I always enjoy reading the Venture Hacks - they're full of real life experience and practical advice. this is good advice for anyone who actually has a term sheert on the table - tougher to do these days but not impossible!
How to close a term sheet quickly
April 28th, 2009
How do you quickly turn a signed term sheet into cash in the bank? I’ve seen entrepreneurs do it in one week and I’ve seen them do it in four weeks.
How do you do it as quickly as possible?
Complete all business diligence before you sign a term sheet.
Set a firm closing date for your lawyers and justify it with something like, “I’m leaving the country on that date.”
Have a strong BATNA that keeps the other side moving quickly.
Listen to our podcast below for the details.
Audio: How to close a term sheet quickly (mp3)
Transcript
Nivi: I was talking to a couple of entrepreneurs today about how to expedite the closing process. Closing is when you go from a signed term sheet to money in the bank.
You are taking the signed term sheet, which is really just a letter of intent; it is for the most part non-binding, except for some confidentiality and no shop clauses, and turning it into a set of closing documents and money in the bank.
Closing can take anywhere from one week, to four weeks, to six weeks, depending on the complexity of the closing. There are some things that you just can’t speed up. There may be legal diligence that needs to be done that just can’t be expedited. It takes time to get it done.
Other than those issues that you can’t really speed up any faster than they are going, it is really up to the entrepreneur to set the timetable for closing. You can set things up so it gets done in a week and you can set things so it gets done in four weeks.
My preference is to get it done quickly for a few reasons. One: It just reduces the risk of not closing. Two: The faster you get it done the quicker you can get back to building your business. Three: It is just good experience and practice to move things forward during negotiations with your lawyers, with the other side’s lawyers, and with the other side.
There are three parts to closing quickly. One: What you do before you sign the term sheet. Two: After you sign a term sheet, what you do on your end to make sure things are moving quickly. Three: After you sign a term sheet what you do to make sure the other side is moving quickly.
Lets cover each of those parts.
Before you sign the term sheet
First lets talk about what you do before you sign a term sheet. Number one, most term sheets have a clause or term in there that indicates what the expected closing date is so your lawyers, the other side’s lawyers, and the other side can all work together towards that date.
My next suggestion is to conduct all your business diligence before you sign the term sheet so there is no business diligence left to do once you have signed the term sheet, during the closing process.
A lot of startups, I think, make the mistake of signing a term sheet too quickly before the investors have made the decision to really invest in the company. And they are just locking the company up with the term sheet, taking the company off the market so they can do their real diligence.
I would prefer to get all the business diligence done before I sign the term sheet. And we have a blog post on this, look it up. It is called, Complete business diligence before you sign a term sheet. We have also got another blog post called, Discuss your plans before signing a term sheet.
You also want to complete as much legal diligence as makes sense and is possible before you sign a term sheet as well. Why leave some legal risks? Why take yourself off the market and expose yourself to the risks that there is some legal issue that is going to trip up the financing. You want to get as much of that done before you sign the term sheet as well. You can find more info on that in the blog post. For most seed stage investment there is not a lot of complexity in your legal documents, whether it is IP or existing contracts, or what have you.
And top tier investors aren’t going to try to push business diligence to after a signed term sheet, in general. And if they do they are pretty up front about it and there is usually a good reason why. If you are working with a good firm you will get the business diligence done before you sign a term sheet anyway. And if you are a seed stage startup without a lot of complexity the legal work is pretty turnkey, which means that you can get it done quickly. And it is really up to you to determine how long it is going to take. These financing closings take as long as you let them take.
How do you expedite the closing process?
There are two parts to this. The first part is making sure your lawyers move quickly. The second part is making sure the other side moves quickly. The other side consists of the fund and their lawyers.
Moving quickly on your end
First lets talk about making sure your side moves quickly. You should understand that you are in a very high leverage position with respect to your lawyers. Your lawyers have taken the risk of working with you while you were an unfunded, seed state startup with a lot of risk that you would go out of business.
They perhaps deferred fees, or gave you reduced rates. And they took on the risks of working with you with the hopes that you would be come a venture backed startup and grow on to great success and do a lot of business with them. Which is exactly what is starting to happen to you at this point in time, you are getting venture backed. You have a signed term sheet.
Your lawyers are in a pretty precarious position. They have taken a lot of risks and that risk is starting to bear fruit. But they are in a position where they are not locked-in in any way. You are not locked-in with them so you can terminate them at any point in time still. If you terminate them they have taken a bunch of risks, worked for reduced rates, deferred fees, and they weren’t interested in working with you while you were a seed stage company. They just did that to build the relationship so that you could work with them when you were a venture back startup spending lots of money on legal fees. If you terminate them, they won’t be able to reap what they sowed. So they’re in a precarious position. You have a lot of leverage over them.
The first thing to do to expedite the closing process is talk to my lawyers and tell them — if you haven’t already, which hopefully you’ve done — is tell them you’re going to measure them in four ways. High quality advice, one. Two, the speed at which they get things done for you. Three, the number of errors in the work product. Four, cost.
Next, you tell your lawyers that you want to have an extremely firm date for the closing process. You can take the Steve Blank approach there, if you like, and tell them that prior to that date, if they need help you are available to help them out, but when that date comes you don’t want any excuses. Right? If they come at you with excuses by that date, it’s really a fireable offense.
The best way to justify an extremely firm date is with a justification. People like to have reasons for why you want them to do things. So come up with a reason why the closing needs to happen by such and such date. For example, “I’m going on vacation on that date, I’m having a baby, I’m leaving to go to a business meeting in a foreign country, we need the money to make a payment, we need the money to hire somebody.” Just get with your team, brainstorm a solid reason why it absolutely has to be closed by that date.
That’s the end of the story of making your side move quickly. Ultimately, it’s really in the interests of your lawyers to actually get it done quickly. We’ve seen too many law firms get fired after a closing because the closing wasn’t done quickly enough, there were too many errors and the entrepreneurs were not happy with it. I think it’s important and good for the law firm for you to communicate what your metrics for success are. Finally, your lawyers are not computers, right? They’re humans. So don’t take the tone of the discussion here too literally. You want to treat them with grace and humility and make them excited to work with you.
Making the other side move quickly
The other piece of the puzzle is getting the other side to move quickly on the closing and getting the other side’s lawyers to move quickly on the closing. In general, if you’re closing with a good firm, a good fund, they also want to close quickly. They don’t have any interest in a slow closing process. It’s just a question of getting their lawyer’s bandwidth.
The best advice I have to get the venture fund, or investors and their lawyers to move quickly, is to have a great BATNA. That’s really the only advice I have for you there. Preferably you’re in a situation where your BATNA has said something like, “If the other side blinks during the closing process, call me.” You want to have a BATNA that’s still chomping at the bit to invest in your company.
I’m not suggesting that you break any no shop clauses or anything like that, or confidentiality agreements that you have in your term sheet. What I am suggesting is prior to signing a term sheet, you want to have a BATNA that is chomping at the bit and will be interested in investing in your company even if the term sheet blows up after it’s signed. They’re chomping at the bit, like I said, they’ve said something like, “If the other side blinks during closing, call me.”
If they haven’t said something like that, you can say something like that. When you call the investors that you’re not going to take money from and tell them that you’re going to sign a term sheet with someone else, you can tell them, “If there’s any problem during the closing process you are going to be my first call. I’m not expecting any problems during the closing process, but in the odd case that there is a problem during closing and we decide to pull the plug, you are going to be my first call.”
So you’re setting things up to have a great alternative if things blow up during closing, and you’re providing yourself with an excuse. You’re saying, if things do blow up it’s not going to be them pulling the plug, it’s going to be me pulling the plug.
Take it away Kazumi.
Learn more about: Closing
Wednesday, April 29, 2009
Friday, April 24, 2009
the new business accelerator - is this the new model for seed VC?
A very interesting set of articles looking at the Y Combinator model and others in this rapidly emerging new sector. i thought the 3rd part was the most interesting - it's all definitely worth looking at if you're following this new emerging sector at all.
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 1)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 2)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 3)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 1)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 2)
New Venture Capital Models – The Rise of Business Accelerator Seed Funds (Part 3)
Wednesday, April 22, 2009
Is VC dead or is it just changing?
Interesting view on the VC industry courtsey of PEHub. At PE Hub they have been debating the merits of various new forms that VC may take - and have been doing it for some time. Worth a look.
http://www.pehub.com/37512/a-vc-revolution-in-the-making/
A VC Revolution In The Making
Posted on: April 19th, 2009
Last night I was invited to attend (thank you Brenda Chia, president AAAIM) the panel discussion “Market Changeup: Fund Management as a Business”, with Priya Mathur (Board director of CalPERS, California Public Employees’ Retirement System; one of the biggest investor in LPs and VC funds), David Fann (President & Chief Executive Officer, PCG Asset Management), Jan Le Chang (Vice President, Centinela Capital Partners), Phil Phleger (Morgan Lewis) and Bob Grady (Managing Director, Carlyle Ventures).
Compared to last year (written up here) the opinion of the people at the top of the innovation food chain was remarkably introspective:
Venture Capital is broken in some fundamental way.So much so that PCG predicts a revolution and a complete redesign of the Venture Capital model, with CalPERS nodding in agreement. CalPERS has gone from a yearly review of their asset allocation to quarterly and is currently debating new hybrid asset allocation models. That means less dependency on VC, and more on other vehicles. At the same time it is looking to reduce its relationships to only the top quartile VCs and getting out of the mid and bottom tier ones altogether. Annex funds, created to fill the void of fleeing late stage investors, are not found to be interesting as the majority of the funds currently in the pipeline will not produce positive returns anyway.
The sentiment from the fund managers was that they are literally “fed up with the rock star parties from VCs that don’t produce returns”. A conclusion clearly not received by all funds as we hear (from a trusted source) that general partners at a downtown Palo Alto walking-dead VC firm are still fetching $1M yearly salaries each, this year.
Everything is going to change.VC is not dead, but everything is under review. Fund managers are now for the first time talking to each other to fundamentally change the outcome of the game, regardless of the state of the economy. They all admitted that none of the widely used mathematical risk models prevented the precarious situation that now forces even CalPERS to pay close attention to its balance sheet and carefully manage available investment cash.
Limited Partners are looking for full transparency of the VC funds, going as far as wanting to see their balance sheets and who is holding their securities. Under the magnifying glass are VC management fees (no more 25%), splits, as well as exorbitant fees gained through stacked funds.
Co-investment with endowment funds are debated as they are too over-allocated in the equity vehicle to provide sustainability. We may see more monolithic investments in VC as a result.
All fund managers think cleantech and health-tech are interesting asset classes, but think the fleeing from technology is somewhat worrisome, they have become weary to over-allocate anywhere. Globally, no economy has proven to show any disparate advantage, the asian and china plays fell equally as hard as the US and elsewhere.
Moving forward, but not so fast.New VC funds will need to come up with a better story. The creators of the new VC funds will likely be experienced operators (just like at the start of technology evolution), removing the pure money managers who failed to add substantial value. They are expected to, as a team, have demonstrated an ability to warehouse deals before, deliver a unique value proposition to the investment climate and provide substantial value to the disruptive proposition of their portfolio companies.
