Dissecting and pattern matching the venture business
Paul Kedrosky, blogger behind Infectious Greed, has a couple of interesting posts again dissecting the venture business and looking for best practices to identify what makes a stellar venture capitalist. A lot of time, effort, words and echo in the blogosphere is dedicated to this task in general, though Paul is certainly qualified to address these issues.
I enjoy reading Paul’s articles and blog posts, and think he addresses some interesting points in this article looking for best practices in venture capital. I think Paul’s conclusions here are mostly right, but would build on the gut conclusion in terms of how to make successful venture investments.
VC is a hits business and the biggest ones matter the most - i.e. a fund maker (or in today’s multi-billion dollar funds - fund makerS). You know these … Apple Computer, Cisco, eBay, Google, ….
What is common?
1. Big friggin markets. Obscenely big.
2. Persistence - have the balls (metaphorically of course) to bankroll the sucker through to win
3. Team - either you have it or you bring in on when you know you don’t (think Cisco)
4. Technology - either you have it or you know you can build it & the barriers to entry using step #2.
5. Hang out (actually actively troll) in a well stocked pond and kiss a lot of frogs
If the market is one that you know is huge, then be sure you back the best team & technology combo among all of the other choices, so that with persistence and bankroll you can win.
The art / gut is betting on the market and the team/technology combo, and having the balls to see it through (& know when to cut your losses).
It’s a well known fact that the asset class as a whole really stinks on a risk/reward basis. It’s the top funds that matter ….. and not many exist. Per Paul’s "VC is a Bubble Business" post, I don’t exactly agree unless you’re trying to invest outside of the top decile (mayby quartile if you’re being generous). The top funds always seem to find the next Apple, Cisco or Google (oh, were all of those Sequoia?), bubble or not.
Lots of money is salivating to get into the class (a psychology that would be interesting to understand), so an adverse selection process is in play (and has been for most of the existence of the asset class) ….. chances are good that unless you’re running a huge institutional fund, are close personal friends with one of the few top funds, or can really identify the next wunderkind of the industry, if you’re offered an opportunity to invest in a VC fund, you should politely decline and run away fast.
– brian
links for 2006-06-28
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(tags: startup entrepreneurship)
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(tags: actionscript flash)
Southwest continues to leverage Web 2.0
I’ve written here on the Listening Post and here on my personal blog about Southwest’s entry into Web 2.0 with their Nuts about Southwest Blog. They took the initiative on the seating controversy issue by posting to their blog on the topic.
They’ve now taken another step in the direction of using their blog and Web 2.0 technologies to better listen to their customers and explain the rationale for their decisions on service changes. This time their CEO appears as a guest blogger on the Nuts blog.
I love this post …. it clearly demonstrates why Southwest is such a great company and why it continues to lead the otherwise hapless airline industry in profitability. Southwest understood the notion and value of listening posts and customer loyalty long before Web 2.0 existed. My assessment is that they simply see Web 2.0 as a new and potentially effective enabler for improving their ability to listen to and better serve their customers, and thus increase loyalty further (profits follow of course).
The fact that Southwest has embraced Web 2.0 all the way up to the CEO’s office provides some of the best evidence to-date that Web 2.0 represents the next best enabler for setting up efficient and effective listening posts and for driving customer loyalty. If one of the long-term leaders in overall profitability and customer loyalty is embracing these new technologies, why would you not do it too?
– brian
Entrepreneurial Team Building
Ed Sim at BeyondVC has an interesting post today on entrepreneurial team building addressing probably the most critical aspect of it …. namely the issue of when to hire key executive roles and the notion of the overstacked early stage team. I like Ed’s thoughts on the overstacked team problem.
I cannot wait to see his assessment of when to hire the VP of Sales. In my experience, a pressure always exists to hire the VP of Sales fast … usually before the business model is baked and thus before the true sales model is understood. This is exactly wrong.
First, it is a lot costlier (from a true dollar and equity perspective as well as from a perspective of distracting the team) to move out a VP of Sales than to replace a few sales reps if your business model morphs from what you thought it would initially be and it turns out you hired the wrong person.
Second, the best sales leaders follow the money. In the early stage, your offering is risky and tough to sell, and the value is still largely unproven. The best sales VPs stay far away from these situations, so you will have an adverse selection problem where the person willing to take your VP of Sales job is not going to be good enough to sell your stuff.
