Category: Entrepreneurship

EntrepreneurshipSaaS

Pioneers get arrows in their backs

Posted on by Ed Sim

Pioneers get arrows in their backs – I have experienced it firsthand from an active investor's viewpoint and written about it in the past.  Being early in a market is great but being too early can be deadly.  Just like the settlers in the westward migration, entrepreneurs who are too early will get arrows in their back.  It doesn't matter if you have a rock star CEO (Bill Coleman who founded BEA) and $100mm of funding from some great investors.  If you are too early and have to spend lots of money educating a market and get engaged in long protracted sales cycles and pilots, you are not going to be able to spend your way to success.

That is what it seems like is happening to Cassat Software. Forbes has an article about Cassat nearing the end.  On the surface it seems like the company was built for the right place at the right time helping enterprises save tons of money and run their internal data center like a cloud.  However the first funding went in 6 years ago and has totaled around $100mm since then.  Here is a quote from their founder and CEO:

For many years, Coleman acted as something of a prophet for cheap computing via the cloud, but he also thought it would mean a sharp drop in pricing with which the big companies would not be able to compete.

"The big guys copied my story," says Coleman. Cassatt, he adds, was upended by a slowing economy and by customers skittish about closing big orders or changing existing ways.

"What frustrates me is my own naivete," Coleman told Forbes. "I thought I could give companies something radical that had a proven return on investment, and they would be willing to change all their companies' computer policies and procedures to get that. Right now, it's hard to get people to get beyond proof-of-concept tests or a data center energy analysis."

He will be right eventually but will not have a lot to show for it.  A couple points to make – raising too much money too early can be harmful as it puts huge expectations on a company before it has proven itself and selling million dollar plus licenses into enterprises has gone the way of the dinosaur as only the biggest companies can afford to do this and it is extremely expensive to do.  Remember some of my old posts about frictionless sales and leveraging the web for sales/marketing and inside sales?  Having just participated as an angel in the recent Eucalyptus funding led by Benchmark, we are hoping to avoid this fate leveraging free download model which has generated over 14 thousand users, many of whom are corporate customers.  In addition, we have signed partnerships and are bundled in the Sun cloud computing initiative and the new Ubuntu enterprise Linux release.  Got to love leveraging partners and downloads to drive sales leads and sales.
Entrepreneurship

Growing your business in a recession

Posted on by Ed Sim

I read a great article by James Surowiecki in the New Yorker the other day titled "Hanging Tough."  In the piece, James gives a historical perspective on companies that thrived and grew during previous recessions by increasing spending on on advertising and R&D.  While I am not advocating that companies go out and blow their cash on ads and spending on far-out development projects, I do want my readers to understand that it is possible to gain market share during difficult times.

One way to read these studies is simply that recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less. When everyone is advertising, for instance, it’s hard to separate yourself from the pack; when ads are scarcer, the returns on investment seem to rise. That may be why during the 1990-91 recession, according to a Bain & Company study, twice as many companies leaped from the bottom of their industries to the top as did so in the years before and after.

A personal example that sticks with me is of former portfolio company GoToMyPC which is now Citrix Online.  We had our huge exponential growth years from 2000-2004 during a difficult time in the technology markets.  And yes, we did increase our spending on ads and at one point in time became one of the largest advertisers on the web.  However, what we did was negotiate for pay for performance contracts where we would only pay if we signed up new customers.  While not a novel idea today, it was quite novel back in the day.  Subsequently we were able to turn a fixed cost that could have been a huge cash drain on the business into a variable cost.  In addition, our ads had tremendous impact because every other competitor was not advertising and our brand became quite recognizable.  Were it not for our creative and aggressive approach to acquiring customers, I would argue that while we would have been ultimately successful it certainly would have taken a lot longer.  So reread the article and think about ways that you can creatively grow your business by turning a fixed cost into a variable cost based on revenue growth and you may find a way to efficiently grow while managing your precious cash.  Remember in times like these, everyone is willing to negotiate and what may have been a hard deal to come by 2 months ago may be possible today.

EntrepreneurshipVenture Capital

Cover the basics before you raise capital

Posted on by Ed Sim

No matter how many times I told my friend that he needed to get a deck together for a potential capital raise and model out some thoughts on market sizing and financials, I ran into resistance.  It was not because he didn't think it was important or that it mattered.  It was because he was understaffed and going 60 miles per hour trying to get a product released.  I can understand that pain but at the same time, if you want to raise capital from anyone, you need to have the basics covered.