CalPERS is eagerly looking to invest in emerging money managers who in due time (2-3 years expectancy to close a new fund) can expect their renewed support. So far, in the first quarter of 2009, 3 new funds have been invested in (compared to 47 all of last year) and no significant uptick is expected until this summer.
Clearly fund managers are licking their wounds, in a holding pattern for some positive news on the economy and perhaps some much needed regulation with regard to transparency. Rest assured, no fund manager seems to debate the value of venture capital as an investment vehicle, it is here to stay.
Help is on the way.The great outcome for entrepreneurs is that fund managers (as we predicted) from now on will pay close attention to the type, behavior and performance of VCs that allows entrepreneurs to build new companies more effectively.
Good times are coming.
Georges van Hoegaerden is the Managing Director at The Venture Company (www.venturecompany.com) in Palo Alto, focused on helping companies with technological and market insight, organizational development, team building, selling and managing growth. This post originally appeared on his blog.
http://www.pehub.com/37512/a-vc-revolution-in-the-making/
A VC Revolution In The Making
Posted on: April 19th, 2009
Last night I was invited to attend (thank you Brenda Chia, president AAAIM) the panel discussion “Market Changeup: Fund Management as a Business”, with Priya Mathur (Board director of CalPERS, California Public Employees’ Retirement System; one of the biggest investor in LPs and VC funds), David Fann (President & Chief Executive Officer, PCG Asset Management), Jan Le Chang (Vice President, Centinela Capital Partners), Phil Phleger (Morgan Lewis) and Bob Grady (Managing Director, Carlyle Ventures).
Compared to last year (written up here) the opinion of the people at the top of the innovation food chain was remarkably introspective:
Venture Capital is broken in some fundamental way.So much so that PCG predicts a revolution and a complete redesign of the Venture Capital model, with CalPERS nodding in agreement. CalPERS has gone from a yearly review of their asset allocation to quarterly and is currently debating new hybrid asset allocation models. That means less dependency on VC, and more on other vehicles. At the same time it is looking to reduce its relationships to only the top quartile VCs and getting out of the mid and bottom tier ones altogether. Annex funds, created to fill the void of fleeing late stage investors, are not found to be interesting as the majority of the funds currently in the pipeline will not produce positive returns anyway.
The sentiment from the fund managers was that they are literally “fed up with the rock star parties from VCs that don’t produce returns”. A conclusion clearly not received by all funds as we hear (from a trusted source) that general partners at a downtown Palo Alto walking-dead VC firm are still fetching $1M yearly salaries each, this year.
Everything is going to change.VC is not dead, but everything is under review. Fund managers are now for the first time talking to each other to fundamentally change the outcome of the game, regardless of the state of the economy. They all admitted that none of the widely used mathematical risk models prevented the precarious situation that now forces even CalPERS to pay close attention to its balance sheet and carefully manage available investment cash.
Limited Partners are looking for full transparency of the VC funds, going as far as wanting to see their balance sheets and who is holding their securities. Under the magnifying glass are VC management fees (no more 25%), splits, as well as exorbitant fees gained through stacked funds.
Co-investment with endowment funds are debated as they are too over-allocated in the equity vehicle to provide sustainability. We may see more monolithic investments in VC as a result.
All fund managers think cleantech and health-tech are interesting asset classes, but think the fleeing from technology is somewhat worrisome, they have become weary to over-allocate anywhere. Globally, no economy has proven to show any disparate advantage, the asian and china plays fell equally as hard as the US and elsewhere.
Moving forward, but not so fast.New VC funds will need to come up with a better story. The creators of the new VC funds will likely be experienced operators (just like at the start of technology evolution), removing the pure money managers who failed to add substantial value. They are expected to, as a team, have demonstrated an ability to warehouse deals before, deliver a unique value proposition to the investment climate and provide substantial value to the disruptive proposition of their portfolio companies.
CalPERS is eagerly looking to invest in emerging money managers who in due time (2-3 years expectancy to close a new fund) can expect their renewed support. So far, in the first quarter of 2009, 3 new funds have been invested in (compared to 47 all of last year) and no significant uptick is expected until this summer.
Clearly fund managers are licking their wounds, in a holding pattern for some positive news on the economy and perhaps some much needed regulation with regard to transparency. Rest assured, no fund manager seems to debate the value of venture capital as an investment vehicle, it is here to stay.
Help is on the way.The great outcome for entrepreneurs is that fund managers (as we predicted) from now on will pay close attention to the type, behavior and performance of VCs that allows entrepreneurs to build new companies more effectively.
Good times are coming.
Georges van Hoegaerden is the Managing Director at The Venture Company (www.venturecompany.com) in Palo Alto, focused on helping companies with technological and market insight, organizational development, team building, selling and managing growth. This post originally appeared on his blog.
Tuesday, April 21, 2009
Three Rules for Investing - Reid Hoffman
Good advice from our fried Reed Hoffman. He's a smart guy and an active investor - his views are worth listening to.
Reid Hoffman: My Rule of Three for Investing
by Guest Author on April 19, 2009
The guest post below was written by Reid Hoffman, CEO and Founder of LinkedIn. Reid, who’s been a prolific writer lately, is a strong advocate of entrepreneurism and the startup mentality. See his recent Washington Post article Let Our Start-Ups Bail Us Out, and the guest post he wrote here on TechCrunch, Stimulus 2.0: It’s The Startups, Stupid. Reid has recently appeared on Charlie Rose, and we had a chance to sit down with him earlier this year for a video interview as well. Reid is an investor in over 60 web ventures including Digg, Facebook, Flickr, Friendster, FunnyOrDie, Ning, Last.fm, Six Apart and Technorati. He is also a member of the nominating committee of our upcoming TechFellow Awards with Founders Fund.
TechCrunch and Founders Fund announced the first annual TechFellow Awards last week. This is a great time to stimulate investment and recognize and encourage tech entrepreneurs –starting up is cheaper, talent is more fluid, and people are more inclined to take calculated risks. If we can find more ways to spur investment, it will be good for the entrepreneur now and good for society later.
As a serial investor, I’ve enjoyed backing some good Web 2.0 companies, and it’s helped me develop a shortlist of criteria to cut the wheat from the chaff. After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will. Many entrepreneurs are product-focused, which leads them to pitch the brilliance of the product.
Others are money-minded, so they can over think the business plan. But neither of these approaches answer the first few questions I want to know as an investor:
1. How will you reach a massive audience?
In real estate the wisdom says “location, location, location.” In consumer Internet, think “distribution, distribution, distribution.” Thousands of products launch every month on hundreds of thousands of new Web pages. How does a company rise above the noise to attract massive discovery and adoption? YouTube did it through existing channels like MySpace, which already reached millions. Yelp had strong SEO, which found them a mass audience searching for restaurants and nightlife. Facebook’s University-centric approach landed them 80% adoption across a campus within 60 days of launch. Every Net entrepreneur should answer these questions: How do we get to one million users? Then how do we get to 10 million users? Then how will you get deep engagement by your users.
2. What is your unique value proposition?
The Internet space is crowded. A product needs to be sufficiently innovative to distinguish itself from the pack, but not so forward thinking as to alienate the user. Many entrepreneurs create incremental improvements on existing products. This can be big – Google revolutionized search when AOL and Yahoo! were presumed to have it locked up – but more often, the pitch sounds like, “It’s a dating site, but for senior citizens…” I want to see innovation that is categorically distinct from existing propositions. Digg lets users decide which headlines are newsworthy. Last.fm tracks music listening with an iTunes plugin and buffer great music discovery. Flickr enables users to share and tag photos in new ways.
3. Will your business be capital efficient?
This may be the most important of the three. Even if you have a mass audience and unique value prop, a business fails without cash flow. An initial round of financing is important, but how reliable is later financing? Will investors see the right elements in the next stage? Your product must scale intelligently – this is why I like software. A well-coded site can adapt to mass demand without its capital expenditures scaling out of control. A product like TypePad can grow to 10 million users without half the growing pains of a service like WebVan, the Web 1.0 startup that attempted to deliver groceries to users’ doorsteps. Try reaching Facebook scale with a service like that.
With these three elements in place – mass audience, unique value, stable funding – a startup has time to discover where it can make money. Few business plans ever pan out like their owners intend. PayPal started as a plan to beam payments between Palm Pilots. Google raised funds with a vision to capitalize on enterprise search and ended up in advertising. The formula is to build an audience with a great product – then secure enough funding to figure out how to make it pay.
Since I’m focused on building LinkedIn, I’m not currently investing in new projects, but I firmly believe now is the time to take smart risks as entrepreneurs and investors. I hope these criteria help startups make better pitches as they fundraise, and maybe even encourage others to take the plunge. Good ideas need good strategy to realize their potential, and if these criteria help a few more companies find capital, it’s a win for everyone.
Reid Hoffman is currently the CEO of LinkedIn.
Reid was LinkedIn’s founding CEO for the first four years before moving to his role as Chairman and President, Products in February 2007. While CEO, Reid… Learn More
Information provided by CrunchBase
Reid Hoffman: My Rule of Three for Investing
by Guest Author on April 19, 2009
The guest post below was written by Reid Hoffman, CEO and Founder of LinkedIn. Reid, who’s been a prolific writer lately, is a strong advocate of entrepreneurism and the startup mentality. See his recent Washington Post article Let Our Start-Ups Bail Us Out, and the guest post he wrote here on TechCrunch, Stimulus 2.0: It’s The Startups, Stupid. Reid has recently appeared on Charlie Rose, and we had a chance to sit down with him earlier this year for a video interview as well. Reid is an investor in over 60 web ventures including Digg, Facebook, Flickr, Friendster, FunnyOrDie, Ning, Last.fm, Six Apart and Technorati. He is also a member of the nominating committee of our upcoming TechFellow Awards with Founders Fund.
TechCrunch and Founders Fund announced the first annual TechFellow Awards last week. This is a great time to stimulate investment and recognize and encourage tech entrepreneurs –starting up is cheaper, talent is more fluid, and people are more inclined to take calculated risks. If we can find more ways to spur investment, it will be good for the entrepreneur now and good for society later.
As a serial investor, I’ve enjoyed backing some good Web 2.0 companies, and it’s helped me develop a shortlist of criteria to cut the wheat from the chaff. After five minutes of a pitch, I know if I’m not going to invest, and after 30 minutes to an hour, I generally know if I will. Many entrepreneurs are product-focused, which leads them to pitch the brilliance of the product.
Others are money-minded, so they can over think the business plan. But neither of these approaches answer the first few questions I want to know as an investor:
1. How will you reach a massive audience?
In real estate the wisdom says “location, location, location.” In consumer Internet, think “distribution, distribution, distribution.” Thousands of products launch every month on hundreds of thousands of new Web pages. How does a company rise above the noise to attract massive discovery and adoption? YouTube did it through existing channels like MySpace, which already reached millions. Yelp had strong SEO, which found them a mass audience searching for restaurants and nightlife. Facebook’s University-centric approach landed them 80% adoption across a campus within 60 days of launch. Every Net entrepreneur should answer these questions: How do we get to one million users? Then how do we get to 10 million users? Then how will you get deep engagement by your users.
