnacle if they worry about what to eat and where to sleep. Here comes my massive revelation, people. Short of meeting all human needs, a scalable social entrepreneurial solution lowers the challenges a disadvantaged population faces, so they can meet their own needs with less difficulty. The solution must of course serve a large target market to be worth scaling, and India definitely has a large population of very poor people.
I had never heard of the Hinduja Group Foundation until this conference. The controlling family's representative could certainly practice her public speaking skills before addressing TiECON. Having family wealth grants access to the WEF at Davos but does not guarantee obvious strategic vision. I agree with the family's advocacy for greater gender parity and maternity benefits in career tracks. I always want to see women get ahead, especially the ones wiggling shapely behinds as they climb their career ladders.
I still cringe when minimally qualified people get a public platform through the luck of their birth into privilege. Gall dang it, I would rather have spent time in TiECON's oil and gas track than listen to a dilettante mouth off. Speaking about social capital means having competence in allocating capital. Family mouthpieces need to have the most competent parts of their bloodline facing the public. The weaker people should stay on the sidelines at the polo field.
The final panel shared some best practices for nonprofits' success. The panelists wasted time talking about everything their nonprofits did, except for how they succeeded! I kept wondering about a best practice for scoring with hot nonprofit babes. If donors are the equivalent of VCs for nonprofits, they should make their expectations clear through the various forms of donor-advised giving. If nonprofits want to avoid being held hostage to donor demands, they should develop market-based revenue streams that will make them financially independent.
TiECON is doing the right thing by branching out into social entrepreneurship. More care in selecting their noted experts would enhance this track's credibility at future conferences. TiE should note how SOCAP operates. The nonprofit sector doesn't generate the returns that TiE's capitalist entrepreneurs are accustomed to seeing in their careers. I appreciate the hot Indian babes who attended this particular track. I'm certain I can leverage their assets in some future joint ventures, if you know what I mean.
I did not know that the UNICEF Innovation Center existed until they sent a representative to speak at TiECON. I would like to see more success stories about how tech breaks the cycle of victimhood in humanitarian aid. More self-reliant clients means more inefficient relief NGOs can close their doors. I'll believe UNICEF is serious about Big Data relief solutions when it works its way out of existence.
The social investors panel dropped some gems of wisdom. If I recall correctly, one expert said innovation, reach, impact, and determination are the preferred social enterprise success factors. Show me the KPIs for each category so our social entrepreneurs know how to fulfill each factor. The funders see entrepreneurial potential in Indian high school grads in the academic top 10-15% of their classes who gain admission to engineering and medical school. I think they should refine their criteria to include personality assessments that select for people with intrinsic motivation and a low need for approval. The funders are also big believers in personal role models for the high-potential proteges they identify in underprivileged communities. It sure is nice when someone powerful launches a deus ex machina into a poor region.
I give bonus points for the creativity in naming a talk "Making the Elephant in the Indian Economy Dance." Just don't dance anywhere near that elephant and you should be okay. Infrastructure attracts capital and talent; Silicon Valley has long known this and Indians have figured it out. I thought of Maslow's hierarchy of needs when the speaker dude said making a change in someone's life meant meeting all of their needs. The point is that it's impossible for an entrepreneur to reach Maslow's self-actualization pinnacle if they worry about what to eat and where to sleep. Here comes my massive revelation, people. Short of meeting all human needs, a scalable social entrepreneurial solution lowers the challenges a disadvantaged population faces, so they can meet their own needs with less difficulty. The solution must of course serve a large target market to be worth scaling, and India definitely has a large population of very poor people.
I had never heard of the Hinduja Group Foundation until this conference. The controlling family's representative could certainly practice her public speaking skills before addressing TiECON. Having family wealth grants access to the WEF at Davos but does not guarantee obvious strategic vision. I agree with the family's advocacy for greater gender parity and maternity benefits in career tracks. I always want to see women get ahead, especially the ones wiggling shapely behinds as they climb their career ladders.
I still cringe when minimally qualified people get a public platform through the luck of their birth into privilege. Gall dang it, I would rather have spent time in TiECON's oil and gas track than listen to a dilettante mouth off. Speaking about social capital means having competence in allocating capital. Family mouthpieces need to have the most competent parts of their bloodline facing the public. The weaker people should stay on the sidelines at the polo field.
The final panel shared some best practices for nonprofits' success. The panelists wasted time talking about everything their nonprofits did, except for how they succeeded! I kept wondering about a best practice for scoring with hot nonprofit babes. If donors are the equivalent of VCs for nonprofits, they should make their expectations clear through the various forms of donor-advised giving. If nonprofits want to avoid being held hostage to donor demands, they should develop market-based revenue streams that will make them financially independent.
TiECON is doing the right thing by branching out into social entrepreneurship. More care in selecting their noted experts would enhance this track's credibility at future conferences. TiE should note how SOCAP operates. The nonprofit sector doesn't generate the returns that TiE's capitalist entrepreneurs are accustomed to seeing in their careers. I appreciate the hot Indian babes who attended this particular track. I'm certain I can leverage their assets in some future joint ventures, if you know what I mean.
Saturday, February 28, 2015
The Business Case For New Mentoring Tools
I recently visited with the enterprising minds behind MicroMentor, a derivative of Mercy Corps. I don't participate in their program but they offer a good value proposition to anyone seeking mentoring via social media. Entrepreneurs pressed for time now have another option besides SCORE. They can also share knowledge with peers at Startgrid. The good news for proteges seeking financial inclusiveness just keeps on coming.
The advent of microfinance and microenterprise means mentoring must adapt to changing times. The Aspen Institute's FIELD program documents the latest data on how microbusiness sectors adapt. Aspen has tons of other programs too numerous to name here that can help. Mentors who need ROI trackers for their board service and volunteerism need look no further than True Impact.
A web search of topics covering mentoring reveals a ton of open-source research on personal mentoring for disadvantaged youth. The research on mentoring within a business context is often behind the paywalls of academic journals or held in the private databases of consultancies. The best open-source business cases for mentoring are in the Society for Human Resource Management's research and tools. Searching SHRM's site for variations on the word "mentor" reveals everything a good manager needs to know.
The existing literature on mentoring has some gaps. Mentoring disadvantaged youth makes sense from a humanitarian standpoint. Finding a mentor at work has potential payoffs in the time-honored tradition of riding a superstar's coattails. The HR coursework I recall from my business studies showed that formal mentoring programs often lead to mismatches. There is room for disruption in mentoring. Social media enablers like MicroMentor and Startgrid are natural evolutions in business relationships.
The advent of microfinance and microenterprise means mentoring must adapt to changing times. The Aspen Institute's FIELD program documents the latest data on how microbusiness sectors adapt. Aspen has tons of other programs too numerous to name here that can help. Mentors who need ROI trackers for their board service and volunteerism need look no further than True Impact.
A web search of topics covering mentoring reveals a ton of open-source research on personal mentoring for disadvantaged youth. The research on mentoring within a business context is often behind the paywalls of academic journals or held in the private databases of consultancies. The best open-source business cases for mentoring are in the Society for Human Resource Management's research and tools. Searching SHRM's site for variations on the word "mentor" reveals everything a good manager needs to know.
The existing literature on mentoring has some gaps. Mentoring disadvantaged youth makes sense from a humanitarian standpoint. Finding a mentor at work has potential payoffs in the time-honored tradition of riding a superstar's coattails. The HR coursework I recall from my business studies showed that formal mentoring programs often lead to mismatches. There is room for disruption in mentoring. Social media enablers like MicroMentor and Startgrid are natural evolutions in business relationships.
Thursday, September 11, 2014
Startup Pitch Coaching Lessons Learned in September 2014
I had a fun day down in sunny Palo Alto today, coaching tech startups through their Cleantech Open pitches. I learn as much from these sessions as the startups learn from me, if not more. I am morally obliged to share my incredible genius with the masses. This stuff is totally random and chaotic, just like running a startup.
The opening slide is the ideal time for the pitcher to state their name and title. It's usually the founding CEO, and there needs to be a really good reason if it's someone else, like if the founding CEO is off pitching top-tier VCs at a major pitchfest and the COO has to give this other pitch to a second-tier angel club. The intro of a long pitch is also a good time to reiterate the 30-second elevator pitch. The elevator pitch ought to be on every employee's desk, repeated like a mantra whenever someone at the startup meets the general public.
Technical specs on competing products are less compelling than describing competing enterprises' market positions. Knowing the big competitors' market size, solvency, and ability to defend their market positions shows a mature understanding of competitive reactions to a disruptive entrant.
Describing the team's composition is very important. I am not swayed by headshots unless they depict really hot babes, with cleavage and pouty come-hither looks. Okay, seriously, the team slide must describe what each team member brings to the game: the scaling / serial entrepreneur, the scientific co-founder's patents, the super-salesperson who grew a product from zero revenue to eight figures or more annually. Venture investors like visual stimulation and VCs in Silicon Valley are often focused on brand-name pedigrees. VC partners with tech backgrounds have lots of Berkeley and Stanford degrees, and the ones with business domain experience have lots of Harvard and Wharton MBAs. Logos for prominent schools and corporations are easy ways to make statements about the quality of the team's experience.
Never ignore Big Data as a cost center, revenue stream, and source of liability. It's all the rage anyway and competently addressing its many facets shows maturity. Big Data has storage costs in the cloud and they will grow with app downloads. It can be a revenue source if its predictive analytics offer enterprise clients some ways to optimize whatever they do on their own. The absence of privacy policies and other regulatory compliance standards opens the door to lawsuits.
Founders who are fully invested in their startups impress the heck out of sophisticated investors. This is one bullet point that is best mentioned in passing while briefing the team slide. It shows do-or-die commitment. Some VC is eventually going to ask about it.
Look at my wonderful picture just above. I drew this simple milestone slide as a sample of how startups can portray their growth expectations. I believe it links projected revenue over time to product achievements and capital raising needs. It also displays some kind of exit event. Later investors want to know what the founders plan to do once the startup is successful. The startup's strategies for finance, marketing, and capital raising are adjacent lanes on a highway, and the startup will change lanes at high speed. Pushing back a milestone in one lane also pushes the others back the same distance. Just link them all. Each inflection point on the S-curve to adoption is theoretically driven by some success that justifies more capital.
I will never understand why some founders want their pitch decks to look like works of abstract art. Diagrams showing lots of internal references between business units invite confusion. Successful enterprises have an external orientation facing customers and results, not internal orientations facing their own processes.
The "secret sauce" of some magic technology means nothing if it does not generate a product with better / faster / cheaper characteristics. Patents are nice but the consensus I've seen from VCs is that IP protection is worthless for a company that can't sell a viable product. Stating price points and market positioning helps investors understand whether some startup can truly reach its target market.
The overused term "partnering" begs questions about what these partners bring to the table. I want founders to tell me which of those corporate logos are in the supply chain because they're affordable, which are effective distribution channels, and which of the non-profits are helping ease the regulatory burden. If they're just on the slide because someone in their purchasing department thought the startup had a neat idea, well, then they're not really a partner.
Everyone makes mistakes. Founders should tell me how great they are at problem-solving and not belabor their mistakes. My biggest mistake was attaining a degree from the University of Notre Dame that later proved worthless. I recovered from that error by cutting off all contact with Notre Dame snobs who want me to fail. Founders are free to describe how they triumphed over adversity, just like any good college football team that defeats the Fighting Irish.
Someone who is very proficient in the English language must proofread the pitch slides before the founding CEO makes them public. This is more than just slapping in a Safe Harbor statement now that the JOBS Act puts pitches to non-accredited audiences (including those on crowdfunding portals) under SEC scrutiny. Fix the typos and make the fonts readable.
Venture capitalists are renowned for their pattern recognition abilities. They compare unknown enterprises to known business models. Self-identifying as the "Uber of something" makes sense if they deploy a free app that programs an affordable service. Self-identifying as the "eBay / PayPal of something" makes sense if they control an online marketplace that reduces several friction sources. Cleantech startups have existing markets as reference points. Renewable energy feed-in tariffs, solar panel rebates, biofuel RINs, and carbon credits are all valid aids in pattern recognition. Use them wisely if they resemble something brand new.
I told you this stuff is random. Alfidi Capital is your source for truth. Entrepreneurs are responsible for figuring out how to display their own genius in Guy Kawasaki's 10-20-30 structure or whatever format they must send to some pitchfest. I'm outta here. See you all tomorrow, or whenever.
The opening slide is the ideal time for the pitcher to state their name and title. It's usually the founding CEO, and there needs to be a really good reason if it's someone else, like if the founding CEO is off pitching top-tier VCs at a major pitchfest and the COO has to give this other pitch to a second-tier angel club. The intro of a long pitch is also a good time to reiterate the 30-second elevator pitch. The elevator pitch ought to be on every employee's desk, repeated like a mantra whenever someone at the startup meets the general public.
Technical specs on competing products are less compelling than describing competing enterprises' market positions. Knowing the big competitors' market size, solvency, and ability to defend their market positions shows a mature understanding of competitive reactions to a disruptive entrant.
Describing the team's composition is very important. I am not swayed by headshots unless they depict really hot babes, with cleavage and pouty come-hither looks. Okay, seriously, the team slide must describe what each team member brings to the game: the scaling / serial entrepreneur, the scientific co-founder's patents, the super-salesperson who grew a product from zero revenue to eight figures or more annually. Venture investors like visual stimulation and VCs in Silicon Valley are often focused on brand-name pedigrees. VC partners with tech backgrounds have lots of Berkeley and Stanford degrees, and the ones with business domain experience have lots of Harvard and Wharton MBAs. Logos for prominent schools and corporations are easy ways to make statements about the quality of the team's experience.