Fast forward 6 weeks from that last conversation, and we ended up having a meeting with a "friendly" VC to receive some market feedback on where his company stood and what needed to get done to raise capital.  And sure enough, it didn't take long for my friend to be questioned on the revenue model, potential market size and opportunity, and how long the cash would last.  Of course, he did have some strong answers but they were not what the VC was looking for – it was not quantitative enough.  We all know that coming up with market sizing and revenue forecasts for a startup is as accurate as the weatherman predicting the weather.  That being said, VCs want to understand the logic behind the numbers as much as the numbers themselves. 

Overall the meeting went as I suspected it would – a VC who was very interested in the product but also highlighting the fact that the revenue model was not clear.  The kiss of death for me on the revenue side was when the entrepreneur said that he would monetize the company like Facebook and Twitter.  Hmmm?  We all know that Facebook and Twitter are unbelievable web phenomenons and suck up incredible user attention.  And yes I am sure that Twitter will find a way to monetize the stream of data flowing through the system and I am sure that Facebook has tremendous value.  That being said accumulating users and worrying about revenue years from now is yesterday's news.  Unless you have tremendous scale when you show up at a VC's door, then don't bank on ad revenue as your only revenue source.  We have seen the market numbers-overall online ad revenue declining but search revenue increasing.  In addition we all know that social apps on the consumer side have incredibly low CPMs and that you need massive numbers to turn into a business.  So if you want to get funded, you better have a clear answer on how you will make money and either be implementing that model today or in the short-term.  What VCs are looking for is a revenue model today that makes sense – this can include premium subscription revenue, analytic revenue, and even lead generation revenue, but don't ptich massive scale and advertising as your go-to revenue souce 24 months from funding.  You will be shown the door quite quickly.

Entrepreneurship

Taking advantage of the horrible environment

Posted on by Ed Sim

My expectations for 2009 are that things will get worse before they get better.  On the portfolio company side, I would rather have my companies growing at a lesser rate getting closer to breakeven than growing too aggressively and burning lots of cash.  Once your house is in order (see some earlier posts I made on this topic), I do see opportunities to take advantage of this environment.

As we all know, in a distressed environment prices come down.  So while now may not be the best time to sell your business as multiples and valuations have come down significantly, it could be a great time to pick up technology to expand your product line. In a world where everything is cheaper, those who are strong enough to make moves can find some great opportunities.  One of my portfolio companies, netForensics just did that as it picked up High Tower Software in an asset purchase.  What this does is allow the company to offer its customers the ability to manage the entire security compliance lifecycle – from log management to a complete security operations center – for all sized organizations, from the smallest departmental installation to the largest enterprise.  In other words, this filled a huge gap in our product line and on our product roadmap and allows us to deliver these capabilities ASAP. 

So in a world where everything is cheaper, you may be able to pick up some great assets at great prices as long as you have your house in order.  Rather than being a distraction, this fit right into our product roadmap and accelerated our product strategy.  One other way to take advantage of this environment is by hiring great people.  There is lots of talent in the market, and it is clear that expectations for total compensation have come down over the last year.  Be on the lookout for these A players so you can continue building your business and be prepared for when the tides turn.

EntrepreneurshipVenture Capital

Positioning and pitch decks for startups

Posted on by Ed Sim

A friend of mine is putting together his first deck for potential investors.  In typical startup fashion, they launched a product, got a number of users, and then iterated several times to improve the service.  With the product in the hands of tens of thousands of users, they started getting inbound requests from larger organizations who were willing to pay for customized and private group related services.  While Version 2.0 will be released to the greater world in the next 6-8 weeks, you may be interested in what I had to say about the pitch deck. 

IMHO, a great pitch deck is concise (15 slides) and highly focused.  And in the deck I like to see the following points covered (yes, this is my preferred order):

  1. One/Two sentence pitch for company -value proposition (1 slide)
  2. Brief history – founded when, capital raised to date and from whom, capital needed in new round (1 slide)
  3. Who/Team – give me some context of who you are, your backgrounds, success/failures so I can get an idea of your ability to deliver and surround yourself with experienced talent, also include any board members or advisory board members that may be relevant (1 slide)
  4. What's the problem? – too often I see pitches where the entrepreneurs dive right into the product and I scratch my head thinking why in the world we need another lifestreaming service or social network or ad network (1 – 2 slides)
  5. How do you UNIQUELY solve the problem? – solving the problem just like everyone else is not exciting.  You need to show how you solve the problem UNIQUELY and ultimately deliver a 5-10x improvement for the customer in terms of ease of use/functionality and cost.  What this boils down to is your simple product pitch. (1-2 slides)
  6. Product/Tech – make sure to tell me about your secret sauce or core tech that enables you to deliver a unique service – screen shots, overview, etc – could be good time to go into demo in a live meeting (1-2 slides)
  7. Customer traction – is product in hands of customers?  if so, how long in market and share some data on users or beta customers or customers (1-2 slides).
  8. Market size/Competitive Overview – how big is the market and how do you come up with that number – how are you positioned in the market – show graphically maybe by offering or value proposition (this is where you get your typical top right hand corner Gartner like quadrant).  A sin is to tell me you have no competition (1 – 2 slides)
  9. GoToMarket Strategy – how will you grow quickly and in a capital efficient manner?  How will you sell your product – online, direct, or indirect sales?  any potential partners signed or game changing partners that will help you deliver?  (1 slide)
  10. Business/Revenue model – show me that the economics of your business work – note that single digit gross margins will get you thrown out the door pretty quickly (1 slide)
  11. Financials – yes I know for early stage customers it is at best a guesstimate but give me an idea of how this will grow, what the revenue numbers look like over the next 3 years to give me an idea of how the business scales, and ultimately it helps me understand the true cash needs for the business to get to breakeven (1 slide)
  12. The financing round – lay out the dollars you are asking for, how it will be used, and how long the cash will last (1 slide)
  13. Milestones-what milestones have you hit so far and what do you plan on realizing during the next year with the new cash (1 slide)