2. What is your unique value proposition?
The Internet space is crowded. A product needs to be sufficiently innovative to distinguish itself from the pack, but not so forward thinking as to alienate the user. Many entrepreneurs create incremental improvements on existing products. This can be big – Google revolutionized search when AOL and Yahoo! were presumed to have it locked up – but more often, the pitch sounds like, “It’s a dating site, but for senior citizens…” I want to see innovation that is categorically distinct from existing propositions. Digg lets users decide which headlines are newsworthy. Last.fm tracks music listening with an iTunes plugin and buffer great music discovery. Flickr enables users to share and tag photos in new ways.
3. Will your business be capital efficient?
This may be the most important of the three. Even if you have a mass audience and unique value prop, a business fails without cash flow. An initial round of financing is important, but how reliable is later financing? Will investors see the right elements in the next stage? Your product must scale intelligently – this is why I like software. A well-coded site can adapt to mass demand without its capital expenditures scaling out of control. A product like TypePad can grow to 10 million users without half the growing pains of a service like WebVan, the Web 1.0 startup that attempted to deliver groceries to users’ doorsteps. Try reaching Facebook scale with a service like that.
With these three elements in place – mass audience, unique value, stable funding – a startup has time to discover where it can make money. Few business plans ever pan out like their owners intend. PayPal started as a plan to beam payments between Palm Pilots. Google raised funds with a vision to capitalize on enterprise search and ended up in advertising. The formula is to build an audience with a great product – then secure enough funding to figure out how to make it pay.
Since I’m focused on building LinkedIn, I’m not currently investing in new projects, but I firmly believe now is the time to take smart risks as entrepreneurs and investors. I hope these criteria help startups make better pitches as they fundraise, and maybe even encourage others to take the plunge. Good ideas need good strategy to realize their potential, and if these criteria help a few more companies find capital, it’s a win for everyone.
Reid Hoffman is currently the CEO of LinkedIn.
Reid was LinkedIn’s founding CEO for the first four years before moving to his role as Chairman and President, Products in February 2007. While CEO, Reid… Learn More
Information provided by CrunchBase
Friday, April 17, 2009
What's wrong with VC
One of the better articles on what's wrong with Venture Capital that's out there lately - and there certainly are alot of them out there!
April 16, 2009, 06:42 PM EST
Guest Column: Venture Capital Under Attack --> -->
(The following is a guest column from Adam Grosser, a general partner with Menlo Park, Calif.-based venture capital firm Foundation Capital, where he has worked since 2000. Foundation Capital last year raised a $750 million fund dedicated to information technology, consumer products and services and clean technology.)
By Adam Grosser
As a venture capitalist, my job is to find great ideas and turn them into great companies.
The journey to find these ideas has taken me from inventors’ basements, to obscure research labs, to, in one case, a smoky Milwaukee bowling alley renowned for its fried Twinkies. With a lot of hard work and a little luck that journey ends on the floor of a stock exchange, witnessing a company you helped build go public. It’s a helluva ride.
What concerns me today is that for too many venture capitalists – and thus too many innovators and small businesses – that ride is coming to an end.
That’s not just bad for venture capitalists. It’s bad for America.
Although venture capital represents just 0.02% of U.S. GDP, it is responsible for an astounding 10% of all U.S. jobs and 18% of U.S. revenues.
Over the last 35 years, one job was created in the U.S. for every $25,000 of venture capital invested. That’s about 10 times cheaper than even the most generous estimates of job creation in the recent federal stimulus package.
Yet today, fear is so dominant, credit so tight, and regulation so onerous that many promising startup companies can’t get off the ground.
Financial markets have little understanding or tolerance for “small-cap” companies, and without a robust public market, potential acquirers are either sitting on the sidelines or bottom-fishing. Few are willing to invest the seven to 10 years and $50 million to $100 million it takes to build a new company.
This general climate of fear is being compounded by three deep structural problems: 1) a dysfunctional technology investment-banking ecosystem; 2) diminishing support from institutional investors for VC-backed enterprises; and 3) an increasingly onerous and counterproductive regulatory environment.
In the 1990s, a vibrant group of four small investment banks helped usher in a golden age of technology investment. Alex Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities – dubbed “the Four Horsemen” – underwrote a large share of venture-backed IPOs, which averaged about 130 a year before the dot-com bubble, compared with about 40 a year since. Those full-service boutiques employed a large group of research analysts that offered potential investors insight into the latest technologies being developed, and held conferences where technology companies could present to these investors.
Today, the Four Horsemen have vanished and so has the sell-side ecosystem that brought venture-backed IPOs to the market. America has now gone two straight quarters without a venture-backed company completing an IPO - the first time that’s happened since we started keeping records in the 1970s.
The second most pressing problem facing VC is pension funds, endowments and other buy-side investors running out of patience with small growing companies. Historically, buy-siders have understood and accepted that most economic value isn’t created until five years after a company’s IPO. But now, a focus on unfavorable current EBITDA multiples is displacing long term predictors of success such as market size, growth rate, technology and management experience.
Finally, we have counterproductive regulations such as Sarbanes-Oxley, and could see two more regulatory measures that will end up undermining the already tenuous value proposition for venture capitalists and their limited partners.
The populist movement to punish short-term profit seekers from the hedge fund and private equity industry by treating carried interest from long-term capital gains as ordinary income would end up applying to venture capitalists as well. There is a material difference between what venture capital firms do and what many hedge funds and private equity firms do. We make a long-term commitment to company-building. They don’t. Equally misguided are signals from Treasury Secretary Timothy Geithner that venture capital firms may be forced to submit to onerous Securities and Exchange Commission reporting requirements to ensure that we aren’t “a threat to financial stability.” This demonstrates a gross misreading of what venture capitalists actually do. Many VC-backed companies don’t utilize any debt at all – meaning that if a company fails, the price is paid only by the immediate investors and employees. Unlike a hugely leveraged hedge fund deal gone bad, a failed VC startup causes minimal collateral damage to financial intermediaries. If we start regulating VCs like hedge funds, it will stymie the risk-taking needed to grow promising but unproven startup companies.
These problems threaten the very foundations of venture capital, and therefore the American economy. So what can we do?
First, build great companies. I can’t speak for the entire industry, but I can attest that my firm, Foundation Capital, has five to 10 companies mature enough to meet all the historical criteria to be successful standalone public companies. We need to keep proving our worth through our work, and telling our story.
Second, we need to find some brave, charismatic bankers to reconstitute an ecosystem that recognizes the needs of rapidly growing innovative companies. The VC community needs to proactively give lead-managed business to the equity-oriented boutiques that care about small companies and are willing to do small IPOs. If there aren’t enough such firms, we should seed some with VC money.
Third, we need to re-educate the buy-side as to why growth companies are so central to building long-term value. The entire system needs to respect the IPO buyer. We can’t rush companies to market that aren’t ready just because an IPO window is open. Offerings must be priced conservatively because as noted before, most of the returns of the VC hall of fame have occurred long after the IPO.
But we also need to appeal to a larger universe of buyers. As Frank Quattrone recently suggested, we should “cultivate a broad array of smaller institutional investors for whom 1% to 10% allocations of smaller ($25 million to $50 million) IPOs would matter.” This would allow potentially game-changing young companies to get the funding they need to reach their full potential.
Lastly, and critically, if the data I began with is as compelling to you as it is to me, we need to make sure every legislator and policy maker knows: Venture capital is how America wins.
This is how America will engineer solutions to energy independence. This is where the breakthroughs in life sciences will come from. This is where tens of thousands of skilled new jobs will be created. Venture capital is the engine of the innovation economy, and we are in grave danger of shutting it down for good.
April 16, 2009, 06:42 PM EST
Guest Column: Venture Capital Under Attack --> -->
(The following is a guest column from Adam Grosser, a general partner with Menlo Park, Calif.-based venture capital firm Foundation Capital, where he has worked since 2000. Foundation Capital last year raised a $750 million fund dedicated to information technology, consumer products and services and clean technology.)
By Adam Grosser
As a venture capitalist, my job is to find great ideas and turn them into great companies.
The journey to find these ideas has taken me from inventors’ basements, to obscure research labs, to, in one case, a smoky Milwaukee bowling alley renowned for its fried Twinkies. With a lot of hard work and a little luck that journey ends on the floor of a stock exchange, witnessing a company you helped build go public. It’s a helluva ride.
What concerns me today is that for too many venture capitalists – and thus too many innovators and small businesses – that ride is coming to an end.
That’s not just bad for venture capitalists. It’s bad for America.
Although venture capital represents just 0.02% of U.S. GDP, it is responsible for an astounding 10% of all U.S. jobs and 18% of U.S. revenues.
Over the last 35 years, one job was created in the U.S. for every $25,000 of venture capital invested. That’s about 10 times cheaper than even the most generous estimates of job creation in the recent federal stimulus package.
Yet today, fear is so dominant, credit so tight, and regulation so onerous that many promising startup companies can’t get off the ground.
Financial markets have little understanding or tolerance for “small-cap” companies, and without a robust public market, potential acquirers are either sitting on the sidelines or bottom-fishing. Few are willing to invest the seven to 10 years and $50 million to $100 million it takes to build a new company.
This general climate of fear is being compounded by three deep structural problems: 1) a dysfunctional technology investment-banking ecosystem; 2) diminishing support from institutional investors for VC-backed enterprises; and 3) an increasingly onerous and counterproductive regulatory environment.
In the 1990s, a vibrant group of four small investment banks helped usher in a golden age of technology investment. Alex Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities – dubbed “the Four Horsemen” – underwrote a large share of venture-backed IPOs, which averaged about 130 a year before the dot-com bubble, compared with about 40 a year since. Those full-service boutiques employed a large group of research analysts that offered potential investors insight into the latest technologies being developed, and held conferences where technology companies could present to these investors.
Today, the Four Horsemen have vanished and so has the sell-side ecosystem that brought venture-backed IPOs to the market. America has now gone two straight quarters without a venture-backed company completing an IPO - the first time that’s happened since we started keeping records in the 1970s.
The second most pressing problem facing VC is pension funds, endowments and other buy-side investors running out of patience with small growing companies. Historically, buy-siders have understood and accepted that most economic value isn’t created until five years after a company’s IPO. But now, a focus on unfavorable current EBITDA multiples is displacing long term predictors of success such as market size, growth rate, technology and management experience.
Finally, we have counterproductive regulations such as Sarbanes-Oxley, and could see two more regulatory measures that will end up undermining the already tenuous value proposition for venture capitalists and their limited partners.