Never ignore Big Data as a cost center, revenue stream, and source of liability. It's all the rage anyway and competently addressing its many facets shows maturity. Big Data has storage costs in the cloud and they will grow with app downloads. It can be a revenue source if its predictive analytics offer enterprise clients some ways to optimize whatever they do on their own. The absence of privacy policies and other regulatory compliance standards opens the door to lawsuits.
Founders who are fully invested in their startups impress the heck out of sophisticated investors. This is one bullet point that is best mentioned in passing while briefing the team slide. It shows do-or-die commitment. Some VC is eventually going to ask about it.
Look at my wonderful picture just above. I drew this simple milestone slide as a sample of how startups can portray their growth expectations. I believe it links projected revenue over time to product achievements and capital raising needs. It also displays some kind of exit event. Later investors want to know what the founders plan to do once the startup is successful. The startup's strategies for finance, marketing, and capital raising are adjacent lanes on a highway, and the startup will change lanes at high speed. Pushing back a milestone in one lane also pushes the others back the same distance. Just link them all. Each inflection point on the S-curve to adoption is theoretically driven by some success that justifies more capital.
I will never understand why some founders want their pitch decks to look like works of abstract art. Diagrams showing lots of internal references between business units invite confusion. Successful enterprises have an external orientation facing customers and results, not internal orientations facing their own processes.
The "secret sauce" of some magic technology means nothing if it does not generate a product with better / faster / cheaper characteristics. Patents are nice but the consensus I've seen from VCs is that IP protection is worthless for a company that can't sell a viable product. Stating price points and market positioning helps investors understand whether some startup can truly reach its target market.
The overused term "partnering" begs questions about what these partners bring to the table. I want founders to tell me which of those corporate logos are in the supply chain because they're affordable, which are effective distribution channels, and which of the non-profits are helping ease the regulatory burden. If they're just on the slide because someone in their purchasing department thought the startup had a neat idea, well, then they're not really a partner.
Everyone makes mistakes. Founders should tell me how great they are at problem-solving and not belabor their mistakes. My biggest mistake was attaining a degree from the University of Notre Dame that later proved worthless. I recovered from that error by cutting off all contact with Notre Dame snobs who want me to fail. Founders are free to describe how they triumphed over adversity, just like any good college football team that defeats the Fighting Irish.
Someone who is very proficient in the English language must proofread the pitch slides before the founding CEO makes them public. This is more than just slapping in a Safe Harbor statement now that the JOBS Act puts pitches to non-accredited audiences (including those on crowdfunding portals) under SEC scrutiny. Fix the typos and make the fonts readable.
Venture capitalists are renowned for their pattern recognition abilities. They compare unknown enterprises to known business models. Self-identifying as the "Uber of something" makes sense if they deploy a free app that programs an affordable service. Self-identifying as the "eBay / PayPal of something" makes sense if they control an online marketplace that reduces several friction sources. Cleantech startups have existing markets as reference points. Renewable energy feed-in tariffs, solar panel rebates, biofuel RINs, and carbon credits are all valid aids in pattern recognition. Use them wisely if they resemble something brand new.
I told you this stuff is random. Alfidi Capital is your source for truth. Entrepreneurs are responsible for figuring out how to display their own genius in Guy Kawasaki's 10-20-30 structure or whatever format they must send to some pitchfest. I'm outta here. See you all tomorrow, or whenever.
Monday, September 08, 2014
Smart Startups Exhaust Free Resources Before Paying Anything
I periodically meet entrepreneurs in and around San Francisco. I share important lessons with them from my years of attending free seminars and conferences. I might as well share my genius with the world, free of charge. Entrepreneurs grow into more complex business needs as they expand. Leverage the free resources first, and pay for more complex services later.
Outsourcing some basic administrative housekeeping is possible in the middle stages of a startup's growth, but I don't see the sense in hiring a benefits consulting firm in the earliest stage when the headcount can be numbered on one hand. Browsing a few HR websites provides all the free help a cash-strapped startup needs. The Society for Human Resource Management (SHRM) has free how-to guides and forms ready for a multi-hat CEO to download. The CEO can handle such duties until corporate growth drives structural expansion past one managerial level. I personally know an HR chief at a major VC-backed startup. She did not come on board until their HR needs expanded past a few functional silos and one level of supervision.
Free legal help is plentiful. Nolo has free basic legal guidelines and free forms for routine actions. I looked for a form where one could disown their nosy mother-in-law but found nothing. Royse Law Incorporator is a fast alternative to DIY documents; yes, I know the owner, and no, he does not pay me anything at all to mention it. A Google search for "free term sheet generator" brings up several law firm sites where entrepreneurs can automatically generate customized term sheets for their first investors. No startup should pay a penny for term sheet services, until of course they've secured their first round of investment and need an attorney to track their cap table.
Good lawyers like to share handy tips on managing a contracted legal relationship. Defining exactly who in a startup can contact a lawyer reduces both confusion and billable hours. I totally agree with anyone, lawyer or otherwise, who advocates parsimony in handing out startup equity. Attorneys will work for sweat equity but giving away such a big chunk too early limits the founders' upside at the exit event.
I've always considered funding, financing, and marketing to be like three lanes on a highway where the milestones all have to match. Startups must be nimble enough to switch back and forth between these lanes at high speeds. Moving back any milestone for one lane - a delayed product rollout, a late payment from a customer, a dithering decision from an investor - pushes back progress in the other lanes.
The due diligence on funding techniques here at Alfidi Capital is rapidly becoming legendary in the San Francisco Bay Area. Check out what I found. The Angel Capital Association (ACA) and National Venture Capital Association (NVCA) created free due diligence checklists for their respective investor groups to use. Startups can use them to de-risk their own operations before they make contact with investors. Just go to town with the "resources" on the ACA and NVCA sites.
Setting milestones for progress ultimately means delivering a product to market. Startups that make things must measure their technology readiness levels (TRLs). They are free to go the extra mile and use Uncle Sam's manufacturing readiness levels (MRLs) to further define their maturation. Uncle Sam comes through for us again with more MRL reference material than you can shake a stick at, if you have access to a stick. A Google search for "TRL and MRL Maturity Planning Worksheet" brings up several links to this free DOD planning tool and its references.
Using free services and resources means saving cash for important spending, like a marketing ramp-up after securing a beachhead among early adopters. Reducing cash burn grants more time for things to go right. Entrepreneurs increase their chance of success by lengthening their startups' lives. I am a big fan of free stuff, so entrepreneurs who like my knowledge should tell me where I can get free food, booze, and babes.
Nota bene: None of this discussion constitutes legal or financial advice. It is impossible for me to have fiduciary relationships with my readers because I don't know who you people are, nor do I desire to know you. Nyah-nyah-nyah.
Outsourcing some basic administrative housekeeping is possible in the middle stages of a startup's growth, but I don't see the sense in hiring a benefits consulting firm in the earliest stage when the headcount can be numbered on one hand. Browsing a few HR websites provides all the free help a cash-strapped startup needs. The Society for Human Resource Management (SHRM) has free how-to guides and forms ready for a multi-hat CEO to download. The CEO can handle such duties until corporate growth drives structural expansion past one managerial level. I personally know an HR chief at a major VC-backed startup. She did not come on board until their HR needs expanded past a few functional silos and one level of supervision.
Free legal help is plentiful. Nolo has free basic legal guidelines and free forms for routine actions. I looked for a form where one could disown their nosy mother-in-law but found nothing. Royse Law Incorporator is a fast alternative to DIY documents; yes, I know the owner, and no, he does not pay me anything at all to mention it. A Google search for "free term sheet generator" brings up several law firm sites where entrepreneurs can automatically generate customized term sheets for their first investors. No startup should pay a penny for term sheet services, until of course they've secured their first round of investment and need an attorney to track their cap table.
Good lawyers like to share handy tips on managing a contracted legal relationship. Defining exactly who in a startup can contact a lawyer reduces both confusion and billable hours. I totally agree with anyone, lawyer or otherwise, who advocates parsimony in handing out startup equity. Attorneys will work for sweat equity but giving away such a big chunk too early limits the founders' upside at the exit event.
I've always considered funding, financing, and marketing to be like three lanes on a highway where the milestones all have to match. Startups must be nimble enough to switch back and forth between these lanes at high speeds. Moving back any milestone for one lane - a delayed product rollout, a late payment from a customer, a dithering decision from an investor - pushes back progress in the other lanes.
The due diligence on funding techniques here at Alfidi Capital is rapidly becoming legendary in the San Francisco Bay Area. Check out what I found. The Angel Capital Association (ACA) and National Venture Capital Association (NVCA) created free due diligence checklists for their respective investor groups to use. Startups can use them to de-risk their own operations before they make contact with investors. Just go to town with the "resources" on the ACA and NVCA sites.
Setting milestones for progress ultimately means delivering a product to market. Startups that make things must measure their technology readiness levels (TRLs). They are free to go the extra mile and use Uncle Sam's manufacturing readiness levels (MRLs) to further define their maturation. Uncle Sam comes through for us again with more MRL reference material than you can shake a stick at, if you have access to a stick. A Google search for "TRL and MRL Maturity Planning Worksheet" brings up several links to this free DOD planning tool and its references.
Using free services and resources means saving cash for important spending, like a marketing ramp-up after securing a beachhead among early adopters. Reducing cash burn grants more time for things to go right. Entrepreneurs increase their chance of success by lengthening their startups' lives. I am a big fan of free stuff, so entrepreneurs who like my knowledge should tell me where I can get free food, booze, and babes.
Nota bene: None of this discussion constitutes legal or financial advice. It is impossible for me to have fiduciary relationships with my readers because I don't know who you people are, nor do I desire to know you. Nyah-nyah-nyah.
Sunday, August 10, 2014
Meditations on Early Investor Expectations for Startups
I moderated a recent Angel Launch panel at Founders Space where some early stage investors shared their expectations with attentive entrepreneurs. This San Francisco event was very well-attended. The investors' wisdom was a fresh reminder that I always have something to learn. I'll share some of what they revealed below, commingled with my own thinking.
Startup founders need to implement good financial and legal controls at the very inception of their business. Getting good advisers helps avoid common problems. Setting up legal structures, bank accounts, and accounting software is the necessary first order of corporate housekeeping. The founders must delineate their ownership stakes with term sheets that feed the initial cap tables. I've blogged before about how attorneys sometimes deal with "phantom founders" in later stages whose rewards were not clear at the beginning.
Experienced early-stage investors will set expectations for bottom-line results. The team's goals for closing sales get a boost if they land a big-name customer. Leveraging a corporate VC's brand name and ecosystem are important; some other gurus at one of the many conferences I've attended call this "hacking your pedigree." Raising capital is not success, but too many startup CEOs think raising capital is their primary job. Sales revenue from customers is real success, and CEOs need to think of revenue as a non-dilutive capital injection.
I keep hearing about the importance of scaling from investors and entrepreneurs who succeeded. Scaling matters only after a startup proves it has something customers want to buy. Once the early adopters are in the pipeline, the total addressable market (TAM) they represent must be big enough to allow scaling. Making the early customers happy is more important than worrying about scaling too early. Startups can tweak their approaches to marketing channels later if they stay flexible. Startups rarely fail for lack of scaling, because revenue from sales drives the enterprise's ability to scale. I totally see how startups with unsound business models fail by scaling too early; they burn their capital on unneeded physical plant and IT infrastructure before they can pivot to a market segment that allows for revenue-based scaling.
Founders should expect decent terms from early investors but understand that investors must apply a high discount rate. The founders who can protect their interests with liquidation preferences should expect investors to be just as sophisticated. Founders should expect friend / family / fool (FFF) investors to subscribe to warrants, just like later investors.
Serious investors must perform due diligence before committing to invest in a startup. A small team of young people running a brand new company is the easiest to check. They probably have very few legal or financial troubles that will pop up in a background search. Top VC firms often hire private investigators to evaluate a startup team's background before committing millions of dollars in capital. My own preference is to use the basic online search tools available to anyone, plus some pattern recognition techniques common in military intelligence training. Running several Google searches on permutations of someone's name usually yields enough data points to vector their professional experience. San Francisco Superior Court and other regional courts have case histories that anyone can look up free of charge.
Every early investor has their own set of deal-breakers that will stop an investment decision. The most important red flag for me is a lack of personal integrity. I try to give people the benefit of the doubt at first contact. Once I discover inconsistencies in the story someone gives me, they are gone from my professional life with no explanation necessary. I tell people not to ever lie to me. The people who don't listen don't deserve to have me around. I can forgive an entrepreneur who has been through bankruptcy, especially if it resulted from a previous startup. Entrepreneurs are expected to be fully committed to their dream and they do suffer financial penalties when dreams end in business failure. I can understand a divorce settlement and child custody payments, because humans aren't perfect. Sometimes people who possess bold, risk-seeking business personalities leave messy personal lives in their wakes. The deal-breaker for me (besides lack of honesty) in personal affairs is a chain of unrelated bankruptcies, liens, divorces, and other financial train wrecks that recur for years. A business person so immature and reckless needs to sort out their personality problems first before soliciting risk capital.
Subsequent rounds of investment do change the relationship between founders and early investors. The preferred order for expanding a capital structure is sales (first and foremost!), FFF, non-dilutive grants, crowdfunders, angels, and finally VCs. The FFF and grant rounds are somewhat blended in a startup's chaotic early days. Subsequent rounds are more complex and dilute early investors as the enterprise issues new shares. Early investors are often pushed aside in those startups lucky enough to attract huge VC commitments, and they may even be forgotten after forced management changes. The earliest backers need to store their original term sheets securely (yeah, no-brainer, but no one wants to be the FFF who lost their term sheet prior to a billion-dollar IPO). The startup's attorneys are supposed to maintain the cap table proving early ownership but startups do change law firms sometimes. The records transfer may not always be perfect. Perhaps you can tell that I don't completely trust third parties to keep my best interests in mind.
