Category: Entrepreneurship

It has been stated that there is a fine line between genius and insanity but who’s to tell where one ends and the other begins.  I can also say that there is a similarly fine line between dilution and delusion but this one is easier to draw.  Recently my partners and I were discussing the merits of a term sheet that came in for a portfolio company.  While the term sheet did not meet our expectations 100%, there were a number of strong points.  Unfortunately, the entrepreneur was not terribly pleased as he had a much higher expectation for round size and valuation in his head.  As we walked through the process for the current round of financing, my partners and I clearly understood that while we can guide the market with our pricing expectations, that ultimately the market decides.  So if faced with this situation, my only word of advice for entrepreneurs is that it is important to know that there is a fine line between dilution and delusion.  Talking to 1 or 2 investors does not ultimately give you a great idea of what you are worth and under that scenario I would encourage you to meet a number of folks to get an idea of what the market thinks about your business.  However, if you have already met a number of firms and they are giving you consistent feedback about how much money to raise and at what price, you may be delusional to keep pressing on in search of optimizing a valuation which no one is willing to pay.  In fact, to be clear, valuation isn’t everything and there are many situations where having too high a valuation for an early stage company can be detrimental as it can set unrealistic expectations for your team and your investors.  Being priced for perfection means that:

1. a company that is performing quite well may be still be viewed as a failure in the eyes of the existing investors and team. 

2. your company must really hit significant milestones to raise a next round of funding at a higher price.

3. it may take too long to raise funding to find the right investor who will pay the valuation you are looking for

4. a potentially great exit for your company may never happen because it doesn’t meet the bar for your last round of financing.

So if the market is giving you a strong signal, listen and remember there is more to a financing than price and you need to carefully balance a number of factors such as other terms in the deal, an investor’s ability to add value, and your ability to work with the lead partner and his firm.

Vision statements matter.  Sometimes we get too focused on the daily bump and grind, the next product release, and forget about the big picture and what we are trying to accomplish (see an earlier post on Vision).  Trust me, the word vision became a dirty word during the bubble as many companies were long on vision and short on execution.  I am not advocating that we return to that environment, but I am strongly saying that companies do need a vision and that it can help them with their execution.

I went out to dinner a couple weeks ago with a few key executives at a portfolio company and as we started talking about future product direction, it seemed that we all had different ideas of where the company should go.  Seeing some confusion I tried to get us focused back on the basics when I asked the team what our vision was.  The first pitch was great and so were the others but unfortunately they were all different.  It is really hard to drive future product direction when your key executives can’t agree on what the company should be when it grows up.  In addition, it is quite difficult to get your employees on the same page without a simple, succinct vision.  Furthermore, it is hard to build word of mouth marketing without boiling down who you are and what you do in a memorable and short manner.  Yes, it can be challenging to distill everything you are doing into a short pitch but great companies are able to do this.  So let’s look at a few companies in the highly competitive video space that have managed to stand out from the crowd (other than YouTube) and break down their vision statements and taglines:

1. Metacafe: Metacafe is one of the world’s largest online video broadcasters with a global audience of 16 million unique visitors (comScore Media Metrix) watching over 400 million videos each month.  Using our VideoRank™ technology, Metacafe is the only site that mines the collective wisdom of its audience to filter and surface the most entertaining videos, making it the best place to both watch and distribute high quality video content.

Tagline: Serving the world’s best videos

(its saying I’m a pretty big player and it gives you the best videos,not just every video – secret sauce is its VideoRank technology)

2. Revver: Revver is a video-sharing platform built the way the internet really works. We support the free and unlimited sharing of media. Our unique technology tracks and monetizes videos as they spread virally across the web, so no matter where your creativity travels, you benefit.

Tagline: What if creativity could pay the rent?

(sounds a little techie-video sharing platform the way the internet works? the differentiation is in the fact you get paid-the vision sounds like it is more focused on the publisher than the consumer, secret sauce is its platform to pay creators)

So they are both video sharing sites but each has its unique spin to help its employees and users spread the word in a simple way.  In addition, I am sure that their respective vision statements helps guide their future product direction.  Revver probably asks itself, does my next release help me further strengthen my advantage as the best platform to get publishers paid.  Metacafe probably is constantly working to improve its community based voting and algorithms.

