Startup Whisperer

How to pickup an entrepreneur

Guy Kawasaki has a great post on the Sun Microsystems blog concerning how entrepreneurs can pickup VCs.

Since we're closing our Series B round, I thought I would provide my counter on how VCs can pickup entrepreneurs:

1. Investor:  Does not respond to an email or voicemail from the entrepreneur.  Entrepreneur:  has
a long memory and will not forget that -- very likely that firm wont be on the list to contact for the
next round or the entrepreneur's next company. 
2. Investor:  Provides clear and honest feedback (good or bad) about the company and its investment prospects.  Entrepreneur:  Appreciates the feedback and the detail and will want to build a relationship with that partner or firm.
3.  Investor says:  "I love you (the CEO) but not your business, why don't you work on one of my companies and/or I'll fund your next one."  Entrepreneur thinks: "How tacky.  Just say "yes" or "no" but don't try to turn the investment discussion into a recruiting session."
4.  Investor:  Provides quick feedback within 48 hours.  Entrepreneur:  respects the feedback (good or bad) and appreciates the timeliness-- no one's time is wasted. 
5. Investor: continues to stay in constant communication with entrepreneurs that he/she likes.  Entrepreneur:  Will clearly appreciate this and will want to talk to him/her.

This isn't rocket science.  Its about building relationships.  We entrepreneurs have long memories and if we're treated fairly, we will remember and will want to work with you.  I have personally found that the best VCs are the ones that do this.  They no that startups are hard.  They also know that dud ideas today could be tomorrow's Google.

Tootsie Roll Pops and Term Sheets

Remember that old commercial with the owl and the Tootsie Roll pop. The commercial asks the question how many bites does it take to get to center of a tootsie roll pop. Maybe its because I am near the end of my fundraising cycle, but this commercial had me wondering about how many VCs does it take to get to a term sheet?

Everyone has a different answer so I thought that I would ask several prominent entrepreneurs about their experiences.  I talked (emailed) to 7 startup CEOs in Seattle. The questions were:

1. Average number of VCs that you approached per each round for Series A: ___  Series B:___  Series C: ____  Series D and higher ____

2. Number of total term sheets that you received per round for Series A: ___  Series B:___  Series C: ____  Series D and higher ____

3. Total amount raised per round:  Series A: ___  Series B:___  Series C: ____  Series D and higher ____

4. Please indicate whether I can include your name/company in the blog post:  Y or N

Overall, the data was very interesting.  This is a small sample and data can be skewed.  The categories were across several different verticals: Internet consumer, enterprise, and B2B software.  Also, the results could be skewed because each CEO had different levels of experience as a CEO when they raised their rounds.   But, this is an interesting proxy for the reader.  The next time you see an entrepreneur smiling, seemingly without a care in the world, consider these numbers:

• 21 VCs for their Series A round
• 31 for the Series B round (hmmm, I wonder why everyone calls it the 'bitch' round)
• 23 for Series C - the numbers dropped amongst the group on average
• On average each round generated ~ 2 term sheets.  It was interesting to note that a couple of the respondents that had lower numbers of total VCs that they talked to actually had 3 term sheets per each round.  This implies that they must have been consistently harvesting relationships as well as focusing on quality conversations.
• I didn't publish how much they raised because there was a huge variance between the raise amounts per round.  The median amount raised was around $45M across the Series A, B, and C rounds.  There was one friend of mine in the D range that would have thrown the numbers way off (huge round).  I'd be interested to look at more data across more verticals.  I wouldn't be surprised to look at the timing of when the money was raised -- usually you don't want to raise money when you need to so that is a factor as well as general economic conditions.

Raising money is tough work.  You hear no 90% of the time.  The best operators play off like its not a big deal but it really isn't that fun.  It is a sales process and it is time consuming.  I want to thank the folks that contributed to this post (everyone asked to be anonymous). 

Venture Capital 2.0

I will be blogging some more about venture capital in the next couple of months.  In the meantime, there has been an increasingy bit of chatter about the changing world of Venture Capital.  Call it "Venture Capital 2.0."  The current model is not unlike the entertainment industry where returns occur within a firm's portfolio from a few winners.  In addition, just like the ever-growing squeeze of the middle-class in the US;  there is an ever-growing discrepancy between the returns from the "best" firms verses the also-rans. Michael Butler, chairman and CEO of investment bank Cascadia Capital, recently wrote an interesting piece called The Death and Re-Birth of Venture Capital.