Ok, pretty basic and that's it.  For those of you have triskaidekaphobia or fear of the number 13, it's ok as it is a lucky number in our house since my wife was born on the 13th.  Anyway, if you cover all of these points the deck should be about 15 pages in length and provide a great overview for potential investors.  One other point that I want to highlight is that how you position your business is key.  Take a look at this post from April 2004 titled What Aisle, What Shelf. You need to make sure that your audience gets where you fit in the ecosystem quickly and how you are different from what else is out there.

UPDATED: One item I forgot to mention: in this world of constant digital bombardment, you must figure out how your product or service becomes a "must-have" versus a "nice-to-have" solution in a customer's daily life.  If you are a "must have" with minimal substitute products then people will clearly pay for what you have.  If you are a "nice to have" in a world of many substitute products even though you may get some usage you will never be able to monetize that base. 

Entrepreneurship

More reasons to watch your burn

Posted on by Ed Sim

Despite these tough times, there are still some bullheaded companies who think they can grow their way out of this mess or find the right M&A partner to bail them out.  I can guarantee you that this is a recipe for disaster.  I was on the phone today with the CEO of one our portfolio companies, and we were joking that we were in unprecedented times since we have been approached by a number of bankers about buying companies that are much larger than us.  So if these bigger private companies are hawking themselves looking for a deal, where does that leave a small startup?

It goes back to my one of my themes about building a business – focus on what you can control and don't try to find a savior by looking at external forces.  What this means is figure out what your core business is and take a scalpel and lop off the areas where you do not see an immediate return on investment.  If you believe you will find a strategic partner to buy you, forget about it because every other private company that has been funded during the last 5 years is trying to do the same.  In addition, I can also promise you that any large or small company looking to buy a startup does not also want to pick up a large burn rate.  Even on a private-private merger, most of these VC-backed companies will do nothing unless the deal is cash flow positive on Day 1.  Do yourself a favor, build an expense line where getting profitable can happen with the cash that you have.  This way you can control your own destiny and also even make yourself a more attractive strategic partner to any company in the future.  One other point for all of those advertising related startups-go find some other revenue streams like becoming a platform for partners via cobranding or hosting fees which scale with usage or find some other premium model because the ad market is drying up and the dollars will flow to some of the larger, more established platforms.

Entrepreneurship

A ray of light in this environment?

Posted on by Ed Sim

I did an interview with Rich Maguire of Datamation last week which he just posted yesterday.  While the markets seemed to get excited for a day about the bank bailout, attention is turning toward an even bigger problem for startups, a potential recession.  The consumer no longer has that ATM called their house and confidence and spending to boot are down.  So what's an entrepreneur to do these days and are there any pockets of opportunity?  Trust me, I am not going to give the party line that it is great to start a company now because, you know what, it really is hard to go out and do that.  However, if you are brave and bold enough to do so, I will tell you that you could be well positioned 18 months from now when the economy does get back into gear.  This market will truly separate out those who are just in it for the money, and those who are out their to build an insanely great product or service.  As for the article from yesterday, here is an excerpt and hope you enjoy.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that spectrum as well.”

EntrepreneurshipVenture Capital

Be prudent but don't panic!

Posted on by Ed Sim

The alarm bells are ringing in Silicon Valley and start-up land today with Sequoia Capital and Ron Conway telling companies to prepare for the economic meltdown and to raise cash by cutting their burn.  This is not new news as being in New York we started to feel the real economic impact in mid-September as Lehman melted down and as Merrill Lynch was bailed out by Bank of America.  This is all prescient advice and something I have been espousing to my portfolio companies for awhile – see my last post from mid-September on Doing More with Less, a mantra that all startups should live by.  All that being said, it is not time to hit the panic button.  Don’t go out and fire everyone wholesale and skinny down just because everyone else is. Do it because it is right for your business and because all of your leading indicators tell you to do so.  Do it the right way by not making a 20% cut across the board but by thoughtfully thinking about your business, your priorities, and where you need to focus your capital and resources to grow your revenue but conserve cash.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before.  As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related.  It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality.  For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses.  Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market.  Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

Entrepreneurship

Delivering on Q3 forecasts!

