Growing your business in a recession

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.

Cover the basics before you raise capital

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.

Hybrid clouds are coming

Amazon has taken off with its cloud compute infrastructure but there still have been some limitations from an enterprise perspective.  Mainly, some enterprises are concerned about keeping their data private, about reliability, and storage costs over time.  Any enterprise looking at potentially leveraging the cloud would love to have a hybrid solution which allows them to manage their own internal cloud and then burst over to a public cloud for either automated failover, extra storage, or to port an application over after using an internal platform for development.  Sun seems to get it as evidenced by their announcement today to offer their own cloud computing platform.  Key here is that it will be interoperable with Amazon S3 and its platform.

"Sun anticipates that the cloud scene will feature many clouds, both public and private, that are interoperable and driven by different application types. Applications eyed for deployment on Sun Cloud include Web 2.0 applications, social networking systems, gaming applications, and anything that needs the scale of the Web, said Tucker. Departmental applications are envisioned as well.

"What we're introducing in New York here is we're talking about our public cloud," for developers, Tucker said. Sun has seen a lot of interest in cloud computing from enterprises, he said. "It’s getting very rapid uptake at least in the large enterprises today," said Tucker.

What is interesting is that their is a little known startup with great open source technology called Eucalyptus which is helping drive some of this initiative. Eucalyptus will be the software that will allow the Sun cloud to interoperate with other platforms and services.  With this open source platform, companies can now deploy apps on their own cloud and use Amazon or other cloud services for high availabilty or extra storage without vendor lockin.  Congratulations to Rich Wolski and team as they have made tremendous strides during the last 6 months.  I was just with them in New York yesterday and believe they are on to something big.

Targeted television advertising is finally here

I have written a few post about the future of television advertising (10/2004, 11/2006, and 12/2006).  Yes the web has taken over and yes video on the web is advancing rapidly but that does not mean that the $60b spent on television advertising will disappear overnight.  What is needed for the industry is a way to make television commercials more relevant, targeted, and dynamic.  In other words, some of the best practices and technology from Internet advertising should be brought to television advertising.  Throughout the years Visible World (full disclosure: my fund has an investment in the company and my partner is on the board) has been working on making this a reality.  Today, there is a great article on the front page of the New York Times business section discussing Cablevision's launch of targeted commercials.  Visible World is the company that is helping Cablevision do this.  We still have a long way to go but it is great to see forward thinking companies trying to redefine television advertising instead of giving up and letting the web take over.

"Beginning with 500,000 homes in Brooklyn, the Bronx and some New Jersey areas, Cablevision will use its targeting technology to route ads to specific households based on data about income, ethnicity, gender or whether the homeowner has children or pets.

The technology requires no hardware or installation in a subscriber’s home, so viewers may not realize they are seeing ads different from a neighbor’s. But during the same show, a 50-something male may see an ad for, say, high-end speakers from Best Buy, while his neighbors with children may see one for a Best Buy video game.

“We have, as an industry, been talking about this since the beginning of time,” said Matt Seiler, the global chief executive of the media firm Universal McCann, a part of the Interpublic Group. “Now we’ve got it in 500,000 households. This is real.”

Taking advantage of the horrible environment

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.

Cisco raises another $4b in cash and looking for acquisitions

Ashlee Vance from the Bits Blog has a nice piece on why Cisco raised another $4b of cash through a debt offering yesterday even though they have $30b in cash. 

"As word of Cisco’s debt sale hit Wall Street, the standard chatter surrounding possible targets began anew. As usual, companies like EMC, NetApp, Sun Microsystems, Red Hat and BMC were discussed as desirable properties."

Regarding Cisco I have heard the same acquisition rumors.  On the smaller private company side, my two cents would be platform consolidation opportunities in the security space (software that can help tie their disparate security products together), bolstering their Scientific Atlanta acquisition by adding more interactive and ad targeting products for the digital set top box, and tuck-in acquisitions for their EOS or social networking initiative (see CNET article for more on this initiative)

I would love to hear your thoughts on this as well.

Best iPhone Photo App – Phanfare Photon

It is great to see my friend Andrew Erlichson getting some rave reviews for Phanfare Photon, his iPhone photo app.  According to ReadWriteWeb:

"Phanfare's Photon is currently the best photo sharing and photo management app on the iPhone. It is important to note that Photon puts less emphasis on social feature than other services like Radar, which we reviewed last week. Instead, it concentrates mostly on giving you easy access to all of your photos, while also providing you with the option to share them with your friends.

