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.