Posted on by Ed Sim

I received some incredible news last night from two portfolio company CEOs updating me on our Q3 numbers.  They not only hit their respective forecasts set early in the year, but they beat them.  Normally I expect our portfolio companies to hit their numbers, but I am ecstatic because we delivered in the midst of the largest financial crisis we have ever seen.  While much news on the technology world is of doom and gloom, and while I too have been advising portfolio companies to conserve cash, it is nice to see that companies are still willing to spend if you deliver a strong value proposition.  More importantly these numbers speak to the commitment of the respective teams to do anything possible to deliver on the Q3 forecasts.  In each company, sales reps and executives flew out to key prospects and knocked off obstacle upon obstacle until they walked away with an order.  Ok, it is not as dramatic as it sounds as there were numerous meetings and technology proof of concepts before getting a sale, but the point remains that the companies that delivered did not wait for the orders but went out and got them.  There were a number of stories of sacrifices that were made including one sales rep who was expecting his third child yesterday but was at a prospect getting the contract inked and another one of a sales rep and sales engineer who camped out at a client’s office all day and wouldn’t leave until they had a signed contract.  Extraordinary times require extraordinary measures, and I hope that stories like these inspire you to keep fighting the good fight and to go out and make things happen.  Startups need to be scrappy and tough to survive!

Entrepreneurship

Doing more with less

Posted on by Ed Sim

Being in New York, it is hard to escape the realities of the ailing financial sector.  When I took the train into the city this morning I could see the somber look in people’s eyes knowing what had just happened to Lehman Brothers and the uncertainty of the financial markets and economy.  Given this state of play, it is clear that capital is becoming scarcer by the minute and that we don’t know when we may come out of this mess.  The mantra for most businesses is to just wait and see rather than make any real decisions, especially when that requires a commitment of capital.  Then I get an email from Bill Morrison at ThinkEquity today outlining his views that we are in Phase II of a Media Recession:

In our experience, media recessions typically develop in three phases. First, marketers reduce spot market activity and eliminate quarterly budget flushes. Then, marketers begin canceling "up-front" commitments and previously signed advertising contracts. Lastly, marketers begin to rationalize/reduce budgets for future years. Our research suggests that we entered phase two of the current media recession during 3Q. Our recent conversations with online publishers revealed a significant number of advertisers that have cancelled contracts or significantly reduced commitments for the second half of 2008. The majority of industry contacts we spoke with this quarter said fundamentals weakened from 2Q to 3Q.

Trust me, I am not a doom and gloom guy and on the contrary believe that now is a great time to invest and build for the future.  That being said, it is also time to be smart and highly efficient. It is a great time to look internally and think about your priorities, your processes and whether or not you can do things better. 

In this backdrop, I had a couple of board meetings last week and as you might have guessed, one of the recurring themes was needing more resources.  While the companies were quite different, I seemed to be in the same meeting with each department head giving an overview and goal tracking from the previous quarter and each presentation ending with, "I need more resources."  It’s not that I am against hiring more people for portfolio companies, since I am all for it.  My only point for all entrepreneurs and managers is that when you put together the hiring plan to make sure you think about the fact that you should always be under resourced and have more things to do than can get done.  What this really means is that you have to do an incredible job of prioritizing your goals. Always ask yourself how you can do more with less and you will find that you and your team will become incredibly resourceful and stretch your dollars a lot farther than anticipated. 

Speaking from experience, I have repeatedly seen situations where managers ask for additional hires, we tell them to wait a quarter, and then they miraculously are able to manage for the quarter. In fact, I was joking at one meeting the other day saying that it was incredible that we had half the staff from a year ago and have more revenue today that we did before.  If we cut in half again, I mused, perhaps we could grow even more.  OK-that is quite extreme, and we did agree to end up hiring a few more resources in various departments.  What really struck me was the fact that when we hit the wall over a year ago everyone thought we weren’t going to be able to make it and grow our business.  What changed was that management became maniacally focused in prioritizing opportunities, not chasing every customer, being ruthless about how they spend their time, and consequently reengineering a number of their internal processes.  We are now a much healthier company with a better operational platform that merits more investment.  While I am not advocating that you starve your business and recognize that every company is different, I am suggesting that doing more with less is a mantra that you should subscribe to regardless of the economic environment and that in the long run it will yield tremendous results for you.