In response to a one page blog by QuartSoft, 
http://quartsoft.com/blog/201303/getting-funded-by-venture-capitalists, 
I decided to start blogging again.  Please read their post first and then my response will make a little more sense.

Over the last twenty years, I have heard scores of VCs and Angels discuss this topic, not to mention the many personal conversations I've had.  There are a couple of significant differences between what they say and what you state here.

The number one issue is "Team."  Not an entrepreneur's experience.  That experience is a part of "team", but rarely do individuals get funded.

Second, while business model is critical to the success of a startup, depending on the stage of the startup, business model has varying level of importance.  The key component of business model of TAM, total available market.  The size and dollar potential of a market must be big enough to support a potential eventual valuation of a company for a 5 to 20+ times return on investment.  If the market isn't big enough, you may have a very nice life style or small business, but not one that generate's wealth.  The purpose of VC investment is to generate wealth, not support personal cash flow needs.  Obviously, in order for a company to generate wealth, a business model that includes market size, pricing, sales penetration rate and cost, cost of sales, along with management of general and administrative (G&A) expense, to support the proposition value generation.

Third, barrier to entry for competition is the general view that includes the intellectual property plan.  Patents, trademarks, copyrights and trade secrets are a part of the strategy, but only a part.  Further, very few startups begin with patents that have been adjudicated.  Generally, provisional patents are filed first.  If you wait for a patent to be granted, you may miss your market window for the benefits to be derived from the IP.  Further, a single patent by itself may leave itself open to competitive attack through additional patents that leverage the first one.  In business we call this a patent fence.

Entrepreneurs come in many forms.  How they fund their business needs to match the purpose of their business as well as its potential.  For example, I had one entrepreneur with whom I temporarily teamed threaten to keep the company private so my claim of equity would never have an liquid value.  This was a single entrepreneur who had poured his own hard earned cash into building a technology company, evolved from an initial business into a service business, and relocated from the East coast to Silicon Valley, who had run out of money before he could launch out of beta.  I came on as CEO to raise investment, launch the service product out of beta and build a team, but not necessarily in that order.  Two months is too short a time to raise money, especially through the holidays, but panic ensued.  There is more to the story, and he is a good person for whom I hold no ill will, but he is not the personality type of someone who will raise capital from professional investors.  

Self assessment is important in these matters.  Are you building an eCommerce site that will make money but is not really distinct?  Then, go the friends and family route or limited partner or LLC structure.  There are lots of doctors and lawyers who want to put their money to work.  You still need to do the work mentioned in the article, but target the right audience for your capital needs.

2011 Happy New Decade!

With the calendar moving past December 31st, 2010, we can say goodbye to a horrendous decade of worldwide financial problems and say hello to a new prosperity brought on by accelerated technological advancements. With much of science and engineering having migrated to information technology, the logarithmic development curve takes us to unknown opportunities in the very near future. It is this greenfield opportunity that empowers the intellectual creative intelligence of innovative entrepreneur and business leaders. While we can't say what specifics will open the doors for new entertainment and business products, we must suppose that these will come from many many areas of individual interests. Just as when we conceive of a product or service and don't know immediately how we will create it tactically, we can identify that components of the product, service and plan will evolve and become available from anywhere, and that we don't have to invent each part.

Some of the areas where I see opportunities in the near term future include hardware like GoogleTV types of intelligent television and Android based tablets or pads, software designed to take advantage of the new features enabled by these open standards, and the online entertainment (e.g., massively multiplayer online games or MMOGs) enabled by collaborative technologies floating in the Cloud.

Obviously, just about every field of human endeavor in the first world countries will see new creative solutions proffered from new and extant ventures. What had been "third world" geographies, effected over the last ten years by the advent of cheap telecommunication and computing technologies, are now becoming or have become booming markets as large sections of that population build bustling economies. What we find useful in one industry can be applied against others. Consider the current Toyota commercials about applying the advances used in their vehicles to non-automotive needs. Another example is the movement of applying game dynamics to "serious" areas. This has been termed "gamification".

Since this is the beginning of the new decade, I am making a commitment to blog on what I see coming. Hopefully, I will have comments from knowledgeable people to assist in an examination of the future. The future will happen whether you participate or not; but, its a whole lot more fun to be part of the game.

Happy New Year to All!

Harrison Rose

Social Networking is Not an industry

Hello all and Happy New Year!

Well, here we are welcoming in another year of the new millennium and the changes in business opportunity continue. If our president somehow doesn't land us in another war, the technology economy will keep prospering. One day I may write on this topic, but I wish to keep my analysis apolitical at this time. Ignoring the effects of the greater world around us, when the technology economy always comes down to a consumer purchasing a service or product, would be just silly.