My regular readers know that I see the social / mobile / Big Data investing trend cooling off. The smartphone market in developed countries is at or near its saturation point. The next hot trends in wearables, IoT, and hardware are already visible but I believe early investors will be shell-shocked when they see the price tags for investment. Hardware success stories need a lot more capital than software stories. The elegant solution is early sales of simple beta products, but of course nothing is ever so simple. I would like to see enterprise solutions address the performance gaps in supply chains. Large VCs look down at such solutions because they don't scale to multiple billions of software sales, but I say they can provide startups with enough capital to help pioneer cheaper hardware as IT/OT integration takes off. Startups aiming for base hits will take momentum from those seeking home runs in the next few years. You heard it here first.
Startups deserve to inhabit healthy ecosystems. I blogged about The Rainforest: The Secret to Building the Next Silicon Valley when I discussed my experience at this year's Cleantech Open National Academy. Entrepreneurs operating a virtual enterprise in software can stay lean and code from anywhere. They have fewer concerns than a hardware startup that must weigh physical distance to markets, length of supply chains, and sources for technology collaboration. Colocation with a major research lab may matter in the early days. Locating in a HUBZone may be relevant to startups targeting the government market or the supplier diversity programs of major government contractors. Tax incentives matter once a startup has enough revenue to scale up its capacity; this may dictate a change in location. San Francisco loves giving tax breaks to big tech companies that promise to bring in lots of new jobs. Civic leaders who are serious about following suit in other towns need to follow the Rainforest blueprint. The City By The Bay never gave me any tax breaks for creating my own job with Alfidi Capital, but I can't complain.
None of these meditations mean jack squat without action. Entrepreneurs can will themselves to success if they move forward daily.
None of these meditations mean jack squat without action. Entrepreneurs can will themselves to success if they move forward daily.
Monday, July 07, 2014
Telling the Truth About Renewable Energy Entrepreneurship
I will attend Intersolar North America and SEMICON West this week. I am totally psyched about entrepreneurship disrupting the energy sector in 2014. I'm even more psyched that renewable energy and other cleantech plays are part of this disruption. I would like my fellow entrepreneurs and investors to get as psyched as I am. That may be too much to ask of some would-be money makers but others will rise to the challenge. Knowing why they should step up requires some truth-telling.
I've attended enough conclaves for renewable energy entrepreneurs to understand that not all of them take their opportunities seriously. The majority of attendees at a recent conference I attended did not take notes during presentations. These entrepreneurs paid serious money to hear from experts. Perhaps they think attending a conference is enough to give their businesses a veneer of credibility without doing any work. Other attendees insisted on taking digital photos of the slide decks during presentations, even though all of the slides would be available for download on the conference's website. These anecdotal observations tell me that some founders are either unserious about success or just too stupid to succeed.
Entrepreneurs aren't the only crowd who may misunderstand renewable energy. Scientists can get it wrong too. I had lunch at that same conference with someone who said he had worked on the IPCC climate change reports. He bristled visibly when I said the IPCC had falsified climate data. After he calmed down, he admitted that the hacked emails showing IPCC officials lying were incriminating and wondered about the real story behind the controversy.
I have an emerging theory about policy makers who alter climate science data to fit a politically-driven narrative. The climate change movement may be a deliberately seeded alternative religion appealing to non-religious pseudo-rationalists. It is useful as an additional means of controlling human behavior, especially financial decisions. The decline of monotheism in the developed Western world means large numbers of people have escaped traditional social control mechanisms. Herding these non-sectarians into a green religion brings them back under elite control. Climate change advocates can be just as duplicitous as "pious fraud" theologians. New theology requires new funding mechanisms. Carbon credit trading is the modern version of tithing to churches in the Middles Ages. Financial institutions endorse carbon credit markets because fear-induced regulations will hand them rentier income.
Civilization needs mechanisms for social control because most humans, especially those on the left-hand tail of the IQ bell curve, would otherwise be out of control. Scientifically derived belief systems may prove more humane than supernatural systems. Global governance advocates have a big philosophical investment in anthropogenic theories of climate change. The central meme is that it's all our fault, just like original sin is all our fault. Both faults require atonement. Paying money to atone is an easy sell.
Renewable energy and cleantech innovation are worth pursuing even if none of these control systems' noble lies were necessary to govern mass behavior. I look forward to a time when noble lies will no longer suffice to maintain social cohesion. That will take a quantum leap in human evolution. I do not lie in my own life. The truth about renewable energy is that it is finally cost-competitive on distributed grids with hydrocarbons and does not produce carcinogenic emissions. That is sufficient justification for entrepreneurs to pursue success in cleantech.
I've attended enough conclaves for renewable energy entrepreneurs to understand that not all of them take their opportunities seriously. The majority of attendees at a recent conference I attended did not take notes during presentations. These entrepreneurs paid serious money to hear from experts. Perhaps they think attending a conference is enough to give their businesses a veneer of credibility without doing any work. Other attendees insisted on taking digital photos of the slide decks during presentations, even though all of the slides would be available for download on the conference's website. These anecdotal observations tell me that some founders are either unserious about success or just too stupid to succeed.
Entrepreneurs aren't the only crowd who may misunderstand renewable energy. Scientists can get it wrong too. I had lunch at that same conference with someone who said he had worked on the IPCC climate change reports. He bristled visibly when I said the IPCC had falsified climate data. After he calmed down, he admitted that the hacked emails showing IPCC officials lying were incriminating and wondered about the real story behind the controversy.
I have an emerging theory about policy makers who alter climate science data to fit a politically-driven narrative. The climate change movement may be a deliberately seeded alternative religion appealing to non-religious pseudo-rationalists. It is useful as an additional means of controlling human behavior, especially financial decisions. The decline of monotheism in the developed Western world means large numbers of people have escaped traditional social control mechanisms. Herding these non-sectarians into a green religion brings them back under elite control. Climate change advocates can be just as duplicitous as "pious fraud" theologians. New theology requires new funding mechanisms. Carbon credit trading is the modern version of tithing to churches in the Middles Ages. Financial institutions endorse carbon credit markets because fear-induced regulations will hand them rentier income.
Civilization needs mechanisms for social control because most humans, especially those on the left-hand tail of the IQ bell curve, would otherwise be out of control. Scientifically derived belief systems may prove more humane than supernatural systems. Global governance advocates have a big philosophical investment in anthropogenic theories of climate change. The central meme is that it's all our fault, just like original sin is all our fault. Both faults require atonement. Paying money to atone is an easy sell.
Renewable energy and cleantech innovation are worth pursuing even if none of these control systems' noble lies were necessary to govern mass behavior. I look forward to a time when noble lies will no longer suffice to maintain social cohesion. That will take a quantum leap in human evolution. I do not lie in my own life. The truth about renewable energy is that it is finally cost-competitive on distributed grids with hydrocarbons and does not produce carcinogenic emissions. That is sufficient justification for entrepreneurs to pursue success in cleantech.
Sunday, July 06, 2014
Alfidi Capital Supports Cleantech Open National Academy 2014
I am entering my second year as a mentor for startups in the Cleantech Open accelerator. I had a great experience last year and I'm taking things to a whole new level in 2014. This year's crop of startups competing for venture investments started off with last week's CTO National Academy West Coast, held at a hotel in Burlingame. I attended and snapped the pic below as proof. The presenters shared some great information that will help entrepreneurs build their businesses. Stand by for my synopsis.
Read The Rainforest: The Secret to Building the Next Silicon Valley to see how other locales can replicate a successful ecosystem fro entrepreneurs. T2 Venture Creation's contribution to this theory is an update to Alex Osterwalder's Business Model Canvas that policy makers can implement in their region. It's a terrific insight but startups aren't the ones who need to hear it, unless a founder is considering relocating to a more hospitable region. City chambers of commerce need to hear about this kind of rainforest if they're serious about attracting news businesses. Conscious Capitalism shows us the way.
The accelerator's alumni had good lessons to share about how market leaders protect themselves from competition. Leaders' disinclination to disrupt their own market positions by adopting startup tech means startups often pivot to different verticals. I'm pretty sure I've said before that third-party validation gives a new product some credibility. I think the most compelling data on cost savings will be confined to some cleantech verticals, specifically hardware, network services, and system retrofits. I was very pleased to hear CTO alumni mention the Federal Laboratory Consortium "user facilities" program, which can be an alternative to an SBIR proposal. I looked for a consolidated description of user facilities online and found several. Here's the National Nanotechnology Initiative's description of user facilities. Argonne National Laboratory has its own rules for user facilities. The alumni also mentioned DOE's NREL Industry Growth Forum, a pitchfest open to cleantech entrepreneurs.
Several CTO participants referenced SolarCity as a benchmark for a cleantech business model. My caveat to enthusiastic entrepreneurs is that Elon Musk helped start SolarCity and they became residential market leaders in California within one year. Those are two success factors most startups can't count on obtaining.
I've heard Steve Blank speak before and he did not disappoint at CTO's Academy. There's no need to repeat his wisdom here for those of us who have his book and read his blog (yeah, that would be me). Startups must iterate products using CustDev, make rapidly revocable changes to business plans that meet sales forecasts, and have advisory boards in addition to governance boards. The one thing entrepreneurs needed to hear most from Steve is that technology is not the same as a business. I tend to tune out prospective founders who talk up their tech without a financing strategy, a go-to-market plan, and the other things they need to run a business. Prequalifying prospects by need and budget is an art but I think a lot of tech-focused founders don't understand it. That's why Steve tells them to get out and talk to 100 customers.
The marketing experts on hand define "traction" as a repeatable sale, with dominant market position in a single segment, and multiple sales to customers within that segment. Folks, that's the only kind of traction that matters. I did not know that a marketing budget should follow the S-curve of product adoption, so it was important to hear that marketing spending matters most after the S-curve accelerates. I heard a lot at this Academy about the importance of picking exactly one market segment to dominate. The implication is that dominance comes after pivoting into a segment that has weak leaders who can't outspend the startup, or one that has secondary market "followers" who will adopt the startup as suppliers. I did the Crossing the Chasm positioning statement exercise last year for Alfidi Capital, and nothing has changed except that my genius is more compelling than ever. Startups need to do that exercise, plus the give-get analysis for partners one of the CTO organizers presented.
I had to choose one of three breakout sessions, and I am glad I chose to pursue sector knowledge of energy and transportation. I now have a firm appreciation for the difficulties facing battery technology startups. Batteries face fundamental limitations in material science. One key to a successful pivot is a controlled burn rate, hence the importance of conserving marketing spending until the path to segment dominance is obvious. The presenter on tidal power mentioned some renewable energy market studies at Altprofits but much of their data needs an update for more recent years.
Transportation is even more difficult to innovate because of slow decision cycles in public infrastructure. Tesla succeeded in addressing the automotive market, once they raised the huge amounts of capital it would take to break high barriers to entry. I see an emerging dichotomy in disrupting transportation. The shared economy in transportation supports high-density urban development, but advances in personal transit like autonomous driving support urban sprawl. Only one of these perspectives will win! I suspect it will be the shared economy, which has already found mass adoption among consumers with severely constrained incomes. The personal transit advances will likely remain confined to niche applications, like traffic in areas where pedestrians are rare.
The breakout session did identify some accelerators I had not noticed before. Prospect Silicon Valley, Transportation Technology Ventures, CalCharge, and SfunCube all want new companies to succeed in energy and transportation. I have every intention of steering startups I think will succeed into those accelerators.
Day two of the Academy brought me another new vocabulary term from a positioning expert: "brand audit." Do a Google search of that term and see all the pretty charts businesses use to boil such an audit down to a positioning statement with Moore's positioning exercise. Presentation tools like Prezi and Keynote offer alternatives to PowerPoint, and entrepreneurs need to know how to use them/
The VC guy giving the second day's keynote said VCs still want to disrupt the huge energy market but the source of cleantech investment is shifting to corporate venture arms and family offices. This money is chasing later-stage startups. I can infer that VCs are increasingly reluctant to commit to early-stage startups after having been burned in the past few years.
I had to reflect on my own business experience during the CustDev workshop. One marketing truism I learned in financial sales is to use open-ended questions to explore a prospect's need and then use closed-end questions to close the sale. That only works if people think you're trustworthy. Being trustworthy has little to do with being honest or competent. Inveterate liars are able to build trust immediately by manipulating people emotionally. The paradox of trust is the difficulty of building a trustworthy relationship by telling the truth. Most humans are uncomfortable with the truth. Lies and shared myths are more comfortable. I do not tolerate lying. I have had extreme difficulty building trust with people who don't want to hear the truth. That's why I'm an analyst who spews truth at the world. People who can't handle the truth won't benefit from my knowledge anyway.
The elevator pitch speaker mentioned Moore's positioning exercise once again. I hope you all see a pattern emerging here. There's no "right audience" that will immediately get the pitch. Any pitch must be able to hook a general audience of investors customers, and distribution partners. A public relations pitch is different; that one is specifically targeted to media outlets that will carry a story. Building a media contact list must be a prerequisite.
I have to pause to reflect once again. Startups carry tons of risk. De-risking tech means validating it with certification for industry standards and synching it with the business model's validation. In plain English, show data proving the tech works and show sales revenue proving customers want it. A risk matrix connecting the probability and severity of each business risk category is a template for management decisions that will mitigate each risk. Student interns are an underappreciated source of risk if they haven't signed IP assignment agreements giving tech ownership to the enterprise. Think twice before you accept a university professor's offer to let his students work for you for free so they can earn academic credit.
I won't restate the details of the financial modeling presentation. Suffice it to say that some expenses drive revenue and the business model canvas must show links from a startup's financial model to its business model. VCs have their own metrics in mind for customer acquisition costs and healthy internal ratios. The VCs on a startup's board will want to see more frequent budget presentations than the board of a public company. KPIs driving revenue and expenses are the only things worth tracking. I believe different market segments will have different metrics for costs. That's why it's better for a startup to focus on dominating one segment.