The populist movement to punish short-term profit seekers from the hedge fund and private equity industry by treating carried interest from long-term capital gains as ordinary income would end up applying to venture capitalists as well. There is a material difference between what venture capital firms do and what many hedge funds and private equity firms do. We make a long-term commitment to company-building. They don’t. Equally misguided are signals from Treasury Secretary Timothy Geithner that venture capital firms may be forced to submit to onerous Securities and Exchange Commission reporting requirements to ensure that we aren’t “a threat to financial stability.” This demonstrates a gross misreading of what venture capitalists actually do. Many VC-backed companies don’t utilize any debt at all – meaning that if a company fails, the price is paid only by the immediate investors and employees. Unlike a hugely leveraged hedge fund deal gone bad, a failed VC startup causes minimal collateral damage to financial intermediaries. If we start regulating VCs like hedge funds, it will stymie the risk-taking needed to grow promising but unproven startup companies.
These problems threaten the very foundations of venture capital, and therefore the American economy. So what can we do?
First, build great companies. I can’t speak for the entire industry, but I can attest that my firm, Foundation Capital, has five to 10 companies mature enough to meet all the historical criteria to be successful standalone public companies. We need to keep proving our worth through our work, and telling our story.
Second, we need to find some brave, charismatic bankers to reconstitute an ecosystem that recognizes the needs of rapidly growing innovative companies. The VC community needs to proactively give lead-managed business to the equity-oriented boutiques that care about small companies and are willing to do small IPOs. If there aren’t enough such firms, we should seed some with VC money.
Third, we need to re-educate the buy-side as to why growth companies are so central to building long-term value. The entire system needs to respect the IPO buyer. We can’t rush companies to market that aren’t ready just because an IPO window is open. Offerings must be priced conservatively because as noted before, most of the returns of the VC hall of fame have occurred long after the IPO.
But we also need to appeal to a larger universe of buyers. As Frank Quattrone recently suggested, we should “cultivate a broad array of smaller institutional investors for whom 1% to 10% allocations of smaller ($25 million to $50 million) IPOs would matter.” This would allow potentially game-changing young companies to get the funding they need to reach their full potential.
Lastly, and critically, if the data I began with is as compelling to you as it is to me, we need to make sure every legislator and policy maker knows: Venture capital is how America wins.
This is how America will engineer solutions to energy independence. This is where the breakthroughs in life sciences will come from. This is where tens of thousands of skilled new jobs will be created. Venture capital is the engine of the innovation economy, and we are in grave danger of shutting it down for good.
Monday, April 13, 2009
Scary VC news...
Scary scary scary. Bad news for our industry. We'll see the fallout in a couple of years. I think its wrong for the NVCA to try to spin this on a positive note - honesty is the best policy. This is bad news...
VCs Find It Hard to Raise Money, Too
Stacey Higginbotham Monday, April 13, 2009 8:53 AM PT 1 comment
Some 40 venture funds raised $4.3 billion during the first quarter of 2009 — the fewest to raise money in a single quarter since the third quarter of 2003, according to data out today from the National Venture Capital Association. And while the dollar figure was 23 percent higher than the $3.5 billion raised in the fourth quarter of 2008, it was 40 percent less than the comparable three-month period a year ago, when 71 funds raised $7.12 billion.
The NVCA tried to put a positive spin on the news, stressing that established venture firms are still able to raise sizable chunks of cash. But the negatives are becoming harder to hide. One reason for the downturn in fundraising, as the industry group notes, is that many VCs are holding onto their cash while they wait for conditions to improve — a lemming-like mindset of cash conservation that won’t help pull us out of the downturn. The other reason is that the limited partners who fund venture capital firms are pinching their pennies as well.
Many of the large endowments that invest in the venture industry have seen their net worth plummet. As the stock market sinks in value, it means a greater proportion of their portfolios is now invested in riskier and less liquid investments such as venture capital funds. Since most endowments can only invest a certain percentage of their dollars in such risky assets, they need to pull back from their investments in the venture sector.
However, there’s another, more urgent reason we’ll be seeing fewer funds raise money over the next few years — the venture model is ailing. Exactly how is a matter of debate: Some argue there’s too much money in the space, and others argue that the days of huge IPOs are a thing of the past. One way or another, one result of this downturn could be the culling of venture firms that should have taken place after the dot-com bust. We may also see successful firms adapt their models to reflect both the smaller funding needs of many technology companies and the greater amount of time that lies between a startup and a blockbuster IPO. But like any culling or evolution, that’s going to hurt.
VCs Find It Hard to Raise Money, Too
Stacey Higginbotham Monday, April 13, 2009 8:53 AM PT 1 comment
Some 40 venture funds raised $4.3 billion during the first quarter of 2009 — the fewest to raise money in a single quarter since the third quarter of 2003, according to data out today from the National Venture Capital Association. And while the dollar figure was 23 percent higher than the $3.5 billion raised in the fourth quarter of 2008, it was 40 percent less than the comparable three-month period a year ago, when 71 funds raised $7.12 billion.
The NVCA tried to put a positive spin on the news, stressing that established venture firms are still able to raise sizable chunks of cash. But the negatives are becoming harder to hide. One reason for the downturn in fundraising, as the industry group notes, is that many VCs are holding onto their cash while they wait for conditions to improve — a lemming-like mindset of cash conservation that won’t help pull us out of the downturn. The other reason is that the limited partners who fund venture capital firms are pinching their pennies as well.
Many of the large endowments that invest in the venture industry have seen their net worth plummet. As the stock market sinks in value, it means a greater proportion of their portfolios is now invested in riskier and less liquid investments such as venture capital funds. Since most endowments can only invest a certain percentage of their dollars in such risky assets, they need to pull back from their investments in the venture sector.
However, there’s another, more urgent reason we’ll be seeing fewer funds raise money over the next few years — the venture model is ailing. Exactly how is a matter of debate: Some argue there’s too much money in the space, and others argue that the days of huge IPOs are a thing of the past. One way or another, one result of this downturn could be the culling of venture firms that should have taken place after the dot-com bust. We may also see successful firms adapt their models to reflect both the smaller funding needs of many technology companies and the greater amount of time that lies between a startup and a blockbuster IPO. But like any culling or evolution, that’s going to hurt.
10 reasons why startups fail
Great advice from our old friend Jolly. Its always important to take a few minutes to remind ourselves of this type of info. I happen to think #2 and #3 are super important.
VENTURE CAPITAL
Top Ten Reasons Why Startups Fail
--> Mohanjit Jolly, Executive Director, Draper Fisher Jurvetson India , March 17, 2009
Entrepreneurship is for those with thick skin, and sheer tenacity to be able to hear lots of “no’s” but not be deterred.
Jolly’s Volley
I think most people are aware of the fact that very few startups actually succeed. That’s precisely what makes entrepreneurs a rare breed. While knowing the risks, entrepreneurs follow their passion, try to change the world and hope for wealth creation for themselves and their shareholders.
It’s the potential for that proverbial home-run (or a Sixer in cricket talk, I suppose) that drives entrepreneurs, especially technology entrepreneurs (and VCs) to get into the game in the first place. But, for a combination of reasons both within and outside one’s control, startups fail. The list below is one compiled by my colleague, Tim Draper. I have tried to add my own little twist to give it some Indian spice and colour. So, here goes…
1. Startups run out of cash: One can argue whether that’s the cause or effect of failure. Often, startups are too optimistic about when their product is going to be accepted by the market (the hockey stick that entrepreneurs and investors alike often talk about). I used to have a professor in Business School who was a turnaround specialist hired by large corporates in the US to help float a sinking ship, and actually have them become viable businesses.
He used to say, “You can run out of wives and girlfriends, but make sure you never run out of cash”. I am guessing the latter will automatically lead to the former in most cases. But all kidding aside, there are often times when the entrepreneur is either too naive or highly arrogant when dealing with the situation of “cash crunch”.
On the former, he/she is busy fighting other fires that he/she simply underestimates how long the cash will last (sales cycles are longer than expected, for example, or customers are more price sensitive than expected). I have also seen the latter, where an entrepreneur will not heed advice from Board or advisors (in terms of cutting the burn) simply because he/she thinks that his/her company is too valuable for the investors and other stakeholders to let die, and they will bridge the company. More often than not, the entrepreneur is wrong. In tough times, investors become a lot more disciplined about letting go of the non-performers, and not putting good money after bad.
2. Founders don’t have complete faith in each other: They fight instead of delegate, trust and verify with each other. This is a tricky one. I often tell entrepreneurs that great companies are founded not by an individual but teams (2 or more founders). Gates and Allen, Brin and Page, Yang and Filo, Jobs and Wozniak and the list goes on and on…It’s important to have one founder who is outward facing (customer/business centric) while another who in inward facing (operations centric).
But there has to be a clear delineation in roles and responsibilities, so that one doesn’t step on the others’ toes. The other aspect is to be brutally honest with each other, and actually have a transition plan, as a company scales. More often than not, founders are great at the early stages of a company, but a new seasoned management team is necessary to scale the business to tens of millions of dollars and beyond in revenue.
Sometimes, I have found myself in situations where two buddies who founded the company are no longer capable of running the company (i.e. the company has grown to a size beyond what the founders can handle). The truly remarkable founders/CEOs are ones who realise when they are no longer right people to be at the helm of the company.
They often step aside, or take on a role of a chairman/evangelist and let a more seasoned CEO steer the company forward. But for a variety of reasons, ranging from “giving up control”, to “title creep (still needing to be CxO)”, to sheer ego, founders end up in a tiff with each other or with the Board. Let me give you a specific example. There is a company where two co-founders (Founders A and B, close friends for many years) started a company with operations and market in India, while they were still in the US. The plan was for them to move to India. But for a variety of personal reasons, Founder A simply could not make the move to India. Founder B, as a result, ended up doing most of the work.
Even though founder A was no longer contributing, founder B did want to let him go due to the long personal friendship. Founder B, as a Board member, has a fiduciary responsibility to do the right thing, and let his buddy go (since he was no longer actively contributing to the company). The unvested equity held by founder A was no longer working towards creating value for the company. Founders often have a hard time choosing between a fiduciarily responsible decision and an emotional personal relationship. By having a detailed conversation around roles and transitions at the onset, founders (who are also good friends) can avoid awkward situations downstream.
3. CEOs hire weak team members: This is partially related to the previous point. Strong CEOs sometimes try to carry everyone with them rather than hiring people who stand up on their own. Again, there may be team members who are dear friends, but may actually not be the best person for the position. CEOs need to do what’s optimum for the company and the shareholders, not their friends or their ego.
Most successful CEOs will utter the following words “always surround yourself with people smarter than you”. Again, if entrepreneurs are honest with themselves and actually adhere to that mantra, they will build a strong company, and an equally strong culture of hiring better and hiring smarter. Many CEOs or executives, due to either ignorance or arrogance, end up settling for weaker team members.
The reason for hiring strong team members is simply that they will question the status quo, and the traditional way of thinking. They will be a resource for the CEO and the Board to help determine the company’s overall strategy. For startups with constrained resources and continuous threat from incumbents, there needs to be a team with a combination of smart out –of-the-box thinking/questioning, scrappiness and uncompromising tenacity. Often founders, who are junior from an experience standpoint, do not want to let go of a lofty title. My recommendation is that one would often be much better off working at a director or manager level for a seasoned VP or CxO from the outside, than try to learn on the job as a CxO or SVP themselves.