So, for now I will share my thoughts on the Web 2.0, Social Networking, and Virtual World technology enabled business opportunity space. Much of these thoughts have been provoked by a very interesting thinker in this area, Jay Deragon (see http://jayderagon.com/blog/) and his blog entry on Plaxo Pulse. In Jay's latest entry, he discusses how various industry observers view the future of Social Networking. Here is my response, that I emailed to Jay:

I fully agree with your fist couple of paragraphs, as a broad generality.

When I was in business school at USC (Executive MBA program), I had a professor who provided a fascinating, statistical and research based general view of industry dominance. It seemed that this applied to almost any industry, and it is one of the tools I have used now for 20 years.

Within the dominance game for an industry, market forces seem to settle on three distinct market leaders that will usually divide a market into 40%-20%-10% with the remaining 30% being divided among niche players. As a market gets more mature, the leaders will eat up niche players reducing the outlying circle and increasing the difference between the major players. In some circumstances, the three leaders can evenly split the majority of the market, especially when their differentiation is perceived to be minor. The data books for time and materials estimation was a good example of this in 1989. Chilton, Motor and Mitchell each had about 27% to 30% of the automotive repair information market, with the remaining being shared by tiny niche players. This was a very mature market and ripe for technologically enhanced change, which happened. Another industry that can be used as an example is today's computer operating system space for the desktop and server markets. The dynamics rarely allow for four to share the huge majority of industry market.

We are already seeing this happen in the technology generated social network space. I don't know what the market share is for LinkedIn, Plaxo Pulse, Facebook, and MySpace, plus the hundreds of niche sites that either license the underlying technology of the leaders, or have developed specialty markets to be served with an evolved focus. But, I can give you an example of a newer SN site that is highly specialized and growing like mad: nextcat.com. Nextcat focuses on the Creatives within the entertainment industry, with the obvious overlap to the business development and producer subset of the same industry.

I believe that the issue that is raised in the Newsweek article is on the financial basis of comparison, where the question of sustainable revenue streams is such a challenge. With a niche SN group the revenue stream is much smaller, but more confident. With a corporate site that uses SN, the purpose is to generate customer or vendor alliance. Hence, when we try to look at SN as an infrastructure for a mass market, the trouble really begins.

Best regards,
Harrison

What do you think?

Startup Issues -- The Team, continued...

Wow, it happened again.

Here I was ready to jump on board another startup -- Ready? Hell, I did jump on board! -- when the rug got pulled out from under me by the worst bugaboo of them all: teammate incompatibility.

The Inventor, holding the majority of the company and the patent (when it issues), didn't speak English well enough to communicate to me his concerns, and when I demonstrated Silicon Valley passion while recruiting another team mate, someone that I was bringing in, he didn't understand what happened. He couldn't understand how his actions forced the situation and couldn't get passed my "very public" reaction (or he couldn't admit being at fault). A week after I had thought the whole incident was behind us, he suddenly brought it up again at a founders' after meeting get together. When he did, the other founder said, "If you can't get past this, then I quit." Thus the team dissolved.

After the Inventor left, my other team mate, also a business person confided that, "If he can't get over something minor like this with you, it is not a matter of "if", but of "when" will it happen to me." He had too many other opportunities, as happens with really good team members, to stick around waiting for the other shoe to drop.

The real problem was that the Inventor was not aligned with the high tech entrepreneurial culture of the Silicon Valley. He had recently come over from a European country where working conditions are heavily mandated by law and failure is not forgiven. In the Silicon Valley, almost every successful entrepreneur has at least one failure behind him or her! "Get up and do it again," is the cry of the crowd.

This is the mentality of the San Francisco Bay Area. While many people fled the catastrophic down turn in technology spending and investment led by the Dot-Bomb, the survivor entrepreneurs are now stronger than ever. This whole area fell into a major depression caused by Y2K delaying the 3 year replacement cycle in the PC business, the Dot-Bomb beginning in early 2001, 9/11 pushing the purchase cycle out further or delaying all IT expansion due to unforeseeable risk, the devastation of multiple industries like travel and hospitality, the venture community pulling an ostrich act, and then just as the computer and communications markets was beginning to pull out of this very, very dark place, our President has to convince Congress that Iraq's government needs to be overthrown for our National Security. Thus, the rebound was pushed off for another 2 years. Now, in September 9th of 2007, six years after that horrible attack, the Silicon Valley is again booming. The rebound is here. And, it is bringing the wannabes out of the woodwork.

Thank god for the vitality of the Valley. I love this place, the people who live here, and the culture of open exploration. But, I'm going to put governors on my internal entrepreneurial engine when I find or create the next startup opportunity for myself. There is going to be a frank discussion as to whether the team that wants me is ready for prime time!