The block of instruction on sustainability would seem at first glance to be obviously mandatory for this crowd. That is not necessarily the case. Steve Blank is probably correct to say sustainability doesn't belong in startups. Here comes my own explanation of why that is true. It raises costs, limits supply chain flexibility, and slows decision speed. Big corporations can easily afford sustainability. Small companies selling premium goods to rich idiots (organic vegetables, artisan chocolate) can afford to make sustainability a selling point because their dumb customers have emotional investments in do-gooder business models. Otherwise, in data-driven startups that aim for market dominance among technically savvy buyers, sustainability destroys scalability!
The third day of this Academy started with important tips for startups who want to win the CTO competition and the larger competition for business success. I'm pretty sure that any entrepreneurs who don't take this seriously won't benefit from my mentorship. The morning VC keynote from one awesome investor named Bill Reichert revealed that VC decisions are just as laden with emotion as the decisions of ordinary investors. I guess all those associate analysts they employ to crunch numbers on segment metrics don't matter as much as whether a VC likes a startup's team. VCs fall in love with a team, its tech, and their vision, in that order. Garage Technology Ventures' "Getting to Wow" and Skillshare's "Art of the Start" curriculum offer tips for crafting this approach.
I'll make a few more original observations on corporate culture based on some material presented at this Academy. Culture is primarily the product of leadership behavior and visible rewards for desired results. Good management deliberately seeds rituals and symbols into a culture that will reinforce desired behavior. I think the concept of a corporate social contract is cute but seeing it violated breeds cynicism. Nothing drives productive people away faster than watching management behavior that contradicts stated organizational goals. Highly compensated labor will remain loyal to a paycheck only so long. Their compensation partly represents the network of clients and contacts they've built, and they take those books of business with them wherever they go.
The attorney panel covered the absolutely necessary legal housekeeping that entrepreneurs ignore at their peril. The lawyers said VC investments set periodic "cliffs" where founder shares will vest, incentivizing them to stay on board. They also warned about miscellaneous people who make minor contributions early on and then show up later as "stealth founders" demanding more equity. These people can derail growth with ownership disputes, and lawyers have strategies for minimizing their disruptions. I do not see the attorneys' point about creating SPVs for single projects somehow ring-fencing these early contributors. I actually think a simple employment agreement will suffice so long as the stealth founder disclaims any subsequent equity claims not covered in the agreement, but of course I'm not an attorney. Startups need to know what constitutes "qualified financing" and why it solves valuation questions early. I've blogged before about the decisions entrepreneurs face in filing their IP. The attorney panel discussed this in the context of the Patent Cooperation Treaty.
I was surprised to hear the lawyers say they think options and warrants are better for sweat equity investors than stock. Those provisions obviously require sweat equity participants to contribute cash in later rounds if they want to realize their rewards. They'd reserve stock for professional investors, not for people contributing in-kind services. One panelist thought a convertible note was okay for sweat equity contributors. Once again, these early agreements prevent the emergence of "stealth founders" later as the IPO approaches.
Some folks at this Academy shared some jarring lessons. One speaker thought a startup should raise the absolute minimum amount of capital needed to execute a project. That contradicts most conventional wisdom to ask for as much money as possible. Perhaps it depends on the stage of the product development life cycle where the startup is raising capital. Another presenter thinks stand-alone pitch decks (i.e., those sitting on the Web not used in a live pitch) are hard to get right. I think crowdfunding portals make these more common than ever and the good pitch decks will stand out. Another comment that VCs care about headcount was left hanging without context. I think headcount matters because it impacts burn rate. Compensation expenses will rise as startups hire more people and spend more on the free goodies common in VC-backed Silicon Valley startups. All of those gourmet food courts serving free arugula salads aren't free to investors. Even VCs track revenue per employee and costs per employee, and I expect them to probe founders on these metrics every quarter.
The final comments on funding were very instructive. Cambridge Associates restated their statistics on cleantech company performance. Like any other investment opportunity, it pays to buy cleantech when everything is cheap and competition is weak. Capital efficiency wins the day because scaling later requires more capital raising. There's plenty of venture money waiting to invest but they like "scaling" from sales growth. One speaker mentioned bank-hosted investment panels as a great opportunity to present to investors. I agree, but they are also expensive because a startup has to hire a good investment bank just to get access. The annual JP Morgan health care conference is a classic example. The startups presenting there already have lots of money from VCs, which is why they can afford to be there to present to even more VCs. I also agree with the speaker who said there are plenty of chambers of commerce between San Francisco and Silicon Valley that hold high-quality meetings all week long. Those venues are a lot cheaper for startups that can't afford to buy their way into a major investment bank's conference.
I blogged about my first attendance at the Cleantech Open National Academy in 2013. Once again, a lot of the participants' knowledge was proprietary and I have been very careful not to reveal details that attendees shared with me in private. Just focus on the common themes: pivot to a segment that allows a dominant position; conserve cash for capital efficiency; construct a detailed positioning statement; focus marketing spending after sales accelerate; protect IP and equity very early; sales fixes everything. Get your startup into an accelerator like the Cleantech Open if you want me as a mentor.
Read The Rainforest: The Secret to Building the Next Silicon Valley to see how other locales can replicate a successful ecosystem fro entrepreneurs. T2 Venture Creation's contribution to this theory is an update to Alex Osterwalder's Business Model Canvas that policy makers can implement in their region. It's a terrific insight but startups aren't the ones who need to hear it, unless a founder is considering relocating to a more hospitable region. City chambers of commerce need to hear about this kind of rainforest if they're serious about attracting news businesses. Conscious Capitalism shows us the way.
The accelerator's alumni had good lessons to share about how market leaders protect themselves from competition. Leaders' disinclination to disrupt their own market positions by adopting startup tech means startups often pivot to different verticals. I'm pretty sure I've said before that third-party validation gives a new product some credibility. I think the most compelling data on cost savings will be confined to some cleantech verticals, specifically hardware, network services, and system retrofits. I was very pleased to hear CTO alumni mention the Federal Laboratory Consortium "user facilities" program, which can be an alternative to an SBIR proposal. I looked for a consolidated description of user facilities online and found several. Here's the National Nanotechnology Initiative's description of user facilities. Argonne National Laboratory has its own rules for user facilities. The alumni also mentioned DOE's NREL Industry Growth Forum, a pitchfest open to cleantech entrepreneurs.
Several CTO participants referenced SolarCity as a benchmark for a cleantech business model. My caveat to enthusiastic entrepreneurs is that Elon Musk helped start SolarCity and they became residential market leaders in California within one year. Those are two success factors most startups can't count on obtaining.
I've heard Steve Blank speak before and he did not disappoint at CTO's Academy. There's no need to repeat his wisdom here for those of us who have his book and read his blog (yeah, that would be me). Startups must iterate products using CustDev, make rapidly revocable changes to business plans that meet sales forecasts, and have advisory boards in addition to governance boards. The one thing entrepreneurs needed to hear most from Steve is that technology is not the same as a business. I tend to tune out prospective founders who talk up their tech without a financing strategy, a go-to-market plan, and the other things they need to run a business. Prequalifying prospects by need and budget is an art but I think a lot of tech-focused founders don't understand it. That's why Steve tells them to get out and talk to 100 customers.
The marketing experts on hand define "traction" as a repeatable sale, with dominant market position in a single segment, and multiple sales to customers within that segment. Folks, that's the only kind of traction that matters. I did not know that a marketing budget should follow the S-curve of product adoption, so it was important to hear that marketing spending matters most after the S-curve accelerates. I heard a lot at this Academy about the importance of picking exactly one market segment to dominate. The implication is that dominance comes after pivoting into a segment that has weak leaders who can't outspend the startup, or one that has secondary market "followers" who will adopt the startup as suppliers. I did the Crossing the Chasm positioning statement exercise last year for Alfidi Capital, and nothing has changed except that my genius is more compelling than ever. Startups need to do that exercise, plus the give-get analysis for partners one of the CTO organizers presented.
I had to choose one of three breakout sessions, and I am glad I chose to pursue sector knowledge of energy and transportation. I now have a firm appreciation for the difficulties facing battery technology startups. Batteries face fundamental limitations in material science. One key to a successful pivot is a controlled burn rate, hence the importance of conserving marketing spending until the path to segment dominance is obvious. The presenter on tidal power mentioned some renewable energy market studies at Altprofits but much of their data needs an update for more recent years.
Transportation is even more difficult to innovate because of slow decision cycles in public infrastructure. Tesla succeeded in addressing the automotive market, once they raised the huge amounts of capital it would take to break high barriers to entry. I see an emerging dichotomy in disrupting transportation. The shared economy in transportation supports high-density urban development, but advances in personal transit like autonomous driving support urban sprawl. Only one of these perspectives will win! I suspect it will be the shared economy, which has already found mass adoption among consumers with severely constrained incomes. The personal transit advances will likely remain confined to niche applications, like traffic in areas where pedestrians are rare.
The breakout session did identify some accelerators I had not noticed before. Prospect Silicon Valley, Transportation Technology Ventures, CalCharge, and SfunCube all want new companies to succeed in energy and transportation. I have every intention of steering startups I think will succeed into those accelerators.
Day two of the Academy brought me another new vocabulary term from a positioning expert: "brand audit." Do a Google search of that term and see all the pretty charts businesses use to boil such an audit down to a positioning statement with Moore's positioning exercise. Presentation tools like Prezi and Keynote offer alternatives to PowerPoint, and entrepreneurs need to know how to use them/
The VC guy giving the second day's keynote said VCs still want to disrupt the huge energy market but the source of cleantech investment is shifting to corporate venture arms and family offices. This money is chasing later-stage startups. I can infer that VCs are increasingly reluctant to commit to early-stage startups after having been burned in the past few years.
I had to reflect on my own business experience during the CustDev workshop. One marketing truism I learned in financial sales is to use open-ended questions to explore a prospect's need and then use closed-end questions to close the sale. That only works if people think you're trustworthy. Being trustworthy has little to do with being honest or competent. Inveterate liars are able to build trust immediately by manipulating people emotionally. The paradox of trust is the difficulty of building a trustworthy relationship by telling the truth. Most humans are uncomfortable with the truth. Lies and shared myths are more comfortable. I do not tolerate lying. I have had extreme difficulty building trust with people who don't want to hear the truth. That's why I'm an analyst who spews truth at the world. People who can't handle the truth won't benefit from my knowledge anyway.
The elevator pitch speaker mentioned Moore's positioning exercise once again. I hope you all see a pattern emerging here. There's no "right audience" that will immediately get the pitch. Any pitch must be able to hook a general audience of investors customers, and distribution partners. A public relations pitch is different; that one is specifically targeted to media outlets that will carry a story. Building a media contact list must be a prerequisite.
I have to pause to reflect once again. Startups carry tons of risk. De-risking tech means validating it with certification for industry standards and synching it with the business model's validation. In plain English, show data proving the tech works and show sales revenue proving customers want it. A risk matrix connecting the probability and severity of each business risk category is a template for management decisions that will mitigate each risk. Student interns are an underappreciated source of risk if they haven't signed IP assignment agreements giving tech ownership to the enterprise. Think twice before you accept a university professor's offer to let his students work for you for free so they can earn academic credit.
I won't restate the details of the financial modeling presentation. Suffice it to say that some expenses drive revenue and the business model canvas must show links from a startup's financial model to its business model. VCs have their own metrics in mind for customer acquisition costs and healthy internal ratios. The VCs on a startup's board will want to see more frequent budget presentations than the board of a public company. KPIs driving revenue and expenses are the only things worth tracking. I believe different market segments will have different metrics for costs. That's why it's better for a startup to focus on dominating one segment.
The block of instruction on sustainability would seem at first glance to be obviously mandatory for this crowd. That is not necessarily the case. Steve Blank is probably correct to say sustainability doesn't belong in startups. Here comes my own explanation of why that is true. It raises costs, limits supply chain flexibility, and slows decision speed. Big corporations can easily afford sustainability. Small companies selling premium goods to rich idiots (organic vegetables, artisan chocolate) can afford to make sustainability a selling point because their dumb customers have emotional investments in do-gooder business models. Otherwise, in data-driven startups that aim for market dominance among technically savvy buyers, sustainability destroys scalability!
The third day of this Academy started with important tips for startups who want to win the CTO competition and the larger competition for business success. I'm pretty sure that any entrepreneurs who don't take this seriously won't benefit from my mentorship. The morning VC keynote from one awesome investor named Bill Reichert revealed that VC decisions are just as laden with emotion as the decisions of ordinary investors. I guess all those associate analysts they employ to crunch numbers on segment metrics don't matter as much as whether a VC likes a startup's team. VCs fall in love with a team, its tech, and their vision, in that order. Garage Technology Ventures' "Getting to Wow" and Skillshare's "Art of the Start" curriculum offer tips for crafting this approach.
I'll make a few more original observations on corporate culture based on some material presented at this Academy. Culture is primarily the product of leadership behavior and visible rewards for desired results. Good management deliberately seeds rituals and symbols into a culture that will reinforce desired behavior. I think the concept of a corporate social contract is cute but seeing it violated breeds cynicism. Nothing drives productive people away faster than watching management behavior that contradicts stated organizational goals. Highly compensated labor will remain loyal to a paycheck only so long. Their compensation partly represents the network of clients and contacts they've built, and they take those books of business with them wherever they go.
The attorney panel covered the absolutely necessary legal housekeeping that entrepreneurs ignore at their peril. The lawyers said VC investments set periodic "cliffs" where founder shares will vest, incentivizing them to stay on board. They also warned about miscellaneous people who make minor contributions early on and then show up later as "stealth founders" demanding more equity. These people can derail growth with ownership disputes, and lawyers have strategies for minimizing their disruptions. I do not see the attorneys' point about creating SPVs for single projects somehow ring-fencing these early contributors. I actually think a simple employment agreement will suffice so long as the stealth founder disclaims any subsequent equity claims not covered in the agreement, but of course I'm not an attorney. Startups need to know what constitutes "qualified financing" and why it solves valuation questions early. I've blogged before about the decisions entrepreneurs face in filing their IP. The attorney panel discussed this in the context of the Patent Cooperation Treaty.
