Beware of fishing expeditions

A number of our portfolio companies have been fielding calls from strategic buyers expressing an interest in acquisition.  This is great news since many of the better acquisitions come when companies are bought and not sold.  For a startup, it can be quite flattering to have a large competitor or suitor express an interest in buying your company.  However, as an entrepreneur you have to be skeptical as many of these calls end up as just another fishing expedition from the strategic buyer. I have seen too many companies get overly excited about these acquisition feelers and waste time educating the potential acquirer only for the acquirer to either do nothing, build it themselves, or buy a competitor.  In fact, you have to recognize and assume that many of these initial calls are just fishing expeditions where a strategic buyer is just trying to get as much information as they can about a market and the competitive landscape.  You have to assume that they are talking to all of your competitors as well.  Before taking your first meeting, make sure you get as much information you can to gauge the real interest in your company.  Here are some questions you should be asking or thinking of during your initial conversation.

  1. Who is calling you, what is their role, and what have they acquired in the past?  You need to determine whether it is just a junior person screening or if it is someone with real clout and decision making power.
  2. Why do they want to enter this market and what is the decision making process by which they will make a build/buy decision?  If they are early in the process, you have to be concerned about wasting your time, educating a potential buyer about your market, and going nowhere with your conversations.
  3. Have they talked to anyone else?  In many cases, an acquirer may already know who they want to buy, but will still talk to other players to fully understand the market and the competitive landscape and to use you as negotiating leverage.
  4. What are they looking for in terms of an acquisition?  Revenue, product, management, both?
  5. Who is responsible for making the acquisition work, and how does the acquirer intend to integrate your company into the existing infrastructure?  Will the acquisition be run as a separate, stand-alone unit or will it report to a certain group.  Knowing this will further help you understand the decision-making process of the acquirer, and who you may need to influence to get a deal done.

Before your first meeting, here are some questions you should have answered yourself:

  1. What other acquisitions have they done, what multiples did they pay, and how recent were the deals?  If the buyer hasn’t done many acquisitions or if they paid low multiples do not start thinking about pie in the sky valuations for your company.
  2. What is the company’s market cap and how much cash is on their balance sheet?  If your selling price is too high for the buyer based on the buyer’s market cap or cash on hand, don’t waste your time educating them about your product and the market.
  3. Use your network to talk to some of the management or venture investors of companies that were recently acquired by the buyer to determine what their process was and to figure out if the opportunity is real or just a fishing expedition.
  4. What is the corporate culture?  Does the acquirer have an NIH (not invented here) syndrome or is there a history of openly collaborating with partners and looking outside for new technology?

Once again, it is always nice to have a large company call you and express acquisition interest.  That being said, go into the conversations with a skeptical eye and make sure you do not waste your time as these strategic discussions can quickly lead to a dead end if not managed appropriately.  The tricky part of the dance is trying to establish early in the process a range that the acquirer will potentially pay for your company assuming everything you tell them is true.  The sooner you can get to this answer the sooner you will know if you should continue talking or just walk away.  If you manage this process appropriately you may find yourself in a great place as many of the best acquisitions happen when companies are bought and not sold.  The downside is that these discussions can suck up lots of your precious resources and be a tremendous distraction to your management team.

VC Blogs – the old and new

I was in California 3 weeks ago when Jeff Nolan told me he was leaving SAP Ventures and moving to a new group within SAP desgined to "Kill Oracle."  We talked about all of the great innovation happening on the web, much of which is consumer-focused, and why it was a good time to make a switch.  Yes, SAP is the dominant player in the enterprise market and even after you account for Oracle’s acquisition binge Oracle still remains the distant number 2 player in enterprise software.  That being said, there are new technologies and new ways of doing business which SAP must keep close tabs on as it maintains its dominance – think service oriented architectures, SaaS, and new markets to enter and conquer.  So I am sad to see one of my VC buddies go back to the operational side, but I look forward to working with him closely as he helps SAP evolve its stategy and maintain its leadership.