Carol Bartz of Autodesk one of the best software CEOs around, said in a recent podcast that she considers her role to be primiarly a sales role. When she goes to conferences and has to fill out her title, she puts down sales and not CEO or General Management. If she considers her responsibility to be sales with a company the size of Autodesk, then the CEO of any early stage startup should really be the VP of Sales until at least the points above are addressed adequately so that the right person can be hired for the right role. All of the other members of the team have a selling role too. Remember Jeff Parker’s rule #7 for entrepreneurs - most startups fail from a lack of revenue not poor cost controls.
The founding team of my current startup Kalivo has three members - a head of products & technology, a head of engineering, and the CEO. We are respectively responsible for requirements gathering and technology infrastructure, building and deploying, and sales, marketing & finance, and this will be the case for quite a while. Our next executive hire will be a VP of Sales, but I can assure you it will not happen soon. We will be doing a lot of market research, requirements gathering, building and selling before we hire that person. We will have customers before we hire our first sales rep, and we will have proven our value proposition to some level and have confidence in our business model before hiring the VP of Sales. If a founder with all of his passion and knowledge of a problem space and its solution cannot sell a product/service, then I highly doubt some outsider could do it better.
So, does the CEO have to fill the role of the VP of Sales on the founding team? Yes and no. Per Carol Bartz, the CEO is always selling the company, so like it or not, introverted or not, the CEO must be focused on sales. That said, if the CEO was primarily a product or technology person, then it may be appropriate to have a sales and marketing person as part of the founding team. In that case, the founding team may look like CEO, head of sales & marketing, and head of engineering. Note no COO exists in any of these cases …. why a COO would be needed to run a 10 person company is beyond my understanding.
– brian
links for 2006-06-27
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(tags: listenomics enterprise2.0)
A Worthwhile Read: Listenomics
You may also want to get involved.
Bob Garfied at Advertising Age coined the term Listenomics in this article about a year ago. The article is well worth a read. The vignettes about the vocational school employee who created a highly popular Apple advertisement and the disparity of consumer reviews for a Bissell vacuum are compelling examples of the power shift underway with Web 2.0 today.
Garfield is following up this posting with a project to publish a book called Listenomics collaboratively online with the readers of his blog. You may want to follow its progress or even get involved to see the potential implications Web 2.0 may have for your business.
The New Media Musings blog highlights the challenge of writing an online book, which is likely to be very true. However, I do wish Bob success in this endeavor, as the topic is compelling and will present ongoing business and legal challenges as well as opportunities.
– brian
What enables a great startup hub?
Recently Paul Kedrosky initiated an interesting discussion about the top technology startup hubs in the USA. His article was an excellent summary of the topic. He even posits how Buffalo could make the list!
The discussion that followed included Fred Wilson arguing that NYC should be #3 on the list, ahead of Seattle and Austin. Of course, Silicon Valley and Boston are #1 and #2 respectively.
This all culminated in this study by O’Reilly Radar that attempts to finally truly rank these startup hubs with relevant data and synthesis. I’ve read too many articles that make claims to ranking the top US startup hubs, yet do not believe the results. My skepticism is mainly because my current hometown is Austin, TX, and it routinely ranks #3 or #4 in these articles. In living the startup scene in Austin for over 9 years now, spending a ton of time in the Bay Area, Boston, and NYC, and having many friends working in Seattle, I am absolutely sure that it is not ranked #3 or #4. Austin does a great job marketing itself, but the substance can be lacking in its marketing claims. It is a very hip town, has a major university turning out solid technical talent and major companies with R&D centers, and a large percentage of its activity is startup-oriented. Also, a lot of rich people live here. However, on a comparative basis, it is way behind Silicon Valley, Boston, Seattle, NYC, and maybe other areas.
Take Austin versus Seattle. These routinely tussle for the #3 spot in most of the startup hub articles. Austin has Dell (which by the way has little track record of people spinning out to do their own startups). Seattle has Microsoft, which has spun out a large number of entrepreneurs. Austin has Whole Foods, Seattle has Starbucks - these help create some rich people and contribute to the startup culture. The next level down makes a big difference. Seattle has Amazon, Real Networks, Blue Nile. Where are these companies in Austin? They do not exist . Silicon Labs is the lone $1B in market cap startup success that I can find. There is no $15 Billion comparable to Amazon (yes, entrepreneurs spin out of Amazon too). Seattle has also had a lot of smaller liquidity events that are not as prominent than what we see happening here.