I was surprised to hear the lawyers say they think options and warrants are better for sweat equity investors than stock. Those provisions obviously require sweat equity participants to contribute cash in later rounds if they want to realize their rewards. They'd reserve stock for professional investors, not for people contributing in-kind services. One panelist thought a convertible note was okay for sweat equity contributors. Once again, these early agreements prevent the emergence of "stealth founders" later as the IPO approaches.
Some folks at this Academy shared some jarring lessons. One speaker thought a startup should raise the absolute minimum amount of capital needed to execute a project. That contradicts most conventional wisdom to ask for as much money as possible. Perhaps it depends on the stage of the product development life cycle where the startup is raising capital. Another presenter thinks stand-alone pitch decks (i.e., those sitting on the Web not used in a live pitch) are hard to get right. I think crowdfunding portals make these more common than ever and the good pitch decks will stand out. Another comment that VCs care about headcount was left hanging without context. I think headcount matters because it impacts burn rate. Compensation expenses will rise as startups hire more people and spend more on the free goodies common in VC-backed Silicon Valley startups. All of those gourmet food courts serving free arugula salads aren't free to investors. Even VCs track revenue per employee and costs per employee, and I expect them to probe founders on these metrics every quarter.
The final comments on funding were very instructive. Cambridge Associates restated their statistics on cleantech company performance. Like any other investment opportunity, it pays to buy cleantech when everything is cheap and competition is weak. Capital efficiency wins the day because scaling later requires more capital raising. There's plenty of venture money waiting to invest but they like "scaling" from sales growth. One speaker mentioned bank-hosted investment panels as a great opportunity to present to investors. I agree, but they are also expensive because a startup has to hire a good investment bank just to get access. The annual JP Morgan health care conference is a classic example. The startups presenting there already have lots of money from VCs, which is why they can afford to be there to present to even more VCs. I also agree with the speaker who said there are plenty of chambers of commerce between San Francisco and Silicon Valley that hold high-quality meetings all week long. Those venues are a lot cheaper for startups that can't afford to buy their way into a major investment bank's conference.
I blogged about my first attendance at the Cleantech Open National Academy in 2013. Once again, a lot of the participants' knowledge was proprietary and I have been very careful not to reveal details that attendees shared with me in private. Just focus on the common themes: pivot to a segment that allows a dominant position; conserve cash for capital efficiency; construct a detailed positioning statement; focus marketing spending after sales accelerate; protect IP and equity very early; sales fixes everything. Get your startup into an accelerator like the Cleantech Open if you want me as a mentor.
Wednesday, June 18, 2014
Mobile Monday Knows Your Startup's Top Legal Mistakes
I attend Mobile Monday Silicon Valley events even though I don't work in the mobile sector's ecosystem. I keep my finger on the pulse of mobile action and meet the folks who put those fancy apps on your smartphone. The event this week was a chance for aspiring entrepreneurs to hear from attorneys on how not to make common legal errors. I did not make any errors when I wrote my nametag. It is truly a state of perfection.
The panel attorneys from Arent Fox and elsewhere handed out free wisdom like candy. There was also free candy available from the Tea Room where they infuse their chocolates with green tea, oolong tea, chai tea, and other stuff. I had my fill of chocolate and took the legal stuff seriously.
Following one's own privacy policy and assigning founder ownership stakes early are pretty basic things. The preponderance of lawyers with diverse specialties makes me think there's a disruptive opportunity for an online lawyer rating and referral service. Call it the attorney version of Yelp. It's too bad Yelp has such a poor reputation that even lawyers should be reluctant to use it.
I hate to admit that likability is a factor determining whether VCs invest in a startup. Investors believe in founders more than tech and will push them to pivot if Plan A doesn't work out. I learned long ago that physical attractiveness and pedigree are key to likability. The guest lecturer in my 2002 MBA venture capital class told us about how her high heels, fishnet stockings, and revealing cleavage helped her close several rounds of funding as a serial entrepreneur. I have told several female entrepreneurs that leveraging sexuality is a successful tactic. That's one reason many attractive women flock to me for wisdom, and other means of stimulation.
I liked hearing the tidbit about structuring owner and advisor equity stakes to align with those parties' fair time commitments. Linking the vesting of an advisor's shares to their fulfillment of agreed objectives is an acceptable practice. Setting term limits on an advisor's board participation is a helpful way around the discomfort of firing them for non-performance. I remember last year when a startup I was mentoring through an accelerator demanded that I violate the accelerator's rules on time commitments and complete all of their worksheets for them. I refused to violate the rules and the startup fired me as a mentor. They retained a former poet with no entrepreneurial experience as a mentor. That startup never made it through round one of the accelerator and the founder failed to commercialize any of his inventions. I don't think it's difficult at all for an advisor to perform well for an ethical entrepreneur.
I learned a little bit about the culture of Silicon Valley. The Valley ethos of "pay it forward" favors gratis introductions to build relationships. Any startup advisor who demands compensation in exchange for introductions to investors raises a red flag in the Valley. That alert must propagate through the Valley's networks like wildfire when it happens. I marvel at the persistence of some "pay-to-play" entities that knowingly flout this ethos. Their excuse is that many hopeless startups benefit from paid exposure to well-heeled groups even if no investment is forthcoming. The reality is that naive startups get fleeced by paying entry fees to pitch fests where no serious investors will be present in the audience.
Some top-drawer law firms do demand a cut in exchange for investor introductions, but they can get away with that because they have access to so many real venture investors who look to them for deal flow. I've also noticed that the top law firms will accept equity compensation from cash-poor startups. I say that's a fair way to comply with the Valley's culture of mutual helpfulness.
I'm not going to castigate the legal climate of California. I trust my state's business laws and I don't need a legal domicile in any other state that would subject me to an unfamiliar jurisdiction. I unwound my LLC structure and Alfidi Capital is now a sole proprietorship because incorporating just didn't benefit me. I don't know how California law treats employee non-agreements but plenty of Valley firms poach from each other constantly, so I suspect those agreements aren't worth much outside of something extraordinary. The attorneys present at this Mobile Monday panel viewed non-competes as a form of golden handcuffs enforceable during corporate acquisitions.
Startups can protect their IP with a "file patent, sign NDA" approach. Tech developers under contractual employment agreements may be tempted to leave early and take that tech to a competitor. Filing a patent on that tech keeps it with the startup that agreed to pay for its development. Requiring the contract engineer to sign an NDA clarifies their role as an employee hired to perform a specific service. The disclaimer language assigning IP ownership to the startup, and not to the employee, should be airtight. Don't ask me how to write it; I'm not an attorney.
I'll close with a video parody one of the attorneys liked. Check out an imaginary Nikola Tesla pitching Silicon Valley VCs. This never happened in history but some future super-genius will relate to the process. All of the Silicon Valley biases are there. Teams, lead investors, and pitch decks matter for any startup that isn't run by Nikola Tesla. Those self-absorbed VCs like teams. I don't like teams unless they leave me alone to do my thing. I think Nikola Tesla would have loved to speak at Mobile Monday.
Following one's own privacy policy and assigning founder ownership stakes early are pretty basic things. The preponderance of lawyers with diverse specialties makes me think there's a disruptive opportunity for an online lawyer rating and referral service. Call it the attorney version of Yelp. It's too bad Yelp has such a poor reputation that even lawyers should be reluctant to use it.
I hate to admit that likability is a factor determining whether VCs invest in a startup. Investors believe in founders more than tech and will push them to pivot if Plan A doesn't work out. I learned long ago that physical attractiveness and pedigree are key to likability. The guest lecturer in my 2002 MBA venture capital class told us about how her high heels, fishnet stockings, and revealing cleavage helped her close several rounds of funding as a serial entrepreneur. I have told several female entrepreneurs that leveraging sexuality is a successful tactic. That's one reason many attractive women flock to me for wisdom, and other means of stimulation.
I liked hearing the tidbit about structuring owner and advisor equity stakes to align with those parties' fair time commitments. Linking the vesting of an advisor's shares to their fulfillment of agreed objectives is an acceptable practice. Setting term limits on an advisor's board participation is a helpful way around the discomfort of firing them for non-performance. I remember last year when a startup I was mentoring through an accelerator demanded that I violate the accelerator's rules on time commitments and complete all of their worksheets for them. I refused to violate the rules and the startup fired me as a mentor. They retained a former poet with no entrepreneurial experience as a mentor. That startup never made it through round one of the accelerator and the founder failed to commercialize any of his inventions. I don't think it's difficult at all for an advisor to perform well for an ethical entrepreneur.
I learned a little bit about the culture of Silicon Valley. The Valley ethos of "pay it forward" favors gratis introductions to build relationships. Any startup advisor who demands compensation in exchange for introductions to investors raises a red flag in the Valley. That alert must propagate through the Valley's networks like wildfire when it happens. I marvel at the persistence of some "pay-to-play" entities that knowingly flout this ethos. Their excuse is that many hopeless startups benefit from paid exposure to well-heeled groups even if no investment is forthcoming. The reality is that naive startups get fleeced by paying entry fees to pitch fests where no serious investors will be present in the audience.
Some top-drawer law firms do demand a cut in exchange for investor introductions, but they can get away with that because they have access to so many real venture investors who look to them for deal flow. I've also noticed that the top law firms will accept equity compensation from cash-poor startups. I say that's a fair way to comply with the Valley's culture of mutual helpfulness.
I'm not going to castigate the legal climate of California. I trust my state's business laws and I don't need a legal domicile in any other state that would subject me to an unfamiliar jurisdiction. I unwound my LLC structure and Alfidi Capital is now a sole proprietorship because incorporating just didn't benefit me. I don't know how California law treats employee non-agreements but plenty of Valley firms poach from each other constantly, so I suspect those agreements aren't worth much outside of something extraordinary. The attorneys present at this Mobile Monday panel viewed non-competes as a form of golden handcuffs enforceable during corporate acquisitions.
Startups can protect their IP with a "file patent, sign NDA" approach. Tech developers under contractual employment agreements may be tempted to leave early and take that tech to a competitor. Filing a patent on that tech keeps it with the startup that agreed to pay for its development. Requiring the contract engineer to sign an NDA clarifies their role as an employee hired to perform a specific service. The disclaimer language assigning IP ownership to the startup, and not to the employee, should be airtight. Don't ask me how to write it; I'm not an attorney.
I'll close with a video parody one of the attorneys liked. Check out an imaginary Nikola Tesla pitching Silicon Valley VCs. This never happened in history but some future super-genius will relate to the process. All of the Silicon Valley biases are there. Teams, lead investors, and pitch decks matter for any startup that isn't run by Nikola Tesla. Those self-absorbed VCs like teams. I don't like teams unless they leave me alone to do my thing. I think Nikola Tesla would have loved to speak at Mobile Monday.
Sunday, March 30, 2014
Box Dev 2014 Flew Drone Cam For Cloud Enterprise
Box held their first ever developer conference last week. I dutifully attended Box Dev 2014 thanks to a hot ticket from Angel Launch. My favorite people always hook me up with multiple blessings. The free food was of course a major incentive. Breakfast bagels, Off the Grid lunch trucks, and spicy dinner entrees were enough to get me excited about hanging with cloud enterprise developers.
I sat very near the front for the early talks and I checked out the folks at the so-called "media" tables. They didn't look like they were banging out too many articles on the event or even taking notes. That's why I take these events seriously. Silicon Valley can always count on Alfidi Capital to pay attention when everyone else is falling down on the job. Slackers checking email and Facebook can hang out somewhere besides the media table.
The CEO of Box is quite a charming fellow. His cloudy socks and bright sneakers reminded me of Marc Benioff's fancy high-tops at Dreamforce 2013. Cloud entrepreneurs have a thing for wild wardrobes. Box is convinced that the addressable market for mobile information workers is larger than the market for people chained to a desktop. They have tailored their cloud enterprise offerings accordingly. I think Dropbox is an obvious competitor, but when I heard Dropbox's CEO discuss his company with Marc Benioff at Dreamforce 2013 I don't recall whether he spent a lot of time emphasizing mobile. These two box-related companies are going to fight it out over enterprise sharing.
Entrepreneurs also have a thing for wild stunts. Box's SVP for development came out to chat up their ability to connect the enterprise to all kinds of things. Lo and behold, Skycatch flew a drone out to the strains of Darth Vader's theme music and took a digital image of the audience. Drones now have an undeniable cool factor. The drone is in the photo just above. I was impressed that it could navigate the confined space of those curtains adjoining the stage without becoming unstable. Photos come with metadata that Box aims to capture. Image metadata has obvious uses in GIS for identifying frequent locations of system failures, sales calls, and other things that will drive enterprise revenue and costs.
Entrepreneurs can capture a few more lessons from Box's success than the implications of image metadata in GIS. Sales is still the most important traction metric, but efforts to grow a startup's numbers of third party developers, API downloads, and SDK uses are worth doing if they drive some buzz. Even page loads and white paper downloads generate metrics for startups desperate to hang their hat on something. Cloud platform providers should also think about having more than one pricing model. Pay per user (accommodates seat count changes), pay per time (accommodates seasonal surges), and pay per capacity (accommodates an expanding enterprise) all have their place somewhere.
The fireside chat with legendary tech star Ben Horowitz gifted the audience a free copy of his book The Hard Thing About Hard Things. I have to love a show that gives me both free food and free books. Ben liked Intel's approach to growing its market beyond memory. I did not know that the "cloud" term came from Bell Labs' technical descriptions of telecom connections. I thought some marketing pros dreamed it up. Ben's favored technique for a package software company (read Microsoft) to turn itself into a cloud service company (read Salesforce) is to acquire a cloud startup and promote that startup's founder to CEO of the acquirer. I don't know of any case where that succeeded, which is probably why Ben thinks such a transformation is so hard. I was very disappointed to hear that Ben was bullish on Bitcoin. His VC firm Andreessen Horowitz is making big bets on Bitcoin. I'm pretty sure they're going to lose it all, but I won't guess about the timetable.
