Friday, November 29, 2013

Angel Launch Launches Startup Venture Summit

I was privileged to attend Angel Launch's inaugural Startup Venture Summit last week in Silicon Valley.  It was the perfect counterpoint in many ways to my Dreamforce 2013 experience.  The Salesforce honchos told their entire ecosystem which markets they wanted to penetrate and laid out the details of their platform updates.  Entrepreneurs at the Startup Venture Summit met investors and partners who could help them gain traction with a big ERP ecosystem.

That layout is typical of what you'll find at eBay's Town Hall venue.  I can be a very aggressive networker when I have a mind to do so but I now find that people at these events seek me out.  I'm sure my listing as moderator of two panels helped attract people, along with my pinch hitting moderation of a third panel at the last minute!

The first VC panel shared their perspectives on top trends.  Stars from Khosla Ventures, Draper Nexus, and Garage Technology Ventures were on hand to let us know that startups need to show investors their "map of the world" on how they will realize their vision.  Paradoxically, VCs are more comfortable funding a business that doesn't immediately need the money if said business spends more time chasing customers than investors.  They like product demos that are installed with customers.  I must agree, because there are way too many shelf-ready products launching at venues like DEMO that never make it anywhere but the showroom.  VCs like it when startups figure out the minimal amount of capital they need to solve their biggest risks.  I just did a Google search of "overfunded startup" to see the frustrations investors have when startups waste money just because they can.  We hear the term "traction" a lot at startup events but the VCs know the term is a proxy for sales and other metrics tracking external acceptance.

The next panel on attracting angels and family funds featured some investors I've known for a while, and a new media outlet named BayLive.  These guys have been around the block enough to know that pitching them something they don't care about is a waste of their time.  This was not the first time I'd heard the startup investing "T's" cited all in one place:  Team, Tech, Traction, Timing, and Total addressable market.  I don't think the set of T's is standardized because different gurus tend to reword them based on their investing preferences.  These guys were big on networking because strong networks share visibility and investor referrals.  Many investors prefer referrals from their networks of attorneys, bankers, and consultants over cold contact from unknowns.  One panelist modestly admonished startups to take money from well-known investors first if they have the luxury of choosing their investors.  I should add that name recognition isn't the only thing prominent venture investors bring to the table and that some third-generation investors just do it because it's the "family business."  I should also add that some banks go out of their way to offer startups a beginner's guide to the early venture ecosystem.  I'm thinking Umpqua Bank, New Resource Bank, and Silicon Valley Bank would be good places for startups to keep their cash if they can't afford a pedigreed introduction at Goldman Sachs.

The moderator for the panel on valuation, acquisition, and expansion strategies was a no-show so I jumped up to offer the conference organizer my services.  I was already there as moderator for two other panels so I might as well save the morning.  "Luck is what happens when preparation meets opportunity" was Seneca's ancient wisdom.  Well, I was prepared when this opportunity presented itself.  Salil Pradhan and Bill Reichert reprised their roles from the VC panel and got more specific on how startups prove their worth as they grow.  They commented that early stage valuations are too high right now, and I was tempted to refer to the infamous Bin 38 "Angel Gate" meeting from a few years back that tried to hold valuations down.  Ron Conway had the correct reaction to that ill-conceived plan.  Anyway, I asked our panelists what they thought of valuation models like the market comparable method.  They thought it was more useful in later stages as the exit event looms.  Early stage valuation is different because it accounts for how much money it will take to build the company, and entrepreneurs need reasonable data points to show early investors.  They also thought expansion strategies must be sales-driven, with a sales capability ready on day one to do CustDev.  The point is not to lead investors into discussing valuation, but to get investors to commit to a business model that can move up a sliding scale of growth.  Experienced VCs have seen that customer acquisition costs are unique to each company and are typically costly in early stages.  Startups that don't need money have the luxury of saying no to investors.  I suspect those startups are rare.  Rarer still are those that can negotiate from positions of strength at an exit.  Our panel felt that taking a decent exit early may be preferable to facing more VC-backed startups later.  I got two things out of my hasty entry into this panel.  First, the ABC of "always be closing" recalls Guy Kawasaki's lesson from "The Art of Rainmaking" that sales fixes everything.  Two, your network is your net worth, and the ecosystem of partners a startup creates looks even better when a potential acquirer wants to merge it with their own ecosystem.