Harrison Rose

Startup Issues #1

This week in Silicon Valley, as is typical, there were several meetings sponsored by the many organizations supporting various industries, professions and entrepreneurial activities. I was able to attend a couple of ones that had great value in their content.

On July 12th, I participated in the Backstage Pass event

The panel on "Best Practices for Running a Board Meeting" was the second of three, with the third planned for November. During this discussion, some major observations were made about the issues of resolving conflict, the need for three separate sections of the Board Meeting, and the importance of communications outside the Board Meeting. While the discussion was of course focused on VC funded, privately held corporations, with little mention of the earliest stage of a startup's life prior to funding, there were some very important points made as to the support of the new CEO.

Here in Silicon Valley, the professional institutional investor does not want to replace the CEO. Doing so creates great risk, and the investor's job is to minimize risk and maximize outcome. What the new CEO must learn is to communicate with the Board prior to the meetings with honesty and supportive data. The Board is there to help you! While many entrepreneurs focus on stealth during the earliest, formative phase, when the CEO is reporting to the Board, stealth is quite inappropriate, as is over stating results. Honesty is the best policy.

Next week, there are additional groups worthy of attention, such as the Startup Epicenter event on Thursday, July 19. If you are an early stage entrepreneur who can learn from others, I highly recommend attending this event.

While working with an entrepreneur this last week, I have been able to demonstrate in substance why I am so much against the "Consultant" who claims that they will help a company raise money. A real management consultant must validate all of the business strategy and determine the level of reality of the business plan and its financial projections before it is possible to get an intelligent investor to invest. After all, if the consultant really does know investors, then his or her reputation is always on the line when an introduction is made. When I work with an entrepreneur or startup, I ask the hard questions and help to answer them.

So, while I am looking for a new opportunity to join, I am helping some entrepreneurs to get their act together. If someone says that they'll help you get funding without learning a lot about your company, then count your fingers after you shake hands.

Finding a Co-Founder

Finding a Co-Founder is a very difficult issue, especially later on in the development process. Having worked with many startups, from the earliest formative dinner table stages through the "we have a prototype and want to raise money" to the Venture-backed stages, I would like to bring my personal and academic history to the question:

How does one find a co-founder?

An acquaintance of mine, Murali Devarakonda, posted this question to LinkedIn Answers recently. This is a very important question for any entrepreneur to ponder. But the answer requires a lot more questions before coherent answers may appear. Think of this as a mix of business, sociology, psychology, strategic analysis and self-awareness. From an engineer or mathematical view, this is an algorithm with many variables, interdependences, reiterations and fuzzy unknowns. To explore this fully would be a dissertation, not a blog entry. So, I'll commit myself to just giving the reader an overview here.

Here are some of the variables to consider:

1. What stage are you at in the start up process?
2. What kind of leader is the entrepreneur?
3. What skill sets are needed at THIS point, and what skill sets will be needed later?
4. Has the equity distribution been determined? Is the current plan satisfactory for bringing in the additional talent?
5. How flexible is the team at THIS point? This also means: an singular entrepreneur do you have the strength of character to stand by your vision, but not to the point of self destruction?
6. Each member of the start up team has their own level of acceptable financial, employment career, social, and marital risk that they can afford. Each person has an assessment of the combined risks and should, but doesn't always, know where the edge is. The entrepreneur must balance these assessments when they recruit co-founders. These variables are personal to the individual, but sum in a fuzzy function to apply for the whole team.
7. What kind of emotional chemistry fits yours? If you can't find someone that fits that then do you have the strength of character to rise above the potential conflicts?
   

Before you go any farther, consider what kind of entrepreneurial endeavor you are undertaking. Is this new company a "Mom and Pop", "Buy a Job", "Life Style" business? Or, is the goal of the company to generate wealth, as in a substantial return on investment, for the entrepreneur and investors. If your answer if the former, then you should look at standard "entrepreneur" magazines like "Inc." or "Entrepreneur" and read some of the blogs, like Prof. Jeff Cornwall's blog The Entrepreneurial Mind on Franchising 101, that are directed the vast, vast majority of classic entrepreneurial activity that has made America great. [BTW: Happy 4th of July] This blog piece is directed at those pursuing the latter form of entrepreneurism, that has made Silicon Valley the economic engine of America for the last 30 years.