If you ask ten different entrepreneurs about venture capital, you will bet many different responses about the importance of it (how much you should take and when, valuations, etc).  I do think that we'll continue to see the increasing trend of earlier stage companies bootstrapping their ventures.  It is just a lot cheaper to start a company with the advent of open source software and enterprise class Web services. I tend to think that the correct answer is actually better answered by the type of business it is and the style of the entrepreneur. 

So what do you think?  Are the top firms going to corner the market forcing the other firms to verticalize and specialize on a region or a category?   Are you running a venture that has opted to not take venture capital?

Do you have the tenacity of Abe Lincoln?

When my fellow entrepreneurs opine to me that starting a business is hard, I certainly agree but I also know that its some of the most rewarding work one will do.  The one thing that really defines success for entrepreneurs is tenacity.  Sure, you need a talented team, a great idea, and some luck. 

We all know the stories of the young wunderkind that hits on that great idea, lands on the cover of Fortune and amasses huge sums of money.  The reality is that it takes time and most of us entrepreneurs spend many years building real businesses.  The "quick" flips that you hear Joe Startup talk about at industry parties certainly happen but are not the way to build a real business (especially when quick flips don't happen that often or that fast). 

You've got to be tenacious about your companies vision and goal.  Whenever, I have had a tough day I think about Abraham Lincoln.  Man, you'd have to be tough to run this marathon of failures and/or absolutely believe that you are on the right track.  Check this out:

Failed in business - 1831
Lost election for legislature - 1832
Failed again in business - 1834
Sweetheart died - 1835
Nervous breakdown - 1836
Lost second political race - 1838
Defeated for Congress - 1843
Defeated for congress - 1846
Defeated for congress - 1848
Defeated for US Senate - 1855
Defeated for vice President - 1856
Defeated for US Senate - 1858
Elected President - 1860

So, the next time you feel like you are having a tough time.  Just look at the career timeline of
Honest Abe. 

Are you a Batman CEO or an Iron Man CEO?

Every CEO needs to be armed with his/her own set of essentials when he/she hits the road.  I wonder what Bruce Wayne or Tony Stark would take on a business trip?  Send me your ideas. 

btw, I am a huge Batman fan as evidenced by this picture.  I'll do anything for press and the Puget Sound
business Journal featured me in my full suit over a year ago. 

There is some really cool reading on the science around Iron Man.  It is a great read for all of us super hero geeks or gadget freaks.  Of course, in a battle I would have to say that Batman would win.  Here is a fun link that categorizes every Batman gadget ever used.  Trust me its very cool (but its older and needs to be updated for Batman Begins).

Brand Positioning Clift Notes

There are many great books on positioning.  Starting out in my career, I read a ton of Al Ries and David Aaker.  Aaker is really a guru on brand and has delivered many great books on branding over the years.  He's a Professor Emeritus at the Haas Business School.

A couple of books that I recommend are Aaker's "Building Strong Brands" and Al Ries', "The 22 Immutable Laws of Branding".  Each deliver very clear and concise perspectives on how to get your company and brand positioned in the minds of consumers. Really that is what its all about.  Its about developing a "Unique Sales Proposition" or USP as us marketing hipsters like to refer to it. 

There is a lot of work that goes into building clear and concise brands.  When developed successfully brands deliver much better return for investors and your company.  Imagine many different elements being integrated a concise positioning statement that clearly puts you the right market segment with a specific value that is different than your competition. 

Before you look at this attachment (Download sample_positioning_framework.pdf) , you have to do the pre-requisite work around identify the market opportunity, target market within the market, and customers wants-and-needs  assessments.  There isn't fluffy stuff.  You need to make sure that you've identified the right market and segment that is addressable by your product as well as being big enough to become a big business.  In other words, you could slice down a target market so small that considerable market share becomes too small to be interesting or its too limited in scope and it wont be defensible as more competition enters your space. 

That said, you want all of this work to culminate into a couple of different work products - the most important is the positioning statement and the marketing statement (the words you use for the elevator pitch).  They mean the same thing but the semantics are different because no investor would get excited about a "Market leader in long tail-based publishers using sophisticated yield management algorithms.  Huh? The doors will close in the elevator without any interest in your idea. 