I moderated my next panel on Big Data, analytics, and business intelligence.  Our topic had a huge scope but the collection of VCs from Fung Capital USA, North Hill Ventures, and Sierra Ventures had it under control.  I'm pretty sure the entrepreneurs in the audience benefited from hearing that product-market fit, tenacity, and fast-scaling sales were some of the things VCs want to see when evaluating early startups.  Stuff like proof of concept and financial due diligence come into play in later rounds.  These VC think ERP pain points exist in Salesforce's mobile integration and in customer in-store behavior prior to the point of sale.  Take note of that, entrepreneurs.  If you can meet those data needs and bridge the gaps between technology platforms, you've got an audience.  They also think that focusing on unit economics early on is a key to scaling up later.  Your high customer churn rates will look bad to VCs so get sticky customers whose lifetime value is clearly measurable.  I asked the panel if any non-transaction ERP functions like HR and supply chain management allow for disruption.  They said that supply chain forecasting is often guesswork and could benefit from data that saves margins.  They key is assessing whether an organization's IT mindset is amenable to changing other non-transaction modules.  The VCs had very diverse opinions on the types of KPIs enterprises should use for Big Data; they mentioned revenue per employee (FTE) should be at least $400K, and that the customer lifetime value must compare favorably to the customer acquisition cost.  Payback period matters too, because VCs can't wait forever before they see a return on their investment.

Some more experienced angels from SF Angel and World Capital Market were up next to present strategies for funding pitches.  My biggest takeaway was the importance of an attention-grabbing story, because investors will want to know what's in it for them.  A lot of the lessons from Guy Kawasaki's 10/20/30 rule carry over as long as entrepreneurs remember that execution matters more than the idea.  I liked that they understood how a founder should be ready to surrender the CEO role or a majority stake if that is what will help the company make it.  Their list of speakers to study for good habits includes Steve Blank and Alexander Osterwalder.  I've heard Steve Blank talk and that guy knows his stuff.

My moderator duties continued with a third panel on enterprise platforms, cloud services, and infrastructure. This was another huge topic for serious investors from RWI Ventures, Second Century Ventures, Opus Capital, Scale Venture Partners, and IPV Capital.  Once again, product-market fit emerged as a key early investment criterion but the size of a startup's opportunity and its whether its revenue growth is sustainable also mattered.  One VC surprised me by mentioning LinkedIn as a due diligence tool.  See folks, your network and professional history don't escape notice.  I personally like to use the name query functions on superior court websites to see if someone I meet has a history of bankruptcies or lawsuits.  I've avoided several potential business partners who had sub-par legal histories.  Anyway, my panelists thought universal connectivity has validated Big Data and users want it accessible 24/7 anywhere.  The roadblock to full implementation is that enterprises don't yet fully trust the public cloud for sensitive data and still use hybrids.  The type of customer an enterprise faces determines whether security trumps performance in the inevitable tradeoff.  Cloud solutions offer value to SMBs that have few tools but startups need to make adoption easy if they want to disrupt big models.  The switching costs and key features of the big providers' walled gardens inhibit customer switches, so the pain points would have to be pretty high to induce a switch.  I asked our resident chip expert whether Moore's law still holds; he thought it was still valid because quantum computing and MEMS can extend chip life.  Ecosystems matter because a startup has to participate in a community of contributors to open source hardware (Arduino) and software (Hadoop) to make them all happy.  Companies can add valuable customized layers on top of open source tech.  The investors like freemium product distribution as a good way to qualify leads, and app marketplaces are a good way to evaluate the size of a platform's ecosystems.  I'll close this one by listing these investors' favorite accelerators:  Y Combinator, InnoSpring, and NAR REach.  There you go, folks.  I know my recollections of these panels can be jumbled in a stream of consciousness style, but buried in all that knowledge are hints you can use to move your startup forward.

I had time to listen to one more panel on investment opportunities in Europe after I had completed all of my moderating duties (three panels!) for the day.  Europort is the EU's vehicle for trade promotion in Silicon Valley.  The Bay Area Council Economic Institute is becoming ubiquitous at these types of events by noting that foreign R&D facilities are growing in the Bay Area.  This panel's observation that virtual trade missions are economical for SMBs mirrored what I heard the US Commercial Service say at a trade promotion event several months ago.  The Euro-folks cut the audience a break by noting that an entertainment budget for a trade mission to Europe wasn't nearly as important as one for a similar mission to Asia.  I guess those old legends about drinking Asian business executives under the table in some Tokyo karaoke bar are true.  I had to do some of that during my years in South Korea in the late 1990s for different reasons.  Perhaps I should have done a lot more.

I was impressed with this AngelLaunch event.  It attracted the right experts and hit the right themes.  Entrepreneurs need to hear this stuff as much as possible in many venues.  The endless pitchfest circuit is always a gauntlet but the addition of crowdfunding kicks fundraising into overdrive.  Tech startups need a 24/7 presence on multiple fundraising portals that leverages the feedback they get at these summits.  I am totally looking forward to similar events from iHollywood Forum.  I'm ready for my close-up.