4. They want to do too much: Usually, successful start-ups figure out a narrow niche that they can dominate and then expand from there. This is where the bowling pin analogy is helpful. Often entrepreneurs face a dilemma of “appearing big enough” to a VC especially during a fundraising discussion, but at the same time being able to focus on a particular segment of a market. There is also a balance between being flexible/nimble as a startup, but at the same time not looking completely lost or defocused.
Often, startups have to experiment and try a variety of approaches to products, channels, business models, but they also have to make sure that there is discipline and analysis behind the decision making. Bottom line: stay focused, become dominant is a very targeted segment or vertical, and with that success as foundation, expand into adjacent areas. Entrepreneurs should paint a long term big picture, in terms of a game changing vision, but be laser focused in their execution, especially when starting up. Admittedly, this is easier said than done (as with most of my articles).
5. They go after too small a market: Selling ice to Eskimos is a trivial but poignant example. You may have the best customised ice sculptures, but it doesn’t mean a whole lot if the market is either too small or non-existent. This is often the case when entrepreneurs develop a technology looking for a problem, rather than developing a product having researched a market and determining that the opportunity exists, it’s large and customers are willing to pay for the right product or service.
Another way of looking at this is to see how much “better, faster, cheaper” one can make a solution compared to something that already exists. Trying to improve existing solutions by 10 or 20% doesn’t usually have an impact. Order of magnitude impact in terms of price/performance is a lot more interesting. Having said that, companies often are created not to address an existing market, but one that is anticipated to emerge.
In India, for example, several companies were created and funded prematurely relying on broadband penetration that was supposed to happen in India. Examples around mobile video or location based services are other areas where current market is tiny, but they will emerge. A very tough question to answer is one of timing – Should a startup wait for a market to be ripe, or build a solution while guesstimating market maturation. I am more a proponent of the former, since there is quantifiable opportunity that often does not require behaviour change, and complete customer education. There is a reference in terms of incumbent products/technologies against which the startup can measure its own offering, in terms of being significantly better, faster and/or cheaper.
6. They don’t charge enough from their customers to survive: They often think their VCs are their customers and that a nice VC pitch is all they need to make to get more money. There is no better cash source than happy, marque price-insensitive customers. Just like many other challenges faced by a startup, determining a business model and more specifically pricing is one of them. Although it’s ok to provide a discount for the early alpha/beta customers, it’s usually not the right move to compete based simply on pricing.
Also, it’s crucial to have a very good idea of costs of creating and delivering one’s product or service, so that pricing and margins are enough to sustain a growing company. Tha aforementioned is an obvious statement, but one would be amazed at how often entrepreneurs don’t actually have a good handle on their margins. In India, which happens to be a more price sensitive economy than most, it’s extremely difficult to start with a low price and raise it over time. The reverse will likely be true. Bottom line: base the pricing on a quantifiable ROI to the customer, and have an incredibly capital efficient production and distribution base. Margins tend to shrink, not expand, as offerings get commoditised over time.
7. They hire too many people up front: Too many mouths to feed too early can sink a company. Keep a low burn until you have your business model in place. In some businesses it is crucial to have a team in place to be able to deliver the product or service. There is usually training involved, so people do need to be hired slightly ahead of revenue. But often, especially in good times, startups hire too many people prior to having clarity of the business model or revenue visibility.
Having a high burn without either having a product/service to sell, or a process to deliver that particular product or service, is the number one reason, in my mind, why startups fail. Startup investments happen in tranches or series of funding that are usually tied to a company hitting specific milestones. But if the burn is high, those early product milestones are not hit in time, and companies have an incredibly difficult time raising additional capital.
On the technology front, early hires are usually engineering centric to develop and refine the product. Once the product is getting close to market release (as alpha/beta), that’s when sales, business development and customer facing hires come into play. The aforementioned is a slight generalisation and seems fairly obvious, but one would be amazed at how frequently this particular mistake is made, often by seasoned entrepreneurs. I have had experience with several companies where, due to the economic/market environment, a RIF (reduction in force) had to take place.
What’s more amazing is that in most cases, after the RIF, the company’s performance did not suffer in terms of revenue, and bottom line improved drastically. Lesson learned: companies can be much more capital and team efficient than they realize. Often it’s only after a startup goes through the over-hiring and then laying-off cycle that entrepreneurs realise that they truly can do more with less.
8. Sheer luck (or lack thereof): Startups can and do get broadsided by competitors, new technologies, big companies changing direction, regulatory environment etc. This is one that squarely belongs in the category that’s completely “out of one’s control”. Startups’ success depends on a blend of luck and skill.
One can argue about the percentage splits between the two. In India, this point may be more true than most places, given the regulatory environment that exists in many sectors. And given the mood of large organisations like the RBI, SEBI, or the various ministries and their dynamic mandates, startups can either tremendously benefit or completely get clobbered by the decisions made. In India, there are grey areas around topics like Service tax, which can cause significant burden or relief depending whether a company is liable or not.
Given my aerospace background, I had a chance to see direct impact on technology companies catering to the defense sector getting tremendous benefit when the Republicans were in the White House vs the Democrats. Finally, often cash rich incumbents can simply play a loss-leading pricing game to crush a startup.
9. They don’t work hard enough or fast enough or smart enough: All those little decisions add up to an outcome. Awareness of the market dynamics subtleties are ignored or not analysed/understood as well as they should be. It’s important, for example, in India to realise that this is primarily a cash based economy, and on top of that a pre-paid economy. So, trying to enter the Indian market with a credit card based purely online subscription model, may not work, especially if the product or service is to be delivered to a broad consumer base.
DFJ has companies in our portfolios who have faced the very same challenges, so the nimble startups have to keep their finger on the market pulse and continuously adjust (without throwing darts in the dark) based on market feedback. Although not often the case, there are times when startups get a bit complacent. This could be due to over confidence in the technology, or on the other extreme, due to fatigue, especially if the company has been going on but been relatively flat for a number of quarters or years.
Sometimes technology entrepreneurs get a bit detached from their eventual customers, not realising that the needs of the market are changing, or the customer behaviour is morphing and as a result the product also needs to change. Lack of that adaptation, or not doing so fast enough, can also lead to a dire end. Let me give another hypothetical example. If a company relies on acquiring online merchants to be able to provide a service like search engine optimisation, or an advertising network to an online publisher, then it’s crucial to have a process in place to be able to add those merchants seamlessly and quickly if the business is to scale. Yet, if that company has an Oracle like culture, and the QA process for every merchant addition takes 8-10 weeks, the company is doomed.
10. They don’t take enough risks: Some start-up entrepreneurs think that they should operate as though they are big companies. This is wrong. They will never beat Microsoft or Google at their own game. They must get creative and do things differently, even at the risk of embarrassment. The incredibly successful entrepreneurs are those who thought monumental, not incremental.
11. Bonus point (buy 10, get 1 free, recession special): Entrepreneurs get greedy. This may be ironic coming from a VC. The sole focus of the entrepreneur should be to create a large profitable long term entity. The big pain point for the entrepreneurs, and understandably so, is around dilution that they suffer when raising capital. That concern often leads to sub-optimal decision making.
For example, especially in times of financial uncertainty like today when valuations tend to be lower, founders/promoters tend to take less money to minimise dilution. My advice to entrepreneurs is “when offered capital, take it”. It’s almost always better to take more capital than less because it usually takes longer and more capital to hit key milestones.
Bottom line: Entrepreneurship is for those with thick skin, and sheer tenacity to be able to hear lots of “no’s” but not be deterred. Having said that, passion alone cannot guarantee success and due in part to reasons given above, startups fail. What’s equally important to realise is that it’s “ok to fail”.
I am obviously not implying that one should stride for failure. Silicon Valley is filled with entrepreneurs who failed their first and even second time before they finally had a success under their belts.
The learning involved in going through a rough startup experience can be tremendous. In India, I feel a sense of risk aversion among entrepreneurs where a stigma still lingers (whether real or perceived) around failure. I think only when that viewpoint changes, will we start seeing truly monumental ideas coming out of India, rather than the incremental “low risk, low reward” variety.
VENTURE CAPITAL
Top Ten Reasons Why Startups Fail
--> Mohanjit Jolly, Executive Director, Draper Fisher Jurvetson India , March 17, 2009
Entrepreneurship is for those with thick skin, and sheer tenacity to be able to hear lots of “no’s” but not be deterred.
Jolly’s Volley
I think most people are aware of the fact that very few startups actually succeed. That’s precisely what makes entrepreneurs a rare breed. While knowing the risks, entrepreneurs follow their passion, try to change the world and hope for wealth creation for themselves and their shareholders.
It’s the potential for that proverbial home-run (or a Sixer in cricket talk, I suppose) that drives entrepreneurs, especially technology entrepreneurs (and VCs) to get into the game in the first place. But, for a combination of reasons both within and outside one’s control, startups fail. The list below is one compiled by my colleague, Tim Draper. I have tried to add my own little twist to give it some Indian spice and colour. So, here goes…
1. Startups run out of cash: One can argue whether that’s the cause or effect of failure. Often, startups are too optimistic about when their product is going to be accepted by the market (the hockey stick that entrepreneurs and investors alike often talk about). I used to have a professor in Business School who was a turnaround specialist hired by large corporates in the US to help float a sinking ship, and actually have them become viable businesses.
He used to say, “You can run out of wives and girlfriends, but make sure you never run out of cash”. I am guessing the latter will automatically lead to the former in most cases. But all kidding aside, there are often times when the entrepreneur is either too naive or highly arrogant when dealing with the situation of “cash crunch”.
On the former, he/she is busy fighting other fires that he/she simply underestimates how long the cash will last (sales cycles are longer than expected, for example, or customers are more price sensitive than expected). I have also seen the latter, where an entrepreneur will not heed advice from Board or advisors (in terms of cutting the burn) simply because he/she thinks that his/her company is too valuable for the investors and other stakeholders to let die, and they will bridge the company. More often than not, the entrepreneur is wrong. In tough times, investors become a lot more disciplined about letting go of the non-performers, and not putting good money after bad.
2. Founders don’t have complete faith in each other: They fight instead of delegate, trust and verify with each other. This is a tricky one. I often tell entrepreneurs that great companies are founded not by an individual but teams (2 or more founders). Gates and Allen, Brin and Page, Yang and Filo, Jobs and Wozniak and the list goes on and on…It’s important to have one founder who is outward facing (customer/business centric) while another who in inward facing (operations centric).
But there has to be a clear delineation in roles and responsibilities, so that one doesn’t step on the others’ toes. The other aspect is to be brutally honest with each other, and actually have a transition plan, as a company scales. More often than not, founders are great at the early stages of a company, but a new seasoned management team is necessary to scale the business to tens of millions of dollars and beyond in revenue.
Sometimes, I have found myself in situations where two buddies who founded the company are no longer capable of running the company (i.e. the company has grown to a size beyond what the founders can handle). The truly remarkable founders/CEOs are ones who realise when they are no longer right people to be at the helm of the company.