Here are some quick steps to think about and a worksheet to help you deliver on some key points for your product or company.

• Positioning statement - you will typically want to tout a key aspect of what you can proverbially hang your hat on in terms of leadership (market share leadership, operational efficiency, or quality).  Each of these imply certain elements.  Market leadership is typically focused on in startups for the obvious reasons -- with scale you can grow topline revenues and margin.  Operational efficiency usually implies margins efficiency (e.g, JetBlue), and quality typically implies solid topline revenue with lower profit margins (e.g, Nordstrom).    

You want to pick a statement that truly reflects your operating strategy.  It has to be unique in that you can clearly define what you are good at in the right market space. 

• Positioning Proof Points - I always like to pull out three unique benefits that are proof points for your positioning.  They are the things that are unique only to you whether its the largest audience dedicated to women  or the best ROI for CRM;  pick out 3 things that define you.  Then pivot those areas by audience. Different audiences care about different things.  For example, suppliers don't care as much about  consumer differentiation, they typically care about conversion and ROI. 

Do the work upfront and you'll have a clearly differentiated product or company in the mind of consumers, suppliers, and investors.

Avoid Strategic Planning Thunderdome

In a startup you should be review your strategic opportunities at least quarterly.  In big companies, you'll start this planning in early Q3.  You'll then go thru several months of vetting and enter into what I call the "strategic planning thunderdome."  Fans of the Mad Max films will remember this reference, "two men enter, one man leave."  Please do not do this in a startup. It is not meant to be a political death match.  There is no internal posturing required.  This is a startup and you are trying to build a business.  Do not expect to have all of your operating variables known.  But, you should have a planning process that is lightweight yet thoughtful.

This is a useful template when you are sitting down with your team.  Download strategic_planning_diagnostic.pdf You are typically balancing how much you are optimizing for market share, revenue, or EBITDA.  Most likely as a startup with fast mover advantage you'll be optimizing for market share.  Think about customer, supplier, and your overall mix (share, revenue, or EBITDA) when assessing where you want to focus.  For example. at WidgetBucks, we're optimize for customer value over supplier.  In other words, we value share and product innovation to publishers and suppliers over working with direct brands.  We'll get there eventually but its not the right timing yet (its right when we're big enough where they will want to work with us).  Take your strategic assumptions thru your prioritization criteria and you'll quickly and easily get to the top 3-5 initiatives for your company. 

Remember to not stare at your proverbial navel too long.  Do this once a quarter.  Get your team involved, agree, and get moving.  Speed is your advantage but don't try to do too many things at the same time.

The Avis Rule

I have worked at big companies.  Once you get 4+ hops between you (the CEO or business leader) and the customer, you are generally spending more time managing people than actually being an active contributor.  Your job is to provide strategic direction, people development, and communication.  I always have to remind myself of that.  In a startup, you are constantly dumbfounded as to why you can't get these big, monolithic companies to move faster.  The reality is that they wont.  They are big.  There are some exceptions to this rule:

- The Avis Rule - guys that are in second place or lower do try harder;  I remember being the RealPlayer product manager in '96 and trying to get a distribution deal done with both Microsoft and Netscape.  Guess who was easier to do a deal with?  Microsoft.  #2 in the browser wars (at that time) was hungrier.

- Beers and Steak Dinners - if you've built a personal relationship with your business partner, you will get stuff done.  Its not Web 2.0 but its reality.  People like to connect with people. 

- Competitive situations - if you do a deal with another large company, the other company will either try to kill you or partner with you.  More likely they will try to buy you if they think they are going to lose you.  This is especially true with M&A events and VCs.  Alas, this is just human nature.

I have been running a totally ad hoc and un-scientific poll over the last 2 months around prospective customer response time.  Granted there are a lot of variables that weight the response time by personal relationships, but, here was a fun little exercise that I did. 