Palantir's founder got some stage time with one of the hottest female tech journalists I've ever seen. War stories about PayPal are part of Silicon Valley's lore. I was more intrigued by the guy's pro-market opposition to rent control and desire to unskew the asymmetrically high compensation in the finance sector. This wasn't the first time I've heard entrepreneurs warn that large firms use regulatory capture to make business hard for startups. I wish I could get as excited as him about AI and VR but those things have been five years away for the last twenty years. The hype about AI and VR reminds me of the perpetual hype for nuclear fusion. It keeps the research money spigot stuck in the on position with no commercial success stories.
The VC panel tried to make some five year predictions for mobile, VR, and other enterprise tech but I don't think they got any farther into probable successes than the Palantir guy. They did make a worthwhile observation about how SaaS contracts favor short-duration pilot terms with cancellation options. That goes back to my own thoughts above about having a diverse pricing model. One client that cancels a short contract is welcome to consider a surge capacity contract. These VCs claimed that some startup types cluster in certain cities. That's true in niche sectors like agriculture, which is so far clustered in Northern California. I've noticed that many mobile and social startups pop up in all the big cities.
I don't think these VCs have many blind spots. They ought to see the disruption potential in capital-intensive verticals with long sales cycles. Startups can capture that by breaking up SaaS sales packages into piecemeal iterations. Salesforce did that with functional modules. Go back to my pricing model notes above and figure out where to start. The "grow fast" go-to-market strategy of consumer SaaS is not the same as the enterprise SaaS strategy of proving speed and agility in overcoming friction. The panelist VCs know this and startups should know it before they design for one market at the exclusion of another. The VCs measure the density of a SaaS solution's network connections by stickiness, virality, symmetry, and intraenterprise strength. In plain English, that means enterprise SaaS is more likely succeed with very dense connections that encourage KM collaboration. Know your monthly recurring revenue (MRR) and its churn before you pitch a VC, and don't pitch standing up when the VC asks for a sit-down conversation. The venture investing community can be finicky. I know they read my blog.
The CIO panel repeated a lot of things I've heard before at tech conferences. Every IT leader wants to jump on the innovation bandwagon because running a cost center is a career dead end. I did not know that the security landscape is evolving faster than the rest of the tech sector. Maybe all of the warnings about app security are finally turning into action. This poses good career opportunities for white hat hackers who can find and plug security holes.
Jerry Yang moderated the CEO panel. The other CEOs on the panel sounded like they really grok CustDev. They should get along well with the earlier CIOs who said they like startups that solve problems. These CEOs admonished the crowd not to sell something they don't already have; apparently a lot of techies need to be told that only established companies can announce vaporware. Their descriptions of reward systems that incentivize adherence to company values reminded me of things I've blogged before about corporate cultures. Folks need to know that the CEO's personality and the HR compensation structure will determine everything. That's Alfidi Capital wisdom. I agree with the CEOs that their job is to tell employees they're doing a good job, and that no one will tell the CEO whether they're effective. That is why KPIs tell CEOs whether they're succeeding.
I gave Jerry Yang a thumbs up as he walked out of the Fort Mason Pavilion after his panel. He's the one on the left in the photo above. I will always be grateful for his second stint running Yahoo because his resistance to Microsoft's buyout offer in 2008 opened a decent arbitrage opportunity for me. I made some money on the differential between the two companies' short-duration options even though the merger deal wasn't consummated. Thanks, Jerry.
The final fireside chat between legends Phil Libin and Steven Sinofsky was the stuff of legend. Techie culture supposedly encourages internal teams to borrow each others' ideas during the SDLC, but I wonder how many companies practice what they preach. Phil said in no uncertain terms that Evernote employees who make PowerPoint slides are unwelcome. That is stunning, and awesome. He correctly places slides in their sales role because he wants a higher cognitive model for engaging teamwork. His vision for workflows that transition seamlessly between mobile and desktop is the kind of sea change forcing packaged software sellers to move their products to the cloud. I do not agree with his prediction that the touchscreen interface will replace the keyboard/mouse setup simply because it's more comfortable for natural human hand movements. Knowledge workers still need to input data somehow and touchpad reticles can't do the whole job. Let me summarize this conversation's brilliant closer, driven by Facebook's acquisition of Oculus Rift: "Oculus is something you put on your FACE. It was bought by a company called FACE-book. We'll see thing like Box-FACE in the future." That had the audience rolling. Great stuff. You had to be there to see tech genius at work.
I have no idea what Box's platform does for clients. They put on a really high-powered developer conference where I scored free food and wisdom. Their CEO can mount a stage at a running leap, so maybe he ran track in high school. They should hold a hackathon at their next conference to motivate developers to build Box stuff. I'm impressed enough with everything to return next time.
I sat very near the front for the early talks and I checked out the folks at the so-called "media" tables. They didn't look like they were banging out too many articles on the event or even taking notes. That's why I take these events seriously. Silicon Valley can always count on Alfidi Capital to pay attention when everyone else is falling down on the job. Slackers checking email and Facebook can hang out somewhere besides the media table.
The CEO of Box is quite a charming fellow. His cloudy socks and bright sneakers reminded me of Marc Benioff's fancy high-tops at Dreamforce 2013. Cloud entrepreneurs have a thing for wild wardrobes. Box is convinced that the addressable market for mobile information workers is larger than the market for people chained to a desktop. They have tailored their cloud enterprise offerings accordingly. I think Dropbox is an obvious competitor, but when I heard Dropbox's CEO discuss his company with Marc Benioff at Dreamforce 2013 I don't recall whether he spent a lot of time emphasizing mobile. These two box-related companies are going to fight it out over enterprise sharing.
Entrepreneurs also have a thing for wild stunts. Box's SVP for development came out to chat up their ability to connect the enterprise to all kinds of things. Lo and behold, Skycatch flew a drone out to the strains of Darth Vader's theme music and took a digital image of the audience. Drones now have an undeniable cool factor. The drone is in the photo just above. I was impressed that it could navigate the confined space of those curtains adjoining the stage without becoming unstable. Photos come with metadata that Box aims to capture. Image metadata has obvious uses in GIS for identifying frequent locations of system failures, sales calls, and other things that will drive enterprise revenue and costs.
Entrepreneurs can capture a few more lessons from Box's success than the implications of image metadata in GIS. Sales is still the most important traction metric, but efforts to grow a startup's numbers of third party developers, API downloads, and SDK uses are worth doing if they drive some buzz. Even page loads and white paper downloads generate metrics for startups desperate to hang their hat on something. Cloud platform providers should also think about having more than one pricing model. Pay per user (accommodates seat count changes), pay per time (accommodates seasonal surges), and pay per capacity (accommodates an expanding enterprise) all have their place somewhere.
The fireside chat with legendary tech star Ben Horowitz gifted the audience a free copy of his book The Hard Thing About Hard Things. I have to love a show that gives me both free food and free books. Ben liked Intel's approach to growing its market beyond memory. I did not know that the "cloud" term came from Bell Labs' technical descriptions of telecom connections. I thought some marketing pros dreamed it up. Ben's favored technique for a package software company (read Microsoft) to turn itself into a cloud service company (read Salesforce) is to acquire a cloud startup and promote that startup's founder to CEO of the acquirer. I don't know of any case where that succeeded, which is probably why Ben thinks such a transformation is so hard. I was very disappointed to hear that Ben was bullish on Bitcoin. His VC firm Andreessen Horowitz is making big bets on Bitcoin. I'm pretty sure they're going to lose it all, but I won't guess about the timetable.
Palantir's founder got some stage time with one of the hottest female tech journalists I've ever seen. War stories about PayPal are part of Silicon Valley's lore. I was more intrigued by the guy's pro-market opposition to rent control and desire to unskew the asymmetrically high compensation in the finance sector. This wasn't the first time I've heard entrepreneurs warn that large firms use regulatory capture to make business hard for startups. I wish I could get as excited as him about AI and VR but those things have been five years away for the last twenty years. The hype about AI and VR reminds me of the perpetual hype for nuclear fusion. It keeps the research money spigot stuck in the on position with no commercial success stories.
The VC panel tried to make some five year predictions for mobile, VR, and other enterprise tech but I don't think they got any farther into probable successes than the Palantir guy. They did make a worthwhile observation about how SaaS contracts favor short-duration pilot terms with cancellation options. That goes back to my own thoughts above about having a diverse pricing model. One client that cancels a short contract is welcome to consider a surge capacity contract. These VCs claimed that some startup types cluster in certain cities. That's true in niche sectors like agriculture, which is so far clustered in Northern California. I've noticed that many mobile and social startups pop up in all the big cities.
I don't think these VCs have many blind spots. They ought to see the disruption potential in capital-intensive verticals with long sales cycles. Startups can capture that by breaking up SaaS sales packages into piecemeal iterations. Salesforce did that with functional modules. Go back to my pricing model notes above and figure out where to start. The "grow fast" go-to-market strategy of consumer SaaS is not the same as the enterprise SaaS strategy of proving speed and agility in overcoming friction. The panelist VCs know this and startups should know it before they design for one market at the exclusion of another. The VCs measure the density of a SaaS solution's network connections by stickiness, virality, symmetry, and intraenterprise strength. In plain English, that means enterprise SaaS is more likely succeed with very dense connections that encourage KM collaboration. Know your monthly recurring revenue (MRR) and its churn before you pitch a VC, and don't pitch standing up when the VC asks for a sit-down conversation. The venture investing community can be finicky. I know they read my blog.
The CIO panel repeated a lot of things I've heard before at tech conferences. Every IT leader wants to jump on the innovation bandwagon because running a cost center is a career dead end. I did not know that the security landscape is evolving faster than the rest of the tech sector. Maybe all of the warnings about app security are finally turning into action. This poses good career opportunities for white hat hackers who can find and plug security holes.
Jerry Yang moderated the CEO panel. The other CEOs on the panel sounded like they really grok CustDev. They should get along well with the earlier CIOs who said they like startups that solve problems. These CEOs admonished the crowd not to sell something they don't already have; apparently a lot of techies need to be told that only established companies can announce vaporware. Their descriptions of reward systems that incentivize adherence to company values reminded me of things I've blogged before about corporate cultures. Folks need to know that the CEO's personality and the HR compensation structure will determine everything. That's Alfidi Capital wisdom. I agree with the CEOs that their job is to tell employees they're doing a good job, and that no one will tell the CEO whether they're effective. That is why KPIs tell CEOs whether they're succeeding.
I gave Jerry Yang a thumbs up as he walked out of the Fort Mason Pavilion after his panel. He's the one on the left in the photo above. I will always be grateful for his second stint running Yahoo because his resistance to Microsoft's buyout offer in 2008 opened a decent arbitrage opportunity for me. I made some money on the differential between the two companies' short-duration options even though the merger deal wasn't consummated. Thanks, Jerry.
The final fireside chat between legends Phil Libin and Steven Sinofsky was the stuff of legend. Techie culture supposedly encourages internal teams to borrow each others' ideas during the SDLC, but I wonder how many companies practice what they preach. Phil said in no uncertain terms that Evernote employees who make PowerPoint slides are unwelcome. That is stunning, and awesome. He correctly places slides in their sales role because he wants a higher cognitive model for engaging teamwork. His vision for workflows that transition seamlessly between mobile and desktop is the kind of sea change forcing packaged software sellers to move their products to the cloud. I do not agree with his prediction that the touchscreen interface will replace the keyboard/mouse setup simply because it's more comfortable for natural human hand movements. Knowledge workers still need to input data somehow and touchpad reticles can't do the whole job. Let me summarize this conversation's brilliant closer, driven by Facebook's acquisition of Oculus Rift: "Oculus is something you put on your FACE. It was bought by a company called FACE-book. We'll see thing like Box-FACE in the future." That had the audience rolling. Great stuff. You had to be there to see tech genius at work.
I have no idea what Box's platform does for clients. They put on a really high-powered developer conference where I scored free food and wisdom. Their CEO can mount a stage at a running leap, so maybe he ran track in high school. They should hold a hackathon at their next conference to motivate developers to build Box stuff. I'm impressed enough with everything to return next time.
Monday, February 24, 2014
Financial Disruption Opportunities In Meatonomics
The Commonwealth Club presented one of its awesome Climate One shows today on meat. The author of Meatonomics and the head of the California Cattlemen's Association discussed the meat industry's effects on our climate. The science behind the contribution of livestock to global warming has been contentious ever since the UN FAO's 2006 report "Livestock's Long Shadow." The existence of a baseline of methane production from livestock is more important to the public than the amount of production. This invites regulation, which in turn opens the possibility of entrepreneurial disruption.
The livestock industry has tried to criminalize whistleblowing exposures of its dirtier practices by lobbying for ag-gag laws. When these laws succeed, our democracy is poorer for the lack of informed consent in what we consume. The Pew Commission on Industrial Farm Animal Production notes that the concentration of food processing in the hands of a few large companies creates unique food supply stresses that are a departure from much of American history. This evolution of the livestock industry invites entrepreneurial disruption from food producers who transparently display their livestock processing.