The trick is to make your vision broad enough to allow you to grow into it, yet be differentiated, and obviously simple to remember.  You want all of your employees when they are talking on the phone with customers or friends or even at cocktail parties to give a simple description of what your company does and how it does it.  You want the next degree of relationships to be able to explain just as easily as your employees – this is how great buzz builds.  You want your key product guys asking themselves how does this next release help our company continue to deliver against our vision.  So remember before launching into a variety of different directions, think long and hard about where you want the company to go and how to distill that vision into an understandable and simple pitch to help get the message out.  Take the simple litmus test at your next management meeting to see if you are all rowing in the same boat or different ones.  Doing this does not guarantee success but definitely helps get you and your team moving in the right and more importantly the SAME direction.

A couple weeks ago I sat down with a new CEO of one of our portfolio companies, and we discussed goals for 2007 and what I and the board expected of him.  Yes, there was your usual conversation about getting more customers, building out a team, and ramping up revenue while managing costs, but one of the most important points I made to him was in how to communicate with the board.  I can tell you that one area where many first-time CEOs fail is in communicating and working with their board.  Either they don’t give you enough information, they give you too much, or they feel that the only news to share is good news.  I have written a few posts in the past on board communication including We Don’t Like Surprises and the VC/Entrepreneur Relationship. Given how important this is, I thought I would share a few simple thoughts with you.

With respect to your information flow, make it timely, transparent, and relevant:

1. Timely: we don’t like surprises.  Tell me in advance.  When you think we are going to miss the quarter by a significant amount, don’t tell me 2 days before the end of the quarter, tell me as soon as you can.  We are partners and this gives us all an opportunity to prepare contingency plans in advance or control our hiring before we run into a wall.  CEOs who communicate well make sure the bad news travels just as quickly as the good news. If you don’t tell us early, we can’t help you.

2. Transparent: let me know as clearly and concisely what the issue is and don’t spin me.  Transparency means sharing the raw data with me as well as the short summary of why something happened positively or negatively. If we don’t get a deal this quarter, and you really don’t think it will happen, don’t keep it on the sales pipeline and set the wrong expectations for us.

3. Relevant: I don’t need to know every little detail of your day-to-day operations but we also do need to be apprised of what is important. Relevancy of course changes with company stage as well.  Knowing as soon as possible about the first couple of engineering hires is relevant in a startup but knowing about the 10th engineer does not require a real-time update.  If you not sure if a specific update is relevant, err on the side of more is better.  Sending an email update out to the board is simple, and trust me, if the news is important, those board members who are more engaged or concerned will reach out to you.  If it really is a big issue (positive or negative), I suggest calling a few of the board members to discuss with them. 

At the end of the day, information flow comes down to trust – board members trusting the CEO and the CEO trusting the board.  The CEO-Board relationship is a two way street.  Board members have to be just as direct, open, and upfront with respect to our expectations for the CEO and the management team.  This means getting a plan in place for the year that is discussed, vetted, and ultimately finalized which the board and the management team sign up to. If you abide by these simple rules, I can assure you that these tips will go a long way towards helping you build a very strong and healthy relationship with your board.  At the end of the day, keeping any relationship strong and thriving is dependent on how well everyone communicates with each other.

There are many things that I am thankful for this year, but one of the best things that could happen to the New York tech scene is the growth of Google.  Last year Google opened a huge office in Chelsea and moved about 500 employees into the new location.  While I initially thought that most of the staffers would be associated with advertising sales or content business development, through my various visits to the office I was surprised to learn that there were lots of engineers working on some significant projects in New York like Google Maps and Google Mobile Search.  There is an interesting article in today’s New York Times about the the Googleplex in Manhattan and how the Silicon Valley culture is being brought to New York. 

The strategy of keeping employees happy and committed to spending endless hours on campus seems to be working. Richard Burdon, 37, an engineer who joined Google two years ago, has been staying past midnight to prepare for the introduction of a project. (Google’s Manhattan engineers have been responsible for developing Google Maps and are working on some 100 other projects.)

“Google is about as interesting as starting your own startup because you can really follow your own ideas,” said Mr. Burdon, who previously worked for Goldman Sachs, Sony and I.B.M. The only time he could remember leaving the office during the workday was to buy a friend a birthday present.