They often step aside, or take on a role of a chairman/evangelist and let a more seasoned CEO steer the company forward. But for a variety of reasons, ranging from “giving up control”, to “title creep (still needing to be CxO)”, to sheer ego, founders end up in a tiff with each other or with the Board. Let me give you a specific example. There is a company where two co-founders (Founders A and B, close friends for many years) started a company with operations and market in India, while they were still in the US. The plan was for them to move to India. But for a variety of personal reasons, Founder A simply could not make the move to India. Founder B, as a result, ended up doing most of the work.
Even though founder A was no longer contributing, founder B did want to let him go due to the long personal friendship. Founder B, as a Board member, has a fiduciary responsibility to do the right thing, and let his buddy go (since he was no longer actively contributing to the company). The unvested equity held by founder A was no longer working towards creating value for the company. Founders often have a hard time choosing between a fiduciarily responsible decision and an emotional personal relationship. By having a detailed conversation around roles and transitions at the onset, founders (who are also good friends) can avoid awkward situations downstream.
3. CEOs hire weak team members: This is partially related to the previous point. Strong CEOs sometimes try to carry everyone with them rather than hiring people who stand up on their own. Again, there may be team members who are dear friends, but may actually not be the best person for the position. CEOs need to do what’s optimum for the company and the shareholders, not their friends or their ego.
Most successful CEOs will utter the following words “always surround yourself with people smarter than you”. Again, if entrepreneurs are honest with themselves and actually adhere to that mantra, they will build a strong company, and an equally strong culture of hiring better and hiring smarter. Many CEOs or executives, due to either ignorance or arrogance, end up settling for weaker team members.
The reason for hiring strong team members is simply that they will question the status quo, and the traditional way of thinking. They will be a resource for the CEO and the Board to help determine the company’s overall strategy. For startups with constrained resources and continuous threat from incumbents, there needs to be a team with a combination of smart out –of-the-box thinking/questioning, scrappiness and uncompromising tenacity. Often founders, who are junior from an experience standpoint, do not want to let go of a lofty title. My recommendation is that one would often be much better off working at a director or manager level for a seasoned VP or CxO from the outside, than try to learn on the job as a CxO or SVP themselves.
4. They want to do too much: Usually, successful start-ups figure out a narrow niche that they can dominate and then expand from there. This is where the bowling pin analogy is helpful. Often entrepreneurs face a dilemma of “appearing big enough” to a VC especially during a fundraising discussion, but at the same time being able to focus on a particular segment of a market. There is also a balance between being flexible/nimble as a startup, but at the same time not looking completely lost or defocused.
Often, startups have to experiment and try a variety of approaches to products, channels, business models, but they also have to make sure that there is discipline and analysis behind the decision making. Bottom line: stay focused, become dominant is a very targeted segment or vertical, and with that success as foundation, expand into adjacent areas. Entrepreneurs should paint a long term big picture, in terms of a game changing vision, but be laser focused in their execution, especially when starting up. Admittedly, this is easier said than done (as with most of my articles).
5. They go after too small a market: Selling ice to Eskimos is a trivial but poignant example. You may have the best customised ice sculptures, but it doesn’t mean a whole lot if the market is either too small or non-existent. This is often the case when entrepreneurs develop a technology looking for a problem, rather than developing a product having researched a market and determining that the opportunity exists, it’s large and customers are willing to pay for the right product or service.
Another way of looking at this is to see how much “better, faster, cheaper” one can make a solution compared to something that already exists. Trying to improve existing solutions by 10 or 20% doesn’t usually have an impact. Order of magnitude impact in terms of price/performance is a lot more interesting. Having said that, companies often are created not to address an existing market, but one that is anticipated to emerge.
In India, for example, several companies were created and funded prematurely relying on broadband penetration that was supposed to happen in India. Examples around mobile video or location based services are other areas where current market is tiny, but they will emerge. A very tough question to answer is one of timing – Should a startup wait for a market to be ripe, or build a solution while guesstimating market maturation. I am more a proponent of the former, since there is quantifiable opportunity that often does not require behaviour change, and complete customer education. There is a reference in terms of incumbent products/technologies against which the startup can measure its own offering, in terms of being significantly better, faster and/or cheaper.
6. They don’t charge enough from their customers to survive: They often think their VCs are their customers and that a nice VC pitch is all they need to make to get more money. There is no better cash source than happy, marque price-insensitive customers. Just like many other challenges faced by a startup, determining a business model and more specifically pricing is one of them. Although it’s ok to provide a discount for the early alpha/beta customers, it’s usually not the right move to compete based simply on pricing.
Also, it’s crucial to have a very good idea of costs of creating and delivering one’s product or service, so that pricing and margins are enough to sustain a growing company. Tha aforementioned is an obvious statement, but one would be amazed at how often entrepreneurs don’t actually have a good handle on their margins. In India, which happens to be a more price sensitive economy than most, it’s extremely difficult to start with a low price and raise it over time. The reverse will likely be true. Bottom line: base the pricing on a quantifiable ROI to the customer, and have an incredibly capital efficient production and distribution base. Margins tend to shrink, not expand, as offerings get commoditised over time.
7. They hire too many people up front: Too many mouths to feed too early can sink a company. Keep a low burn until you have your business model in place. In some businesses it is crucial to have a team in place to be able to deliver the product or service. There is usually training involved, so people do need to be hired slightly ahead of revenue. But often, especially in good times, startups hire too many people prior to having clarity of the business model or revenue visibility.
Having a high burn without either having a product/service to sell, or a process to deliver that particular product or service, is the number one reason, in my mind, why startups fail. Startup investments happen in tranches or series of funding that are usually tied to a company hitting specific milestones. But if the burn is high, those early product milestones are not hit in time, and companies have an incredibly difficult time raising additional capital.
On the technology front, early hires are usually engineering centric to develop and refine the product. Once the product is getting close to market release (as alpha/beta), that’s when sales, business development and customer facing hires come into play. The aforementioned is a slight generalisation and seems fairly obvious, but one would be amazed at how frequently this particular mistake is made, often by seasoned entrepreneurs. I have had experience with several companies where, due to the economic/market environment, a RIF (reduction in force) had to take place.
What’s more amazing is that in most cases, after the RIF, the company’s performance did not suffer in terms of revenue, and bottom line improved drastically. Lesson learned: companies can be much more capital and team efficient than they realize. Often it’s only after a startup goes through the over-hiring and then laying-off cycle that entrepreneurs realise that they truly can do more with less.
8. Sheer luck (or lack thereof): Startups can and do get broadsided by competitors, new technologies, big companies changing direction, regulatory environment etc. This is one that squarely belongs in the category that’s completely “out of one’s control”. Startups’ success depends on a blend of luck and skill.
One can argue about the percentage splits between the two. In India, this point may be more true than most places, given the regulatory environment that exists in many sectors. And given the mood of large organisations like the RBI, SEBI, or the various ministries and their dynamic mandates, startups can either tremendously benefit or completely get clobbered by the decisions made. In India, there are grey areas around topics like Service tax, which can cause significant burden or relief depending whether a company is liable or not.
Given my aerospace background, I had a chance to see direct impact on technology companies catering to the defense sector getting tremendous benefit when the Republicans were in the White House vs the Democrats. Finally, often cash rich incumbents can simply play a loss-leading pricing game to crush a startup.
9. They don’t work hard enough or fast enough or smart enough: All those little decisions add up to an outcome. Awareness of the market dynamics subtleties are ignored or not analysed/understood as well as they should be. It’s important, for example, in India to realise that this is primarily a cash based economy, and on top of that a pre-paid economy. So, trying to enter the Indian market with a credit card based purely online subscription model, may not work, especially if the product or service is to be delivered to a broad consumer base.
DFJ has companies in our portfolios who have faced the very same challenges, so the nimble startups have to keep their finger on the market pulse and continuously adjust (without throwing darts in the dark) based on market feedback. Although not often the case, there are times when startups get a bit complacent. This could be due to over confidence in the technology, or on the other extreme, due to fatigue, especially if the company has been going on but been relatively flat for a number of quarters or years.
Sometimes technology entrepreneurs get a bit detached from their eventual customers, not realising that the needs of the market are changing, or the customer behaviour is morphing and as a result the product also needs to change. Lack of that adaptation, or not doing so fast enough, can also lead to a dire end. Let me give another hypothetical example. If a company relies on acquiring online merchants to be able to provide a service like search engine optimisation, or an advertising network to an online publisher, then it’s crucial to have a process in place to be able to add those merchants seamlessly and quickly if the business is to scale. Yet, if that company has an Oracle like culture, and the QA process for every merchant addition takes 8-10 weeks, the company is doomed.
10. They don’t take enough risks: Some start-up entrepreneurs think that they should operate as though they are big companies. This is wrong. They will never beat Microsoft or Google at their own game. They must get creative and do things differently, even at the risk of embarrassment. The incredibly successful entrepreneurs are those who thought monumental, not incremental.
11. Bonus point (buy 10, get 1 free, recession special): Entrepreneurs get greedy. This may be ironic coming from a VC. The sole focus of the entrepreneur should be to create a large profitable long term entity. The big pain point for the entrepreneurs, and understandably so, is around dilution that they suffer when raising capital. That concern often leads to sub-optimal decision making.
For example, especially in times of financial uncertainty like today when valuations tend to be lower, founders/promoters tend to take less money to minimise dilution. My advice to entrepreneurs is “when offered capital, take it”. It’s almost always better to take more capital than less because it usually takes longer and more capital to hit key milestones.
Bottom line: Entrepreneurship is for those with thick skin, and sheer tenacity to be able to hear lots of “no’s” but not be deterred. Having said that, passion alone cannot guarantee success and due in part to reasons given above, startups fail. What’s equally important to realise is that it’s “ok to fail”.
I am obviously not implying that one should stride for failure. Silicon Valley is filled with entrepreneurs who failed their first and even second time before they finally had a success under their belts.
The learning involved in going through a rough startup experience can be tremendous. In India, I feel a sense of risk aversion among entrepreneurs where a stigma still lingers (whether real or perceived) around failure. I think only when that viewpoint changes, will we start seeing truly monumental ideas coming out of India, rather than the incremental “low risk, low reward” variety.
good insight from our friends at the WSJ on pitching VC's
We love this newly created WSJ blog on VC. This particulary posting is a very straight up look at how VC's view startups and their presenatations. Its basic info but a good reminder...
An inside look from VentureWire at high-tech start-ups and their investors.
Venture Capital Dispatch Feed
April 9, 2009, 02:55 PM EST
How To Avoid Making A Bad Pitch --> -->
By Ty McMahan
All venture capitalists have probably experienced a bad pitch from an entrepreneur. But a couple years ago, the team at Canaan Partners heard a real sleeper.
No, we mean, a real sleeper.
The chief executive and vice president of sales for a start-up company visited Canaan’s Menlo Park, Calif., office. Just as the CEO was hitting his stride, really driving home the reason Canaan should invest in his company, a deep, nasally sound vibrated across the conference table.
The VP of sales was taking a snooze.
“The CEO kept blazing through his pitch, acting like it wasn’t happening,” Canaan’s director of marketing, Gina Vakili, said. “If there’s an elephant in the room, we should all acknowledge it.”