Average response time from initial email to email response:
Advertising network executive - 1-2 days
Major search engine - one week
Advertising agency - one week
E-commerce executive - one week
VC - under 1 hour
Brand - > 2 weeks
Internet startup - under an hour

What does this imply?  Faster companies move faster.  It is interesting to note that even big advertising network companies respond pretty quickly.  I tend to plan our business development path around engaging viral and word-of-mouth networks versus relying on big enterprise deals with big players.  Even when you close a big deal, its still hard to get the wallet share of revenue or impressions up in a timely manner.  If you need a big customers to move the needle, then pick off #2 or #3.  They usually need the help and haven't invested as much in R&D.  You could really fill a gap for them. 

Plan your time wisely, take a deep breath, and  understand that its hard work sitting thru staff meetings all day in a big company.

Open The Kimono

Your job as a leader in a company is to communicate.  Communication is key.  Especially in startups, when you are moving so quickly.  You need to make certain that your employees, investors, and the outside world is caught up with what is happening with the business.  I recommend a weekly update to your company and your Board.  This doesn't supplant the need to manage by walking around but it does enable you to scale in your communication effectiveness. 

Here is a sample flow of how a weekly communication should be framed:

<Your Company Name Here>

Summary
<Brief summary of the business highlights from the last week>

________________________________________

Performance:
•    Show week-over-week (WoW) performance in impressions, revenue, market share, or EBITDA.  Make sure to explain why there are variances to plan that are either positive or negative.   Also, make sure to include P&L summaries at the end of each month.  Your entire goal here is to not surprise your investors.
•    Examples: 

• April WoW gross revenue increased by 10%.
• MoM, April revenue increased by 24% over March.

P&L LINE     Jan  '08      Feb  '08      Mar  '08      Total
Net Revenue               
Total COGS               
Gross Profit               
OPERATING EXPENSES:               
Development               
TAC               
Other S&M               
General & Administration               
Total Expense               
Net Ordinary Income               

Operating initiative(s):
•    Note:  you want to include several of your agreed upon initiatives in you operating plan.  Examples:  marketing programs, market share programs, etc.

Sales/Business Development:
•    Include a high-level sales pipeline for B2B businesses and/or new deals that greatly impact your demand.  In addition, you will want to flag any account management issues that you have with current accounts. 

Product:
•    In technology, you will want to include updates on key features and product updates;  make sure to include projected ship dates versus actual ship dates

Spend no more than 30 minutes compiling your weekly update.  You will also want to cater your updates differently between the Board and your company.  You will be surprised how happy everyone is that you've been transparent about what is happening with your business.

Eat What You Shoot

I have a proclivity for enjoying (and remembering) random business quotes.    I used to get a kick out of the quotes from Jim Barkdsale (former Netscape and AT&T CEO).  He had a great way of stating the obvious but somehow making it seem profound.  A great example,
    "Of course, nothing happens until somebody sells something." - Jim Barksdale

I am a firm believer that startups CEOs should do their own business development.  It is hard to enough running a startup.  You are constantly juggling between hiring, raising money, providing strategic direction, washing bottles, or whatever.  But, nothing gets a CEO focused on closing business and feeling the progression of your business as building your own sales pipeline.  The immediate feedback you get with a win or a loss is immeasurable.  I know too many CEOs that manage their startups from spreadsheets.  There is no better way to get feedback on your product by being in the front lines.

When you in the early stage of your startup, you don't have the luxury of having a world-class product management team supporting you.  Being your own salesperson, allows you to think through the real challenges that your own salespeople may be having, too.  An additional benefit is that it makes you sharp.  It makes you smart as an operator and also as a strategic steward to your business.  It will expose things about what you are doing that you simply do not know or understand.  This is helpful for other areas of your operating repertoire like presenting to investors and your Board.  I ran across this great post from Josh Kopelman about how entrepreneurs have a hard time with admitting that they don't know something.  It is also good practice to be in-front of a customer that simply is smarter than you.  Be willing to say, "I don't know." 

I recently was in a sales situation with a large potential customer;  I was explaining how our contextual algorithm worked.  The SVP that I was talking to is a truly bright ad rock star and didn't want my "Fisher Price" explanation, he wanted to know some specific information on how well our system would work thru their ad server against their own Fortune 50 clients.  I got our CTO on the phone and we got the questions answered but it was a stark reminder that I needed to bone up on some technical information.  In the process, I started to think thru how we could better work with exchanges and ad networks by pre-tuning our system to specific clients.  It got me thinking like a brand marketer not just like a performance marketer.