As a New York-based venture capitalist, this is great news.  While many employees continue to enjoy the meteoric growth of the company, I am quite excited at the prospect of having hundreds of well-trained engineers and product managers in New York who will one day want to start their own company.  New York has always had a talented and core group of technologists, many of whom are working on startup number 2 or 3, but what gets me excited is the idea that many newbies to the startup and web culture will have the opportunity to experience the fast-paced, engineering driven world of Google.  It is precisely the engineers like Richard Burdon mentioned above who worked at major corporations like Goldman Sachs, Sony, and IBM, who may have never left their jobs for a startup but did so for Google.  It is also many of these engineers, once they get their feet wet in an engineer driven culture, who will eventually want to leave and start their own companies contributing to the continued emergence of New York as a great place to launch a web startup.

It is near the end of the year and I would hope by now that most companies have been through a revision or two of their strategic plan and budget for 2007.  While strategic planning and budgeting is a task that some may find quite onerous or even useless, it is an imperative process and one that will help align your team and continue driving the growth of your business.  Rather than go into a step-by-step walkthrough of this process, I thought it would be more helpful if I share with you the number one mistake I see made year in and year out – companies putting together plans and revenue targets which are unattainable. Look, we all want our companies to excel and stretch to reach their goals but at the same time setting a bar in the clouds can be detrimental to you and your company’s health.

Why is this a problem?  First, creating a plan that is too ambitious only sets you and the company up for failure.  People don’t like to fail and you and your employees can get demoralized after repeatedly missing targets by a significant amount and especially if your compensation is tied to a plan that will never be realized.  Secondly, in trying to hit an unattainable plan, management teams typically make another huge mistake – overhiring too early or frontloading all of their hires to spend their way to success.  What this does is speed up cash burn without delivering the desired results.  In an earlier post, I mentioned how hiring too far in advance of your market can lead to ruin:

"Do more with less and be careful of ramping up sales until you have a repeatable selling model.  In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins."

So just do yourself a favor when you build your strategic plan for next year – get input from all of the key stakeholders (sales, marketing, engineering), get them to buy off on the plan, and put together goals that force the company to perform at its best while at the same time being grounded in reality.  A good possible solution is for your company to lay out 2 plans – a baseline growth plan which the board approves and an upside plan that has a higher benchmark which the employees use as their goal.  What this does is allow companies to manage to a certain burn rate (baseline) but at the same time continue to push its teams to excel and deliver results.  If the company exceeds the baseline plan in a certain quarter, companies can always add a few more people to maintain the upside growth.

James Surowiecki has a great article in the New Yorker this week about the new Nintendo Wii system, titled "In Praise of Third Place."  What James really asks is if you are a distant third in a market, how do you compete with the big boys?  In this case, Nintendo is slugging it out with Sony and Microsoft and rather than going into hand-to-hand combat, Nintendo has changed the game and the stakes – forget about being the most powerful and fastest machine but how about focusing on being the easiest to use with a significant differentiating feature – motion sensors.  James goes on to say:

The point is that business is not a sporting event. Victory for one company doesn’t mean defeat for everyone else. Markets today are so big—the global video-game market is now close to thirty billion dollars—that companies can profit even when they’re not on top, as long as they aren’t desperately trying to get there. The key is to play to your strengths while recognizing your limitations. Nintendo knew that it could not compete with Microsoft and Sony in the quest to build the ultimate home-entertainment device. So it decided, with the Wii, to play a different game entirely.

I would argue that rather than title the article "In Praise of Third Place" that it should be titled "In Praise of First Place" because what Nintendo did was slice and dice the multi-billion dollar gaming market so that it could be first place in a submarket (which is quite huge) that Nintendo has defined, that plays to its strengths, and that it can win.  This is a big deal and quite smart.  Even though Nintendo is a large company fighting even larger ones, this is a strategy that any startup can use – change the stakes and be the best in your new category.  This does not mean to slice ad infinitum until you get a market so small that it is irrelevant, but the point is that going into "hand-to-hand" combat with those with much greater resources can be quite hazardous to your health.  Take a look at an excerpt from an earlier post I wrote about competing with the big boys. 

First, as a startup you have to get away from a feature/function battle because you will always lose against a big boy.  If a customer has already bought a product from an incumbent, they are more often than not willing to stay with that incumbent if they can deliver the extra feature/function soon enough in a good enough way. What I like startups to do is win with the product roadmap and vision.  Show the prospect how you solve their needs today better than the incumbent but more importantly why you are different and how your approach will solve their future needs.  If you can differentiate on this level, it gives you a much better chance to win.