Organically raised meat is fashionable in places like the San Francisco Bay Area. This says little about its advantages in profitability or even sustainability. Like anything else dependent on cold chain logistics, the financial viability of organically raised meat may vary by geography and the cost of energy. The American Grassfed Association won't want to hear the Meatonomics evidence that grassfed cattle contribute measurably more methane to the atmosphere than cattle that are corn-fed in commercial breeding programs. This implies that innovations to capture methane and other greenhouse gases from cattle production, and convert them into energy that brings ranches close to net-zero energy use, will find a ready market in the organic sector. The rural land experts at the American Society of Farm Managers and Rural Appraisers (ASFMRA) have a large body of knowledge for types of land suited for agricultural production. Food entrepreneurs don't have to reinvent the wheel. The USDA-funded Agricultural Marketing Resource Center describes grants and data available to agribusiness entrepreneurs. Anyone going whole hog (pun intended) into organic production should do their market research first.
Sometimes Uncle Sam helps out agricultural innovation in small ways. The USDA's NRCS maintains an Environmental Quality Incentives Program (EQIP) that provides grants for producers' conservation projects. A truly free market approach would eliminate federal crop insurance, price support programs, and insurance for floodplain habitation. Those reforms would be much more appropriate targets for the livestock industry's lobbying than more ag-gag laws. One area that probably will not see reform is the existence of commodity checkoff programs that fund sector-wide promotions. Entrepreneurial producers of sustainable foods may as well use checkoffs to their advantage while they exist.
Meatonomics may not succeed in convincing Americans to reduce meat consumption, but cattle ranchers are amenable to arguments for more sustainable production. This allows room for ag-tech entrepreneurs. Understanding where to begin means knowing USDA's AWIC farm animal standards. Launching disruption means mastering USDA's AFSIC organic production practices. It takes more than a fortnight to connect the market data from the Economic Research Service and the National Agricultural Statistics Service but farmers and the American Farm Bureau Federation do it all the time. Food technology startups are the new darlings in the VC sector's eyes. They can attract funding if they disrupt the unsustainable practices of industrial farm animal production.
The livestock industry has tried to criminalize whistleblowing exposures of its dirtier practices by lobbying for ag-gag laws. When these laws succeed, our democracy is poorer for the lack of informed consent in what we consume. The Pew Commission on Industrial Farm Animal Production notes that the concentration of food processing in the hands of a few large companies creates unique food supply stresses that are a departure from much of American history. This evolution of the livestock industry invites entrepreneurial disruption from food producers who transparently display their livestock processing.
Organically raised meat is fashionable in places like the San Francisco Bay Area. This says little about its advantages in profitability or even sustainability. Like anything else dependent on cold chain logistics, the financial viability of organically raised meat may vary by geography and the cost of energy. The American Grassfed Association won't want to hear the Meatonomics evidence that grassfed cattle contribute measurably more methane to the atmosphere than cattle that are corn-fed in commercial breeding programs. This implies that innovations to capture methane and other greenhouse gases from cattle production, and convert them into energy that brings ranches close to net-zero energy use, will find a ready market in the organic sector. The rural land experts at the American Society of Farm Managers and Rural Appraisers (ASFMRA) have a large body of knowledge for types of land suited for agricultural production. Food entrepreneurs don't have to reinvent the wheel. The USDA-funded Agricultural Marketing Resource Center describes grants and data available to agribusiness entrepreneurs. Anyone going whole hog (pun intended) into organic production should do their market research first.
Sometimes Uncle Sam helps out agricultural innovation in small ways. The USDA's NRCS maintains an Environmental Quality Incentives Program (EQIP) that provides grants for producers' conservation projects. A truly free market approach would eliminate federal crop insurance, price support programs, and insurance for floodplain habitation. Those reforms would be much more appropriate targets for the livestock industry's lobbying than more ag-gag laws. One area that probably will not see reform is the existence of commodity checkoff programs that fund sector-wide promotions. Entrepreneurial producers of sustainable foods may as well use checkoffs to their advantage while they exist.
Meatonomics may not succeed in convincing Americans to reduce meat consumption, but cattle ranchers are amenable to arguments for more sustainable production. This allows room for ag-tech entrepreneurs. Understanding where to begin means knowing USDA's AWIC farm animal standards. Launching disruption means mastering USDA's AFSIC organic production practices. It takes more than a fortnight to connect the market data from the Economic Research Service and the National Agricultural Statistics Service but farmers and the American Farm Bureau Federation do it all the time. Food technology startups are the new darlings in the VC sector's eyes. They can attract funding if they disrupt the unsustainable practices of industrial farm animal production.
Thursday, February 13, 2014
Monday, January 13, 2014
Alfidi Capital Checks Out Brown University West Coast Accelerator 2014
I truly admire the Brown University Entrepreneurship Program. The university goes out of its way to connect student-run startups with investors and experts through its West Coast Accelerator program thanks to committed alumni. I blogged about their event last year and I had to attend this year to see what's new. I attended the accelerator's Innovation Summit yesterday and the caliber of experts they attracted was impressive.
Brown alum Jonathan Speed led off by thanking everyone for attending. This guy is relentlessly positive and he's always loaded with business tips. Jonathan's team recruited high-powered sponsorship from IDEO, Y Combinator, Singularity University, Salesforce.com Foundation, Presidio Graduate School, and others who offered their support. Our hosts at the de Young Museum let us know about their own Artist Fellows and Artist Studio programs for innovators they want to showcase. The Brown folks introduced this year's lineup of participating startups and remarked on how the good working relationship between Brown and the Rhode Island School of Design (RISD) has spawned ventures. I'm not familiar enough with the startups' business models to evaluate their chances for success, but I was particularly impressed that students were willing to tackle India's "last mile" of water infrastructure and Big Data sorting in real estate investment. Those are big market opportunities but startups will face tons of competition.
MIT's Jose Estabil was a featured speaker on the origins of innovation. He graphed university-driven innovations in a 2x2 matrix I've never seen before, where the quest for understanding competes with considerations for practical use. The ideal combination of both narratives gives us "Pasteur's quadrant." I suspect a similar dynamic plays out at government research laboratories, so I'll have to show that chart to folks at the Federal Laboratory Consortium if I can get myself invited to one of their tech transfer events. Jose made the case that entrepreneurial inclinations aren't as simple as a nature versus nurture debate and that innovation specialties can be taught much like health care disciplines. I like his emphasis on probabilistic thinking, which is teachable but runs against our programming from evolutionary biology. Studies in psychology and the social sciences have shown that most people don't incorporate more recent evidence into their presumptions (as Bayes' Theorem indicates is necessary for more accurate observations) because our programming biases us in favor of behaviors learned early. Fighting our genes' inertia is an entrepreneurial trait, or as Steve Jobs put it while relaunching Apple, we should "think different."
I liked Jose's practical tips for success. First, being crisp with the "grandmother rule" avoids overly long technical explanations and drives the point about how a startup's tech solves real problems. Second, knowing your audience means understanding that not all investors have the same "win" scenarios. Finally, recruiting partners with the "rule of three" means measuring your networking success by obtaining three or more commitments from a follow-up contact. Jose also presented Roy Rodenstein's matrix of startup funding from how2startup and I found it in Roy's "Overview of Startup Fundraising" deck at Slideshare.
Phizzle's Ben Davis spoke on Big Data's relationship with innovation. According to Ben, the holy grail of marketing is multi-service data aggregation leading to multi-channel delivery. The key to understanding how to make that happen will come from sentiment analysis. aka opinion mining. That's a new construct driving machine learning that will push marketing messages at us thanks to all of the likes we've clicked on Facebook and shares we've clicked on Tumbler. I don't know enough about sentiment analysis to apply it, but rest assured that hot marketing careers will attract computer scientists for the next few years. Google shows their developers how to build a sentiment analysis model with the Google Prediction API. IBM's Social Sentiment Index shows how analytics results are customizable. The good news is that we'll all get what we want before we even know we want it. The bad news is that the era of privacy that coincided roughly with the first and second waves of the Industrial Revolution is ending right now. Don't worry, we won't miss it once it's gone.
Intel's Brandon Barnett shared insights related to his work with the Business Innovation Factory and We The Data. I'll give him special props for helping military veterans transition to civilian careers through Intel's hiring programs, according to his Factory bio. My readers know how important that is to me. Brandon reminded us about threats to a startup from outside its ecosystem when a Copernican Revolution changes sociocultural values. These values are in flux today and we see their redefinition of ownership and productivity driving new business opportunities. I consider outsourcing and the sharing economy to be symptoms of these changes. Brandon cited a study by Bain and the WEF on personal data as a new asset class. I'm pretty sure I heard about this concept at one of the telecom conferences I attended last year, and I'm still trying to find a decent accounting rule treatment for assigning a financial valuation to data. I noticed this Harvard Business School blog mentioning Clayton Christensen's revelation that 95% of new product launches fail. This supports Brandon's contention that disruptive startups win when they launch something that doesn't play to existing competition. Check out Michael Raynor's book The Innovator's Manifesto for clues on how disruption engenders tremendous growth. I think entrepreneurs can adapt Alex Osterwalder's business model canvas along the lines of Brandon's ideas to create some game-changing global experiment.
I've got a few game-changing ideas of my own. My longtime readers know I'm optimistic about smart grid technology in energy use. Much of the tech I've read about so far focuses on embedded sensors that transmit machine log data to utilities. It is divorced from human-generated data in social media channels. The first technology to bridge the two worlds, while protecting user privacy, will see the world beating a path to its door. Some startup may have that answer.
I like that more startup accelerators are using emerging templates to reduce the errors entrepreneurs commit. The growing acceptance of lean startup approaches, Customer Development, technology readiness levels, investment readiness levels, and the business model canvas are having the same effect on startups that Moneyball had on the conventional wisdom governing baseball. Read what Steve Blank says about the relevance of a Moneyball approach. Relying on less formal knowledge is so 1990s. The Big Data era is formalizing paths to success and helping us avoid the things that don't work. Moving from data to analysis to decision making should raise the odds of success for high-risk enterprises. I believe Brown's West Coast Accelerator makes that happen.
Brown alum Jonathan Speed led off by thanking everyone for attending. This guy is relentlessly positive and he's always loaded with business tips. Jonathan's team recruited high-powered sponsorship from IDEO, Y Combinator, Singularity University, Salesforce.com Foundation, Presidio Graduate School, and others who offered their support. Our hosts at the de Young Museum let us know about their own Artist Fellows and Artist Studio programs for innovators they want to showcase. The Brown folks introduced this year's lineup of participating startups and remarked on how the good working relationship between Brown and the Rhode Island School of Design (RISD) has spawned ventures. I'm not familiar enough with the startups' business models to evaluate their chances for success, but I was particularly impressed that students were willing to tackle India's "last mile" of water infrastructure and Big Data sorting in real estate investment. Those are big market opportunities but startups will face tons of competition.
MIT's Jose Estabil was a featured speaker on the origins of innovation. He graphed university-driven innovations in a 2x2 matrix I've never seen before, where the quest for understanding competes with considerations for practical use. The ideal combination of both narratives gives us "Pasteur's quadrant." I suspect a similar dynamic plays out at government research laboratories, so I'll have to show that chart to folks at the Federal Laboratory Consortium if I can get myself invited to one of their tech transfer events. Jose made the case that entrepreneurial inclinations aren't as simple as a nature versus nurture debate and that innovation specialties can be taught much like health care disciplines. I like his emphasis on probabilistic thinking, which is teachable but runs against our programming from evolutionary biology. Studies in psychology and the social sciences have shown that most people don't incorporate more recent evidence into their presumptions (as Bayes' Theorem indicates is necessary for more accurate observations) because our programming biases us in favor of behaviors learned early. Fighting our genes' inertia is an entrepreneurial trait, or as Steve Jobs put it while relaunching Apple, we should "think different."
I liked Jose's practical tips for success. First, being crisp with the "grandmother rule" avoids overly long technical explanations and drives the point about how a startup's tech solves real problems. Second, knowing your audience means understanding that not all investors have the same "win" scenarios. Finally, recruiting partners with the "rule of three" means measuring your networking success by obtaining three or more commitments from a follow-up contact. Jose also presented Roy Rodenstein's matrix of startup funding from how2startup and I found it in Roy's "Overview of Startup Fundraising" deck at Slideshare.
Phizzle's Ben Davis spoke on Big Data's relationship with innovation. According to Ben, the holy grail of marketing is multi-service data aggregation leading to multi-channel delivery. The key to understanding how to make that happen will come from sentiment analysis. aka opinion mining. That's a new construct driving machine learning that will push marketing messages at us thanks to all of the likes we've clicked on Facebook and shares we've clicked on Tumbler. I don't know enough about sentiment analysis to apply it, but rest assured that hot marketing careers will attract computer scientists for the next few years. Google shows their developers how to build a sentiment analysis model with the Google Prediction API. IBM's Social Sentiment Index shows how analytics results are customizable. The good news is that we'll all get what we want before we even know we want it. The bad news is that the era of privacy that coincided roughly with the first and second waves of the Industrial Revolution is ending right now. Don't worry, we won't miss it once it's gone.
Intel's Brandon Barnett shared insights related to his work with the Business Innovation Factory and We The Data. I'll give him special props for helping military veterans transition to civilian careers through Intel's hiring programs, according to his Factory bio. My readers know how important that is to me. Brandon reminded us about threats to a startup from outside its ecosystem when a Copernican Revolution changes sociocultural values. These values are in flux today and we see their redefinition of ownership and productivity driving new business opportunities. I consider outsourcing and the sharing economy to be symptoms of these changes. Brandon cited a study by Bain and the WEF on personal data as a new asset class. I'm pretty sure I heard about this concept at one of the telecom conferences I attended last year, and I'm still trying to find a decent accounting rule treatment for assigning a financial valuation to data. I noticed this Harvard Business School blog mentioning Clayton Christensen's revelation that 95% of new product launches fail. This supports Brandon's contention that disruptive startups win when they launch something that doesn't play to existing competition. Check out Michael Raynor's book The Innovator's Manifesto for clues on how disruption engenders tremendous growth. I think entrepreneurs can adapt Alex Osterwalder's business model canvas along the lines of Brandon's ideas to create some game-changing global experiment.