It probably goes without saying, the company failed to attract funding from Canaan. Falling asleep in the middle of a pitch is a rare and extreme example of what not do when speaking to venture capitalists, but there are plenty of common mistakes that can be avoided.
To help entrepreneurs be prepared when they present to the firm, Canaan created the Entrepreneur Pitch Workbook, essentially a “Dummies” guide to pitching venture capitalists. (See below for a shorter, slideshow version of this guide.)
Assembled in a slick, colorful 27-page spiral-ring book, the guide outlines the perfect pitch. It covers everything from the typical time allowed for an introductory meeting, the ideal number of slides in a presentation and what the entrepreneur should wear to the meeting.
“The pitch book is written for entrepreneurs who don’t know our firm,” Vakili said. “We need to get to know each other and determine if we can work together because it’s a long-term relationship.”
Canaan’s advice for that first meeting:
1. Let us get acquainted with you and your team. We want to work with smart, honest people. This is a long-term relationship and it needs to be good fit.
2. Help us understand the opportunity. Unless you’re a niche, we probably already know the sector. Don’t spend too much time on that, spend time on the solution.
3. Don’t come in and negotiate. Entrepreneurs who come in and say “before we get started, I’d like you to know that we have multiple term sheets on the table” make us wonder, “then why are we meeting? Why are you here having a first meeting if you’re at the term sheet stage with other firms?”
After polling the firm’s investment professionals, Vakili compiled a list of the top pitch mistakes:
1. Lack of clarity – Executives should be able to express what the company does in 30 seconds. A presentation should be 30 minutes long without interruptions.
2. Arrogance and megalomania – Don’t bring a team to a presentation and not permit them to speak. “We invest in people and teams. If you brought your team, let them speak, show them off.”
3. Avoiding questions – Don’t dance around questions, especially if they’re asked multiple times in different ways. Be thoughtful and willing to explain your concerns with the business.
4. No competition – Don’t insist you have no competition. “We have a unique IP that gives us a multi-year lead” is never true. If someone wants to chase you, they can be right on your heels.
5. Not understanding the market - Market-sizing should be top-down and bottoms up. Saying, “We just need 0.1% of the population of China to be a success” ignores the importance of identifying and describing the target customer.
6. Not knowing the numbers – Be able to explain how your company plans to drive 500% revenue growth in its second year. But don’t suggest a valuation.
“I thought maybe [the pitch book] is just for new people,” Vakili said. “But, I’ve had successful entrepreneurs say how helpful it is. We’ve received great feedback.”
The book has been particularly helpful to entrepreneurs pitching partners in the firm’s offices in India and Israel. “That community is very new [to venture capital] and they’re looking for guidance and thought leadership,” Vakili said.
To better view the slideshow below, click the “full screen” icon on the bottom right of the box below or click the link which takes you to slideshare.net.
Canaan Entrepreneur Pitchbook
An inside look from VentureWire at high-tech start-ups and their investors.
Venture Capital Dispatch Feed
April 9, 2009, 02:55 PM EST
How To Avoid Making A Bad Pitch --> -->
By Ty McMahan
All venture capitalists have probably experienced a bad pitch from an entrepreneur. But a couple years ago, the team at Canaan Partners heard a real sleeper.
No, we mean, a real sleeper.
The chief executive and vice president of sales for a start-up company visited Canaan’s Menlo Park, Calif., office. Just as the CEO was hitting his stride, really driving home the reason Canaan should invest in his company, a deep, nasally sound vibrated across the conference table.
The VP of sales was taking a snooze.
“The CEO kept blazing through his pitch, acting like it wasn’t happening,” Canaan’s director of marketing, Gina Vakili, said. “If there’s an elephant in the room, we should all acknowledge it.”
It probably goes without saying, the company failed to attract funding from Canaan. Falling asleep in the middle of a pitch is a rare and extreme example of what not do when speaking to venture capitalists, but there are plenty of common mistakes that can be avoided.
To help entrepreneurs be prepared when they present to the firm, Canaan created the Entrepreneur Pitch Workbook, essentially a “Dummies” guide to pitching venture capitalists. (See below for a shorter, slideshow version of this guide.)
Assembled in a slick, colorful 27-page spiral-ring book, the guide outlines the perfect pitch. It covers everything from the typical time allowed for an introductory meeting, the ideal number of slides in a presentation and what the entrepreneur should wear to the meeting.
“The pitch book is written for entrepreneurs who don’t know our firm,” Vakili said. “We need to get to know each other and determine if we can work together because it’s a long-term relationship.”
Canaan’s advice for that first meeting:
1. Let us get acquainted with you and your team. We want to work with smart, honest people. This is a long-term relationship and it needs to be good fit.
2. Help us understand the opportunity. Unless you’re a niche, we probably already know the sector. Don’t spend too much time on that, spend time on the solution.
3. Don’t come in and negotiate. Entrepreneurs who come in and say “before we get started, I’d like you to know that we have multiple term sheets on the table” make us wonder, “then why are we meeting? Why are you here having a first meeting if you’re at the term sheet stage with other firms?”
After polling the firm’s investment professionals, Vakili compiled a list of the top pitch mistakes:
1. Lack of clarity – Executives should be able to express what the company does in 30 seconds. A presentation should be 30 minutes long without interruptions.
2. Arrogance and megalomania – Don’t bring a team to a presentation and not permit them to speak. “We invest in people and teams. If you brought your team, let them speak, show them off.”
3. Avoiding questions – Don’t dance around questions, especially if they’re asked multiple times in different ways. Be thoughtful and willing to explain your concerns with the business.
4. No competition – Don’t insist you have no competition. “We have a unique IP that gives us a multi-year lead” is never true. If someone wants to chase you, they can be right on your heels.
5. Not understanding the market - Market-sizing should be top-down and bottoms up. Saying, “We just need 0.1% of the population of China to be a success” ignores the importance of identifying and describing the target customer.
6. Not knowing the numbers – Be able to explain how your company plans to drive 500% revenue growth in its second year. But don’t suggest a valuation.
“I thought maybe [the pitch book] is just for new people,” Vakili said. “But, I’ve had successful entrepreneurs say how helpful it is. We’ve received great feedback.”
The book has been particularly helpful to entrepreneurs pitching partners in the firm’s offices in India and Israel. “That community is very new [to venture capital] and they’re looking for guidance and thought leadership,” Vakili said.
To better view the slideshow below, click the “full screen” icon on the bottom right of the box below or click the link which takes you to slideshare.net.
Canaan Entrepreneur Pitchbook
Tuesday, April 7, 2009
Great post on basic startup marketing tools
basic but thorough info for any company. these days social media is a bigger and bigger part of our world - you can't ignore it or you will definitely get left behind.
Startup Marketing: Tactical Tips From The Trenches
I’m speaking at the Inbound Marketing Summit later this month in San Francisco. There are some really great speakers lined up (David Meerman Scott, Chris Brogan, Charlene Li, Paul Gillin and others). If you’re looking to learn more about inbound marketing and how to get found in Google, social media and blogs, this should be a great event. If you decide to attend, use the code HUB200 for a special $200 discount. Drop me a note if you’re going to be there, would love to meet-up.
My session’s going to be called “Startup Marketing: Tips From The Trenches”. As I get my thoughts together for this, I started making a list of all of the things I’d advise a new startup to do to get things kicked off with a limited budget. As it turns out, there are a lot of tactical steps that individually don’t do much, but in aggregate start laying the foundation for much bigger things. So, I thought I’d share some of these things with you. This list is not intended to be a comprehensive “here are all the things you should do”, but more of a “if I were starting a company today, here’s what I would do in the first 10 days…” It’s written in a short, punchy style. I’ll likely revise it in the future as I add more things, but I wanted to get “Version 1.0” out there for you and see what you think.
Tactical Tips for Startup Marketing
1. Pick a name that works. Needs to be simple, memorable and unambiguous. The “.com” domain should be available without playing tricks with the name (like dropping vowels or adding dashes). Also, just because there’s no website on a domain doesn’t mean it’s “available”. Available means something you can register immediately, or that has a price that you’re willing to pay attached to it. Don’t wander down the rabbit hole of finding the perfect name if you have no indication that it’s for sale. This will waste a bunch of your time.
2. Put a simple website up. Doesn’t have to be fancy. The goal is to put enough content on the site to start the Google sandbox clock. Don’t worry about the site not saying much (nobody’s going to be looking at it anyways). Make sure to use a decent content management system (CMS) and not Dreamweaver or (shudder) FrontPage. Just because you can hand-craft HTML doesn’t mean you should for your startup website. The structure and features of a CMS are going to be important someday. Trust me.
3. Get some links into the new startup website. If you have a personal website, link to it from there. If you have friends/associates/family with websites, cash in some favor chips and get them to link to it. The goal is to get the Google crawler to start indexing your site. You only need one decent link to get things going. To check whether your site is being indexed by Google, do a search like site:yoursite.com (not perfect, but good enough).
4. Setup a twitter account. Name of the account should match your company/domain name. Link to your twitter account from your main site and to your main site from your twitter account. (Note: If you have a natural skepticism of the value of twitter, you are welcome to this skepticism. But, go ahead and grab your twitter account anyways. You can resume your skepticism after you do that).
5. Add e-mail subscription. Let people sign-up to get an email when you’re ready to show them the product. A simple email signup form is sufficient.
6. Get a nice logo. Run a quick contest on CrowdSpring or 99Designs and you’ll wind up with something decent enough. Make sure you get the vector file (Illustrator or EPS file) as part of the final deliverable. If you've got design skills yourself, or know somebody really good that can do it, even better.
7. Setup a Facebook business page (known as a “fan” page) for your startup. You’re not going to get many fans in the early days. That’s OK. Just get something out there. Add a simple description of your startup, link back to your main website. The usual stuff.
8. Create a clean Facebook URL. Facebook doesn’t allow simple/vanity URLs (unless you're big and established). So, to make things easier on yourself (and your users), setup a sub-domain and redirect it to your Facebook page. For example, here’s what I did: facebook.hubspot.com (notice that when you visit this link, it takes you automatically to the ugly Facebook URL). Setting up this sub-domain is free and usually pretty easy (it’s done through whoever your registrar is for your domain).
9. Kick off a blog. You can use one of the free hosting tools (like WordPress.com), but don’t use their domain name. Put your blog on blog.yourcompany.com — or if you’re proficient and can install WP locally, make it yourcompany.com/blog. Do NOT make it yourcompany.wordpress.com. The reason is that you want to control all the SEO authority for your blog and channel it towards your main website. And, chances are, WordPress.com doesn’t need your help on the SEO front.
10. Write a blog article that describes how you got to this point. What problem you’re hoping to solve. Why you picked this problem. It should feel a little uncomfortable revealing what you’re revealing. If you have tendencies towards being in “Stealth Mode”, read “Stealth Mode, Schmealth Mode”. With inbound marketing, you’re going to need to get used to revealing things that might be uncomfortable. Get over it.
11. Setup Google Alerts for at least the following: Your company name, link:yourdomain.com and “industry term”. Try to find a good balance for your industry term so you don’t get flooded with alerts that you simply will start ignoring. This may take some iteration and refining. (Oh, and use the “As It Happens” option in Google Alerts so you’re not waiting around for new alerts to show up).