The O’Reilly study gets to the core of some true metrics of startup activity - the jobs data. It’s one thing to say you have a lot of startup activity, it’s a totally different thing to prove that in terms of true economic value-added activity, such as jobs creation.
Austin has all of the ingredients that Paul Kedrosky outlined in his article on startup hubs, and it does a great job with PR. What it lacks is a significant group of profitable, growing startup companies. My purpose here is to highlight the gap between hype and substance here, becuase without the substance the hype eventually wears out. Every other ingredient seems to be here in Austin, we just need more startups that turn into growing profitable entities …. soon.
– bkm
PS - if you don’t believe me, read the comments on the O’Reilly and Fred Wilson pieces. You’ll see Austinites and former Austinites living in NYC or Boston making similar claims
Pluggd launches for podcasts!
A friend and former colleague at Trilogy, Alex Castro, just announced the launch of his new company Pluggd today. I think Alex is building a valuable re-aggregator for podcasts on the web, and his vision is highly compelling. Pluggd received a very positive review from TechCrunch today as part of its launch, so I think they agree with me and validate that Alex is off to a great start.
As a full disclosure, I am an angel investor in Pluggd. I believe in Alex’s vision for this important new media market, and his Microsoft and Amazon credentials are also compelling. What most compelled me to invest in Alex besides his credentials, the market potential for podcasting, and his vision and passion for the space, was his tenacity. He is a very gritty entrepreneur and I believe he will outlast any competitor in capturing this market by providing the best solution. As a result, the Web will get a service that makes finding, distributing and consuming podcasts easy and fun.
Good luck Alex and Pluggd. You’re off to a great start!
– brian
The Greatest Untapped Asset
Imagine someone that uses your product day after day, and is an expert in all of its functionality. They paid you for the right to use your product. They know how to use it in more ways than you and your trainers and customer service representatives do. They provide you feedback on its benefits, and tell you ways that you can improve the product too. They help your other customers to solve problems with your product and find undiscovered features and functionality. They also provide testimonials about your product and company, and they refer other highly qualified buyers to you. The conversion to sale rate for these referrals is extremely high. They also buy upgrades to your product as well as purchase other products from you.
And now the best part, you don’t have to pay this person a penny in income ….
Sounds like a dream? Well that is true. Moreover, almost every company has many of these people. They go by many names: “customer evangelists”, “apostles”, “loyal customers”, and several more.
Whatever they are called, your company needs to embrace and extend these valuable assets. Read more
links for 2006-06-19
To Engage, or Not to Engage?
Yes, that is the question on the minds of marketers and entire businesses in today’s Web 2.0 world.
In our research and sales discussions, a fault line largely exists between those companies that are engaged and those that are not. A company either is hosting a forum, blogging and/or posting comments to blogs and forums (i.e. engaged in Web 2.0), or is dead-set against doing so.
Which is the right answer? Well, each company needs to decide that on their own. Benefits and risks certainly exist to both approaches. Whether to engage or not primarily depends on the risk/reward tradeoff for a given company. Below are some of the benefits and risks associated with each engagement decision:
links for 2006-06-12
Kalivo’s ROI
When selling products or services to companies, “what is the ROI I can expect from your solution?” is a primary question that one needs to answer. While we are still in the prototype stage of developing the Kalivo service, I will attempt to begin to answer that question here. I expect that our answer will evolve over time as our beta customers begin to use our service and provide us with feedback and ideas.
By ROI, typically this means that the prospect is looking for a hard, measurable dollar amount against which they can compare the investment in your product or service. This is in contrast to a a soft value proposition, where it can be logically argued that a return exists even though it cannot be truly measured.
Suffice it to say, we strongly believe that using Kalivo will generate significant value for our customers. Key value drivers that come from a company using Kalivo to engage with its communities on the Web and provide an interactive corporate community include:
- increased customer loyalty,
- recognition of market thought leadership,
- greater awareness
- improved brand perception, and
- higher search engine rankings and website traffic.
However, it is imperative to prove that the ROI exists as well and necessarily provide a means for measuring it.
links for 2006-06-10
links for 2006-06-09
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