I've got a few game-changing ideas of my own. My longtime readers know I'm optimistic about smart grid technology in energy use. Much of the tech I've read about so far focuses on embedded sensors that transmit machine log data to utilities. It is divorced from human-generated data in social media channels. The first technology to bridge the two worlds, while protecting user privacy, will see the world beating a path to its door. Some startup may have that answer.
I like that more startup accelerators are using emerging templates to reduce the errors entrepreneurs commit. The growing acceptance of lean startup approaches, Customer Development, technology readiness levels, investment readiness levels, and the business model canvas are having the same effect on startups that Moneyball had on the conventional wisdom governing baseball. Read what Steve Blank says about the relevance of a Moneyball approach. Relying on less formal knowledge is so 1990s. The Big Data era is formalizing paths to success and helping us avoid the things that don't work. Moving from data to analysis to decision making should raise the odds of success for high-risk enterprises. I believe Brown's West Coast Accelerator makes that happen.
Wednesday, January 01, 2014
Serious Entrepreneurial Knowledge for Patents, Financing, and Risk
I'd like to discuss some concepts I learned from attending a seminar last November in SVC Wireless' Advanced Entrepreneur Development Program. I learned a lot about how legal experts solve problems in patent portfolios, startup financing, and sources of risk (both internal and external) to an enterprise. I'm interspersing my own knowledge and observations with the concepts I picked up from the speakers, so none of this constitutes legal advice. Aspiring entrepreneurs reading my stuff are welcome to seek out Fenwick and West's Silicon Valley office in Mountain View for a more professional discussion of risk management.
TechCrunch and CB Insights track the growing influence of angels and seed round investors. I think the VC community is still getting over its reluctance to endorse crowdfunding but that is changing as more VCs establish a presence on crowdfunding portals. Seed-DB shows the growth of accelerators and their ability to attract seed capital to participating startups. Their list will never be complete because new accelerators pop up all the time. If this database survives the accelerator bubble it can help us avoid survivorship bias among surviving accelerators once we analyze those that fail.
Term sheets decide valuation, dilution, liquidation preferences, voting rights, and board structures. The largest corporate law firms have automated term sheet generators. I like the ones from Orrick and WSGR. Those are free because startups have to make their own term sheets in the early rounds. VCs will have their own term sheets in later rounds. Startups that don't hire attorneys to track their cap tables will have to do it themselves, and it is extremely important that they get it right the first time to avoid securities fraud. The SEC doesn't like business owners who misrepresent the ownership of their companies. Mapping cap tables to key employees tells those team members how much time they need to spend at the enterprise before their sweat equity options will vest. Series Seed has a very interesting take on a term sheet that has what appear to be crowdsourced edits.
I once saw a very lengthy due diligence checklist on the website of a major VC firm. That was back in 2007 but it stuck in my mind. Larger VCs that have the resources to commit eight-figure sums to a round will have a multi-page checklist. Smaller investors with less at stake can get away with simpler tools. I use Google searches and superior court website name queries to see if any entrepreneurs I meet have questionable backgrounds. That's how I uncovered the history of a Stolen Valor fraud who ripped off the San Francisco veterans' community. That stupid jerk continues to prospect rich suckers around town. Some people never learn anything.
Big law firms perform a public service by tracking VC funding trends. These are usually located in the "entrepreneurial services" section of the firms' websites. Every quarter entrepreneurs can see how much money is chasing the hot sectors. I'm pretty sure funding for mobile software will dry up after what I saw at many tech conferences in 2013. The world doesn't need another calendar app. Pitchbook also has data on PE valuations so entrepreneurs can see whether VC-funded companies have matured.
Enterprise IP ownership matters. Employment agreements matter. Prior employees can bring lawsuits for IP infringement if the IP they created isn't clearly assigned to the company with an employment agreement. Contractors who are specifically tasked to do something can end up owning what they create even if an assignment agreement governs their final product. Clean IP assignment in the eyes of the law happens under an employment agreement. Employment lawyers exist to review those agreements. I am so glad to be a sole proprietor because I don't ever have to understand employees' needs or try to solve their problems.
Startups with little cash will have to figure out creative ways to employ people with non-cash compensation, which to me means sweat equity. Entrepreneurs can do their part in building credibility with key employees by showing them where they stand on the cap table and by forgoing any deferred salary themselves. More mature startups (i.e., those with enough revenue to pay salaries) should use publicly available compensation figures to lure the expertise they need. That's part of the reason why Salary.com and Glassdoor exist.
I disagree with a lot of the conventional wisdom on patent protection. A lot of what lawyers say about the importance of filing patents just seems like a sales pitch for hiring them. Prior art can invalidate a patent and the wide availability of so much information through online searches makes it very difficult to write a patent that truly secures something original. USPTO's patent manual section 2128 paints a very broad definition of accessible prior art. Non-disclosure agreements (NDAs) covering trade secrets are probably more effective in keeping the lid on something proprietary, because a filed patent is immediately searchable and thus visible to competitors.
Fenwick and West helpfully provide a free guide to developing a patent strategy, with a separate patent checklist. Once again, a lot of this strikes me as a full-employment program for attorneys. The market ultimately decides whether a proprietary technology succeeds once its creators start executing their business plan. I must admit I like the use of military-type terms like sword, shield, guard, numbers, and counterstrike that I hear mentioned in discussions of patent strategy. It seems that some enterprises will protect a core tech by filing a decoy patent for some vaporware product just to throw a competitor off their trail. I think the best patent strategy is a proactive search for existing patents. That avoids duplicating something that already exists and thus inviting a lawsuit.
Legal risks come in three flavored layers: occurrence (when some adverse event actually happens), detection (an attorney or regulator discovers the action), and challenge (the likelihood of an injured party launching litigation). I think minimizing occurrence through good management is the easiest mitigation strategy, but my job is easy because I only have to manage myself and not a bunch of troublesome people. Copyright infringement damages are quite hefty and DMCA makes discovery inevitable in our digital society. Enterprises with in-house IP counsel like to keep them busy taking on infringers.
Startups that pivot from software to IoT devices are going to get hit with regulatory risk. Our society has spent the last two decades incentivizing coding over making, and the smartest job creators need to learn the craft of manufacturing all over again. A lot of coders have no clue how to get federal and state regulatory approval for new physical devices. Adding network connectivity means adding the FCC to an approval list. I question the legal strategy of playing for regulators to give up with repeated requests for delayed action. Regulators may not be as smart as those of us in the private sector but technology means they won't even need to be alive. Governments will eventually automate regulatory functions into BRMS engines that will automatically troll their responsible sectors for violations and send repeat notices demanding compliance. Soft law can become hard law but I think that happens when sufficient industry lobbying demands it. That's why startups can stay ahead of industry moves by joining relevant trade associations to watch pending regulatory changes.
FEMA's emergency preparedness guide for business includes a business impact analysis that is adaptable to non-emergency situations. I think it behooves entrepreneurs to graph all of their legal and regulatory risks on a chart that compares severity of impact to probability of occurrence. They can then design mitigation strategies for each source of risk, estimate the cost of mitigation, and then prioritize the solutions by either strategic importance or cost. That's not taught in MBA programs but I learned how to do that in the military. Startups don't think about insurance but policies for errors and omissions, or for directors and officers, may come in handy.
I'll make one final announcement about Alfidi Capital. I don't have to register a trademark to own it. I am the first and only user of the terms and logos for "Alfidi Capital" and I don't have to register anything. I can and will sue anyone who tries to use or register my marks. You can all see that I learn a ton of stuff from the free seminars I attend. I love using free information from the public domain.
Nota bene: Nothing in this article constitutes legal advice. I'm not telling anyone what to do here. I'm kicking these ideas around purely for my own enjoyment. None of the organizations mentioned above paid me any money at all to publish anything in this article.
TechCrunch and CB Insights track the growing influence of angels and seed round investors. I think the VC community is still getting over its reluctance to endorse crowdfunding but that is changing as more VCs establish a presence on crowdfunding portals. Seed-DB shows the growth of accelerators and their ability to attract seed capital to participating startups. Their list will never be complete because new accelerators pop up all the time. If this database survives the accelerator bubble it can help us avoid survivorship bias among surviving accelerators once we analyze those that fail.
Term sheets decide valuation, dilution, liquidation preferences, voting rights, and board structures. The largest corporate law firms have automated term sheet generators. I like the ones from Orrick and WSGR. Those are free because startups have to make their own term sheets in the early rounds. VCs will have their own term sheets in later rounds. Startups that don't hire attorneys to track their cap tables will have to do it themselves, and it is extremely important that they get it right the first time to avoid securities fraud. The SEC doesn't like business owners who misrepresent the ownership of their companies. Mapping cap tables to key employees tells those team members how much time they need to spend at the enterprise before their sweat equity options will vest. Series Seed has a very interesting take on a term sheet that has what appear to be crowdsourced edits.
I once saw a very lengthy due diligence checklist on the website of a major VC firm. That was back in 2007 but it stuck in my mind. Larger VCs that have the resources to commit eight-figure sums to a round will have a multi-page checklist. Smaller investors with less at stake can get away with simpler tools. I use Google searches and superior court website name queries to see if any entrepreneurs I meet have questionable backgrounds. That's how I uncovered the history of a Stolen Valor fraud who ripped off the San Francisco veterans' community. That stupid jerk continues to prospect rich suckers around town. Some people never learn anything.
Big law firms perform a public service by tracking VC funding trends. These are usually located in the "entrepreneurial services" section of the firms' websites. Every quarter entrepreneurs can see how much money is chasing the hot sectors. I'm pretty sure funding for mobile software will dry up after what I saw at many tech conferences in 2013. The world doesn't need another calendar app. Pitchbook also has data on PE valuations so entrepreneurs can see whether VC-funded companies have matured.
Enterprise IP ownership matters. Employment agreements matter. Prior employees can bring lawsuits for IP infringement if the IP they created isn't clearly assigned to the company with an employment agreement. Contractors who are specifically tasked to do something can end up owning what they create even if an assignment agreement governs their final product. Clean IP assignment in the eyes of the law happens under an employment agreement. Employment lawyers exist to review those agreements. I am so glad to be a sole proprietor because I don't ever have to understand employees' needs or try to solve their problems.
Startups with little cash will have to figure out creative ways to employ people with non-cash compensation, which to me means sweat equity. Entrepreneurs can do their part in building credibility with key employees by showing them where they stand on the cap table and by forgoing any deferred salary themselves. More mature startups (i.e., those with enough revenue to pay salaries) should use publicly available compensation figures to lure the expertise they need. That's part of the reason why Salary.com and Glassdoor exist.
I disagree with a lot of the conventional wisdom on patent protection. A lot of what lawyers say about the importance of filing patents just seems like a sales pitch for hiring them. Prior art can invalidate a patent and the wide availability of so much information through online searches makes it very difficult to write a patent that truly secures something original. USPTO's patent manual section 2128 paints a very broad definition of accessible prior art. Non-disclosure agreements (NDAs) covering trade secrets are probably more effective in keeping the lid on something proprietary, because a filed patent is immediately searchable and thus visible to competitors.
Fenwick and West helpfully provide a free guide to developing a patent strategy, with a separate patent checklist. Once again, a lot of this strikes me as a full-employment program for attorneys. The market ultimately decides whether a proprietary technology succeeds once its creators start executing their business plan. I must admit I like the use of military-type terms like sword, shield, guard, numbers, and counterstrike that I hear mentioned in discussions of patent strategy. It seems that some enterprises will protect a core tech by filing a decoy patent for some vaporware product just to throw a competitor off their trail. I think the best patent strategy is a proactive search for existing patents. That avoids duplicating something that already exists and thus inviting a lawsuit.
Legal risks come in three flavored layers: occurrence (when some adverse event actually happens), detection (an attorney or regulator discovers the action), and challenge (the likelihood of an injured party launching litigation). I think minimizing occurrence through good management is the easiest mitigation strategy, but my job is easy because I only have to manage myself and not a bunch of troublesome people. Copyright infringement damages are quite hefty and DMCA makes discovery inevitable in our digital society. Enterprises with in-house IP counsel like to keep them busy taking on infringers.
Startups that pivot from software to IoT devices are going to get hit with regulatory risk. Our society has spent the last two decades incentivizing coding over making, and the smartest job creators need to learn the craft of manufacturing all over again. A lot of coders have no clue how to get federal and state regulatory approval for new physical devices. Adding network connectivity means adding the FCC to an approval list. I question the legal strategy of playing for regulators to give up with repeated requests for delayed action. Regulators may not be as smart as those of us in the private sector but technology means they won't even need to be alive. Governments will eventually automate regulatory functions into BRMS engines that will automatically troll their responsible sectors for violations and send repeat notices demanding compliance. Soft law can become hard law but I think that happens when sufficient industry lobbying demands it. That's why startups can stay ahead of industry moves by joining relevant trade associations to watch pending regulatory changes.
FEMA's emergency preparedness guide for business includes a business impact analysis that is adaptable to non-emergency situations. I think it behooves entrepreneurs to graph all of their legal and regulatory risks on a chart that compares severity of impact to probability of occurrence. They can then design mitigation strategies for each source of risk, estimate the cost of mitigation, and then prioritize the solutions by either strategic importance or cost. That's not taught in MBA programs but I learned how to do that in the military. Startups don't think about insurance but policies for errors and omissions, or for directors and officers, may come in handy.
I'll make one final announcement about Alfidi Capital. I don't have to register a trademark to own it. I am the first and only user of the terms and logos for "Alfidi Capital" and I don't have to register anything. I can and will sue anyone who tries to use or register my marks. You can all see that I learn a ton of stuff from the free seminars I attend. I love using free information from the public domain.
Nota bene: Nothing in this article constitutes legal advice. I'm not telling anyone what to do here. I'm kicking these ideas around purely for my own enjoyment. None of the organizations mentioned above paid me any money at all to publish anything in this article.
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