Phanfare's CEO Andrew Erlichson strongly believes that the iPhone and other smartphones will disrupt the traditional point-and-shoot photo camera market in the long run and will allow new players like Apple to get a foot into this market. This app is Phanfare's first step in following the market in this direction by marrying the iPhone's camera feature with a very capable cloud storage and photo sharing service."

I first started using Phanfare in late 2004 and have been a fan since.  Andrew and I go way back as I invested in his first startup, Flashbase, which we subsequently sold to Doubleclick a year later.  As I wrote back in 2004, Andrew believed in the idea of client software which was network enabled and sought to create an iTunes like environment for photos with smart caching and local manipulation of media with smart synching so albums and photos could be viewed from anywhere.  As the online photo sharing market has become more competitive, I have watched Phanfare evolve from a pay only service for sharing photos with small groups to a more wide open version with more community and collaboration.  And now Phanfare has staked its claim in the mobile market with its iPhone app (get it here).  Once again, what I love about the iPhone app is its rich client interface which also has smart caching so my albums and videos can pull up almost instantaneously with limited wait time.  So Andrew's vision of rich network connected clients have moved from the desktop to the next battleground, the mobile handset. As you know, seasoned entrepreneurs know how to be flexible and make course corrections in their business model and distribution strategy as the market evolves. Andrew has clearly done that over the years and it will be interesting to see how his bet on the smartphone market and the iPhone in particular pays off.

Positioning and pitch decks for startups

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. 

Sundance and a movie about a web pioneer you may have never heard of

My brother-in-law, composer and recent Emmy winner, Ben Decter, is kicking it this week in Sundance while two of his movies Heart of Stone and We Live in Public make the rounds. This summer he and I spoke about We Live in Public and Josh Harris.  It took me a few minutes to remember who he was and meeting him more than a few times while he was out raising capital for one of his many projects, Pseudo.com.

Josh started Jupiter Communications which during the mid-90s was the go-to research firm for market growth numbers for every startup business plan.  As a VC, you couldn't believe them, but it didn't stop every entrepreneur from using the hockey stick projections in their business plans.  Anyway, he went to start Pseudo.com, one of the first production companies for webisodes and streaming media.  In an old New York Magazine article from 1999 Josh proclaimed that ""The potential for a company like Pseudo is to start from a Website and replicate the success of ABC, NBC, or CBS — a long shot but an enormous payoff." He then went on to wire his house with heat sensing cameras so that his and his girlfriend's every move would be streamed live over the Internet."  Anyway, Pseudo.com went under in 2000 and Josh subsequently disappeared in isolation for quite awhile. 

As the writeup for the movie mentions, Josh "proved how in the not-so-distant future of life online, we will willingly trade our privacy for the connection and recognition we all deeply desire.  Through his experiments, including a six-month stint living under 24-hour live surveillance online which led him to mental collapse, he demonstrated the price we will all pay for living in public."  While his predictions were dead on in many respects, it is also quite tragic to see the pain that it inflicts on his own life. Who would have thought how quickly our private lives have become public as we leave a digital trail of ourselves, our loaction, our videos and pictures, and our thoughts all over the web, social networks, and Twitter.  The question we should all ask is where will all of this connectedness leave us 10 years from now.  I hope you enjoy the trailer and more importantly my brother-in-law's music 🙂

Going old school – how to reach people effectively

I had lunch with a friend last week when we were talking about the days years and years ago where it was cool to have an email address on your business card.  In fact, I remember picking attorneys to work on our venture deals in the mid-90s not only based on cost and experience but also based on how digital they were – no AOL email addresses please and if you use IM, then great.  Now I can honestly say that I can be overburdened at times dealing with my email, IMs, sms messages, phone calls, LinkedIn and Facebook messages.  So I must say it was quite refreshing last week when I received a hand delivered note from Robert Samet who runs Madison Search Partners, a well respected boutique search firm for senior level sales searches in the digital media and software sectors.  He, of course, had sent me a few emails before that and also followed up with an email afterwards.  Robert went old school with snail mail and physical communcations and with that got my attention.  Yes this is an old marketing trick but one that sometimes gets lost in the shuffle of digital communcation.  I, of course, had to take his call and when we spoke I asked him how his campaign went.  His hit rate was quite high and given his creativity, he is definitely a guy I want to use in the future for a search.  So in this day of constant and immediate communication, physical mail and snail mail can sometimes leave a lasting impression.  As for myself, I actually got some personal stationary last year to send note cards to friends and business contacts when I want to make sure that I deliver a more effective message.