12. Find three closest competitors. Pretend like someone is paying you $10,000 for locating each competitor. Really try hard. Barely managed to find three? Take a lot of effort? Great. Now find 3 more. Of these 6, pick the two that you think are the most marketing savvy. They should have a Website Grade > 90, a blog with some readers, a website that you can envision people using, a twitter account that they actually post to, etc. These are the competitors that you’re going to start “tracking”. Add their names and websites to your Google Alerts.
13. Update your LinkedIn profile (you do have a LinkedIn profile, right)? Mention your new startup, and add a link to your startup website to one of the three slots for this purpose. Make sure you specify the anchor text. Don’t go with the default of “My Website”. The anchor text should be your startup name and maybe a couple of words of what it does. You can look at my profile to get a sense: http://www.linkedin.com/in/dharmesh (note: I don't accept LinkedIn invites from people I don't know. If you're looking to get to know me, follow me on twitter @dharmesh).
14. Get business cards printed. Don’t go overboard, but don’t use a “free” option (because it’s not really free, it’s just subsidized). I don’t believe much in business cards, but you need them to simply avoid the 30 seconds of discussion as to why you don’t have a card when people ask you for one at conferences and meetings and such. They’re worth the price to avoid that uncomfortableness.
15. Use the Twitter Grader search feature to find high-impact twitter users in your industry. Start following them. You want to start forging relationships. Start building your twitter network. Resist the temptation to mass-follow a bunch of random people or play other games just to get your follower count up. That’s not going to matter. Get some high quality relationships going. If you’re really serious, start using an app like TweetDeck so you can more easily monitor the needed conversations.
16. Create a StumbleUpon account. Specify your areas of interest (part of registration). Spend 10 minutes a day (no more!) stumbling and voting things up/down. Start befriending those that are submitting sites that are relevant and interesting for your startup. Don’t submit your own stuff — just start contributing.
17. Subscribe to the LinkedIn Answers category that best fits your area of interest. Answer one question a day that you feel like you’ve got some expertise in. Don’t self-promote. You’re seeking to build credibility and trust — not sell anything.
18. Find the bloggers that are writing about your topic area. Subscribe to their feed, and read their stuff regularly. Leave valuable comments and participate in the conversation. (Do not spam them or write “fluff” comments. If you don’t have something useful to add to the conversation, don’t comment).
19. Start building some contacts on Facebook. Organize your users into groups (one for your business and another for friends/family). This will come in handy later. Don’t spam people and ask them to visit your website. At this point, your website is still probably not worth visiting.
20. Grade your website on Website Grader. Fix the basic things. You should be able to get a 50+ just by doing the simple things it suggests. [Disclaimer: I wrote Website Grader].
21. Get Some Analytics: Install some web analytics software and start watching your traffic. Where is it coming from? How is it growing? What keywors are people using to find you? What content are they looking at? It's ok to get a bit maniacal and obssessed about it at first. Many of us do that (and some of us never get over it).
Stay tuned for a revised edition in a few weeks as I think about this more (and watch my actual behavior). Also, if you’re interested in startups, you can follow me on twitter @dharmesh.
What have I missed? What ideas do you have on tactical things for startup marketing? What do you do?
Posted by Dharmesh Shah on Tue, Apr 07, 2009
Startup Marketing: Tactical Tips From The Trenches
I’m speaking at the Inbound Marketing Summit later this month in San Francisco. There are some really great speakers lined up (David Meerman Scott, Chris Brogan, Charlene Li, Paul Gillin and others). If you’re looking to learn more about inbound marketing and how to get found in Google, social media and blogs, this should be a great event. If you decide to attend, use the code HUB200 for a special $200 discount. Drop me a note if you’re going to be there, would love to meet-up.
My session’s going to be called “Startup Marketing: Tips From The Trenches”. As I get my thoughts together for this, I started making a list of all of the things I’d advise a new startup to do to get things kicked off with a limited budget. As it turns out, there are a lot of tactical steps that individually don’t do much, but in aggregate start laying the foundation for much bigger things. So, I thought I’d share some of these things with you. This list is not intended to be a comprehensive “here are all the things you should do”, but more of a “if I were starting a company today, here’s what I would do in the first 10 days…” It’s written in a short, punchy style. I’ll likely revise it in the future as I add more things, but I wanted to get “Version 1.0” out there for you and see what you think.
Tactical Tips for Startup Marketing
1. Pick a name that works. Needs to be simple, memorable and unambiguous. The “.com” domain should be available without playing tricks with the name (like dropping vowels or adding dashes). Also, just because there’s no website on a domain doesn’t mean it’s “available”. Available means something you can register immediately, or that has a price that you’re willing to pay attached to it. Don’t wander down the rabbit hole of finding the perfect name if you have no indication that it’s for sale. This will waste a bunch of your time.
2. Put a simple website up. Doesn’t have to be fancy. The goal is to put enough content on the site to start the Google sandbox clock. Don’t worry about the site not saying much (nobody’s going to be looking at it anyways). Make sure to use a decent content management system (CMS) and not Dreamweaver or (shudder) FrontPage. Just because you can hand-craft HTML doesn’t mean you should for your startup website. The structure and features of a CMS are going to be important someday. Trust me.
3. Get some links into the new startup website. If you have a personal website, link to it from there. If you have friends/associates/family with websites, cash in some favor chips and get them to link to it. The goal is to get the Google crawler to start indexing your site. You only need one decent link to get things going. To check whether your site is being indexed by Google, do a search like site:yoursite.com (not perfect, but good enough).
4. Setup a twitter account. Name of the account should match your company/domain name. Link to your twitter account from your main site and to your main site from your twitter account. (Note: If you have a natural skepticism of the value of twitter, you are welcome to this skepticism. But, go ahead and grab your twitter account anyways. You can resume your skepticism after you do that).
5. Add e-mail subscription. Let people sign-up to get an email when you’re ready to show them the product. A simple email signup form is sufficient.
6. Get a nice logo. Run a quick contest on CrowdSpring or 99Designs and you’ll wind up with something decent enough. Make sure you get the vector file (Illustrator or EPS file) as part of the final deliverable. If you've got design skills yourself, or know somebody really good that can do it, even better.
7. Setup a Facebook business page (known as a “fan” page) for your startup. You’re not going to get many fans in the early days. That’s OK. Just get something out there. Add a simple description of your startup, link back to your main website. The usual stuff.
8. Create a clean Facebook URL. Facebook doesn’t allow simple/vanity URLs (unless you're big and established). So, to make things easier on yourself (and your users), setup a sub-domain and redirect it to your Facebook page. For example, here’s what I did: facebook.hubspot.com (notice that when you visit this link, it takes you automatically to the ugly Facebook URL). Setting up this sub-domain is free and usually pretty easy (it’s done through whoever your registrar is for your domain).
9. Kick off a blog. You can use one of the free hosting tools (like WordPress.com), but don’t use their domain name. Put your blog on blog.yourcompany.com — or if you’re proficient and can install WP locally, make it yourcompany.com/blog. Do NOT make it yourcompany.wordpress.com. The reason is that you want to control all the SEO authority for your blog and channel it towards your main website. And, chances are, WordPress.com doesn’t need your help on the SEO front.
10. Write a blog article that describes how you got to this point. What problem you’re hoping to solve. Why you picked this problem. It should feel a little uncomfortable revealing what you’re revealing. If you have tendencies towards being in “Stealth Mode”, read “Stealth Mode, Schmealth Mode”. With inbound marketing, you’re going to need to get used to revealing things that might be uncomfortable. Get over it.
11. Setup Google Alerts for at least the following: Your company name, link:yourdomain.com and “industry term”. Try to find a good balance for your industry term so you don’t get flooded with alerts that you simply will start ignoring. This may take some iteration and refining. (Oh, and use the “As It Happens” option in Google Alerts so you’re not waiting around for new alerts to show up).
12. Find three closest competitors. Pretend like someone is paying you $10,000 for locating each competitor. Really try hard. Barely managed to find three? Take a lot of effort? Great. Now find 3 more. Of these 6, pick the two that you think are the most marketing savvy. They should have a Website Grade > 90, a blog with some readers, a website that you can envision people using, a twitter account that they actually post to, etc. These are the competitors that you’re going to start “tracking”. Add their names and websites to your Google Alerts.
13. Update your LinkedIn profile (you do have a LinkedIn profile, right)? Mention your new startup, and add a link to your startup website to one of the three slots for this purpose. Make sure you specify the anchor text. Don’t go with the default of “My Website”. The anchor text should be your startup name and maybe a couple of words of what it does. You can look at my profile to get a sense: http://www.linkedin.com/in/dharmesh (note: I don't accept LinkedIn invites from people I don't know. If you're looking to get to know me, follow me on twitter @dharmesh).
14. Get business cards printed. Don’t go overboard, but don’t use a “free” option (because it’s not really free, it’s just subsidized). I don’t believe much in business cards, but you need them to simply avoid the 30 seconds of discussion as to why you don’t have a card when people ask you for one at conferences and meetings and such. They’re worth the price to avoid that uncomfortableness.
15. Use the Twitter Grader search feature to find high-impact twitter users in your industry. Start following them. You want to start forging relationships. Start building your twitter network. Resist the temptation to mass-follow a bunch of random people or play other games just to get your follower count up. That’s not going to matter. Get some high quality relationships going. If you’re really serious, start using an app like TweetDeck so you can more easily monitor the needed conversations.
16. Create a StumbleUpon account. Specify your areas of interest (part of registration). Spend 10 minutes a day (no more!) stumbling and voting things up/down. Start befriending those that are submitting sites that are relevant and interesting for your startup. Don’t submit your own stuff — just start contributing.
17. Subscribe to the LinkedIn Answers category that best fits your area of interest. Answer one question a day that you feel like you’ve got some expertise in. Don’t self-promote. You’re seeking to build credibility and trust — not sell anything.
18. Find the bloggers that are writing about your topic area. Subscribe to their feed, and read their stuff regularly. Leave valuable comments and participate in the conversation. (Do not spam them or write “fluff” comments. If you don’t have something useful to add to the conversation, don’t comment).
19. Start building some contacts on Facebook. Organize your users into groups (one for your business and another for friends/family). This will come in handy later. Don’t spam people and ask them to visit your website. At this point, your website is still probably not worth visiting.
20. Grade your website on Website Grader. Fix the basic things. You should be able to get a 50+ just by doing the simple things it suggests. [Disclaimer: I wrote Website Grader].
21. Get Some Analytics: Install some web analytics software and start watching your traffic. Where is it coming from? How is it growing? What keywors are people using to find you? What content are they looking at? It's ok to get a bit maniacal and obssessed about it at first. Many of us do that (and some of us never get over it).
Stay tuned for a revised edition in a few weeks as I think about this more (and watch my actual behavior). Also, if you’re interested in startups, you can follow me on twitter @dharmesh.
What have I missed? What ideas do you have on tactical things for startup marketing? What do you do?
Posted by Dharmesh Shah on Tue, Apr 07, 2009
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