Another VC friend, Scott Maxwell of Insight Venture Partners, has launched a new blog with encouragement from myself and Brad Feld.  Many of the VC bloggers on the web are early stage focused so Scott will bring a unique twist to the VC blogging world by focusing on expansion stage companies that have a product and some decent quarterly revenue.  As Scott mentions in his post:

The issues faced by technology companies at this stage of development are very different that early stage companies. The major issues are around distribution strategy and execution, but as companies scale they tend to need more formal development approaches and have many other process, organization, skill, and staffing gaps as well. Every CEO is also looking for more leads, customer introductions, and ongoing advice in every category, personal and professional.

I tend to agree with Scott so if you want a different perspective, a perspective of what your later round VC is looking for, I suggest putting Scott’s blog on your must read list.

Web 2.0 Bubble

I had an enjoyable lunch with Jeff Jarvis today catching up on a number of things and brainstorming about value in the next generation web.  During the conversation I vented a little frustration at the use of buzz words and bubble-like mentality with terms like Web 2.0.  I am starting to get extremely tired and frustrated about every pitch that I see now where a company claims they are a Web 2.0 company and lists their principal reasons for being Web 2.0.  It reminds me of the mid-90s when everyone said they were an Internet company and sprinkled their pitch with wild growth expectations from Jupiter Communications.  Or when everyone said they were a Java company when Java was the cool buzzword.  Frankly I do not care if you are Web 2.0, Web 1.0, etc.  All I care about is what your service or product does, why it is valuable to the end user, why it is uniquely different from the competition, what the barriers to entry are, and how you plan on reaching your customers and how you will ultimately make money.  Don’t start your pitch with Web 2.0 ecochamber talk.  In fact as Jeff and I discussed several companies and ideas, we concluded that most of them were just features and not companies.  And as Jeff states, when small is the new big, then it poses problems for VCs as well.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

While getting in early and being nimble is a great way to make money, no matter how early you go, it is hard to build a sustainable VC portfolio investing in features.  As an entrepreneur, if you can get up and running for $20-30k, so can 10 other talented people.  Fred Wilson and a new VC blogger, Peter Rip, have written some thoughtful posts about a bubble mentality developing.  I have written about it before as well in an earlier post comparing and contrasting 1999 vs today.

In other words, these business models are quite capital efficient.  It is no wonder why VCs are quite excited about next generation web companies.  All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble.  As you see from Tim’s map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.

So if you are an entrepreneur, stop talking about Web 2.0 and start talking about how you are going to scale your business and make money.  Start talking about how you are going to create a defensible barrier to entry.  Better yet, since it is so cheap and easy to get started show me whay you are not just a feature, show me your user growth, and show me how you will maintain your competitive advantage.  Sure, as a startup, you will not have all of the answers and your business model may change, but show me that you care about these business concepts and that you have thought through these issues.  While I am a big believer in the promise of the web, I see this less as a revolution but more an evolution from where we started in the mid-90s.  We are talking about the same principles as the mid-90s, and we would not be here today were it not for the incredibly painful bursting of the last bubble.  But with every bubble bursting comes a rebirth and from the last bubble what we have is lots of cheap bandwidth, resilient entrepreneurs who scraped for crumbs to survive, and a mentality to do it cheaply (rise of open source and leveraging commodity inputs).  What we also have today versus yesterday are business models that can scale cheaply, be profitable, and throw off lots of cash.  Let’s focus more on these concepts versus being Web 2.0, as I do not want to think about what kind of rebirth will come from another bubble.


Angus Bankes, CTO of Moreover, recently introduced me to Jeremy Ruston, the creator of TiddlyWiki.  I honestly did not really get it at first, but I have been using TiddlyWiki since last weekend and have really grown to like it.  According to Jeremy, who I spoke to this week, Tiddlywiki is a reusable, non-linear, personal web notebook.  On the TiddlyWiki site, Jeremy goes on to say:

It’s written in HTML, CSS and JavaScript to run on any modern browser without needing any ServerSide logic. It allows anyone to create personal SelfContained hypertext documents that can be posted to any WebServer, sent by email or kept on a USB thumb drive to make a WikiOnAStick.

As I’ve said before increasingly the web is becoming my platform and the browser is my gateway to rich services.  I have a public blog which you are reading here, a private blog where I bookmark some items and make notes to myself, a couple of wikis which we use internally at Dawntreader or with portfolio companies to work on specific projects, and now a TiddlyWiki which I use to organize my personal thoughts, put ToDoLists together, record call notes, etc.  Instead of having all of my notes in a notebook or in Outlook or Word, I now have a searchable, taggable personal notebook accessible through any web browser.  I can link to files in my hard drive, websites, etc.  It is open source and there is an increasingly strong community building new plugins and macros to add to your TiddlyWiki.  The great thing is that it is a selfcontained file with no server side installation meaning I can carry it with me, email it, put it on a USB drive, or even upload it to a fileshare internally or on the web.  I am still grokking this but needless to say I suggest that you save a copy of it and start using it.  I am currently using Johnny LeRoys TigglyTagWiki version which you can find here.  As for how big or active the community is, Jeremy says it is hard to tell but his site is getting 25k unique visitors a month and growing.  On Technorati there are 1271 posts with Tiddlywiki mentioned.  For an even clearer explanation of TiddlyWiki, I suggest going to  Euicho does a good job of breaking it down to its elements, comparing and contrasting it to Wikis, and outlining the limitless possibilities:

  • It works great as a documentation manager for products, software, etc.
  • Do you have a desktop full of tiny .txt file reminders and notes? It can store little bits of information, reminders, and notes like that with ease.
  • It makes a great FAQ page.
  • Turn it into a todo list, with items as tiddlers.
  • Some use it as a blog.
  • Some use it as a website.
  • Make it your own personal dictionary/encyclopedia.

What I love most about Tiddlywiki is that it is quite easy to use but incredibly flexible.

Verisign acquires Moreover

Like Nick Denton and David Galbraith, I can’t comment on the acquisition.  What I can say is that Moreover was a pioneer in the early use of weblogs via newsblogger, news search, and content syndication via XML and RSS.  That being said, we had to make some choices when the economy cratered in 2000 and sometimes you can be too early to market before people are fully ready for what you have.  I now look forward to what Verisign will do with the combined Technologies group.  As David Galbraith says, it will be interesting to watch…

I have been banging on about the importance of ping servers for a while, perhaps Versign with Moreover and can do something or perhaps another startup will.

Whatever happens, the architecture of online publishing is changing and with it, the entire architecture of search – pinged instead of crawled. That is a very big deal for Google.

It has been quite a journey during the last five years, but I am glad that I had the chance to work closely with so many talented professionals like Nick Denton, Jeff Jarvis, David Galbraith, Jim Pitkow, and Angus Bankes, many of whom are helping shape the next generation web.

Order takers versus order makers

I have to admit that hiring excellent sales people is not an easy task.  Any sales person worth his weight can pitch with the best of them, articulate a strong value proposition, and demonstrate a nice track record of success.  I like to look at past experiences on a sale person’s resume and a history of overachievement.  All that being said, I have also had plenty of sales managers come in the door with all of the criteria but just flail.  Some have ridden a hot product in a hot market and others for some reason just cannot make the transition from one company to another or one market to another.  One of the fundamental criteria that any startup needs to look for is hunger.  If you are a sales rep at an early stage company with no name, no brand, and an unproven product, you better be hungry, make your calls, schedule your meetings and not take no for an answer.  What this boils down for me is the difference between "order takers" and "order makers."  In one of my portfolio companies we thought we hired the best team with significant industry experience having ramped up a startup to a successful IPO.  What happened, in my mind and the CEO’s mind, is that they got fat and happy.  At the peak of their success from the prior company the sales team had performed so well that they transitioned from order making to order taking.  Instead of going out and playing the numbers game-doing the dirty work, making the calls, and having the meetings, they expected resellers and customers to come to them.  They expected the fax machine to ring with orders.  They went elephant hunting in search of the big win which proved to be elusive or too lenghty an endeavor.  So whatever you do when you hire your next group of sales reps, make sure they have the qualifications but more importantly make sure that they have the hunger and desire to win.  Make sure that you have "order makers" and not "order takers."

Next-generation web

I am out in the Bay area the next couple of days but unfortunately will not be at Web 2.0.  That being said, I suggest staying up-to-date on next-generation web applications and services through Emily Chang’s eHub.  It is great to see all of the innovation out there but we must remember while it takes much less to build an application and get it out to the masses, the barriers to entry are much lower.  All it takes is one to two smart programmers to get a rich product in the market and as you dig into eHub it is quite obvious that there are several categories with 3 or 4 players in them already (not including what Yahoo, Google, and others are doing).