The germination of the start up occurs when an entrepreneur is either struck by a perceived need, or by the coolness of an idea, technology, unexplored capability. This is the stage when it is easiest to find real co-founders. Sometimes this is in school, as happens in PhD and MBA programs; sometimes on the job, such as discovering a better way to do something that can be applied beyond your current company's focus; and sometimes it comes during a brainstorming session with friends or colleagues. When this is the case, there may be other interested parties at the time of conceptualization, and these may become co-founders. When this happens, it is more important to make sure that you have an agreement in place for the intellectual property that is the concept and a vesting arrangement for the co-founders that will allow people to drop out without destroying the structure supporting the work done to date. I have seen many variations on failure to do this from the leader's promise "to take care of it later" to the plot of The Producers. If you don't have the right structure, or any of the co-founders decide to bail before you have the relationships in writing, you may have significant problems as you try to bring on more people.

After the first level formulation, the very early stage entrepreneur (or team) follows a line of discovery generally based on their training. When their background training is purely of an engineering type, it is too easy to assume that the business parts are something that "will come later", dismissing this as if it is simple or requires little work. When the training is business school without the hands on technical background, and the plan is based on the implementation of a new technology, then the risks and unknowns associated with the concept are usually under appreciated and not well understood. This is why investors look for a team that bring together the two sides of a high tech business by having real world experience in high tech development and operations. The dot-bomb proved how foolish it was to ignore this classic view. Finding co-founders at this stage without money behind you is very difficult. Until the candidate can buy into your vision through the eyes of their specialty, their perceived risk for the proposition is much, much greater than yours! Not only do they have to compare the opportunity that you present to their current source of income, but they also have the more difficult issue of comparing the opportunity to those they don't yet know. This opportunity cost is greatest for those potential partners who have already had enough success that the financial risk to them is relatively low. On the other hand, if your target partner can't afford to leave his or her job, you need to assess the risk associated with a part time partner (and how to compensate the position in equity).

There are places where you can mingle (or "network" as they say) to meet people who are looking for a team to join. This leads to people entering your "resources" funnel -- an idea that is similar to a sales funnel. Figuring out the talent you need for each step in your development, both business and technological, is a filter. Finding the people to enter the funnel's mouth is the major challenge. Having the closing process at the end will only be served when workable candidates make it through all of your filters. Your process has to have the right level of background checking and gut feeling while allowing you to generate a win-win deal. When your candidate becomes a team member, whether co-founder or 'whatever', they become the greatest source for other potential team members to enter the funnel.

Part of the problem the entrepreneur has is this belief in the importance of stealth. For most start ups this is a myth, and a damaging one at that. Not only are you maintaining invisibility from potential customers, business partners and investors, but you are not visible to people with the skills and motivation that make great co-founders! An idea is a dime a dozen. It is always about the execution! This is another reason why investors prefer a team that has successfully worked together in a previous start up.

The next stage in the start-up comes after the preliminary business plan is created (when lead by a business head) or a proof-of-concept prototype is built (when headed by a technology lead). Here is when it becomes necessary to fill in the holes of the team, and ego becomes the paramount barrier. While you may identify the perfect candidate as a team member (co-founder or whatever), can you offer a deal that will make the risk worth taking? Without internal investment, either from the co-founders or through "Friends and Family", the risk is substantially higher, and the entrepreneur needs to recognize that fact. I can't tell you how many technologists approach me to come on board their "golden idea" without offering me the kind of consideration that I need to offset the risks of their opportunity and the risk of missing a much better opportunity while I'm breaking my neck to turn their idea into a business vision. So many entrepreneurs think that now that they have a prototype that the risk is low and a seasoned business person like myself should be willing to work on the come. Turn this around and ask yourself if you'd take this offer. Of course you wouldn't.

While progressing along the path from concept to thriving venture, the co-founders maintain their value as a piece of ownership by making good decisions. Every decision that leads to dilution of your ownership by providing equity to others should make your total value increase. If it doesn't then you either did not make a good decision or over valued your holdings prior to the decision. Try to be realistic. It is hard, but worth it because it makes it easier to sleep at night.

Social networking, like LinkedIn, and real world networking lead you to find the people you need. Know what skills you are after and then tell people who may know someone that you are looking for a person with those skills. Other places include Craig's List where you can advertise for the right people. You can also have announcements made at the Connect! Center in Sunnyvale, a wonderful pool of talent of the newly dispossessed. Don't forget to join the various functional groups like Silicon Valley's SDForum, where you can make your need known to the membership of entrepreneurial technologists and business people. I don't yet know of a social networking Web site specific to people with an entrepreneurial bent who are looking for teams to join. If one exists, hopefully, someone will bring it to my attention and then I will share it here.

Your comments are most appreciated.
--Harrison Rose

Investment and Business Models

Web 2.0 is already showing a little of the exuberance of the dot-com craziness. Yes, the technology is "sexy" ... and it enables better GUI types of features ... and it promotes new modalities of interaction often called "social networking" ... and there are a lot of people doing it. But, it is just a new set of tools. The creativity behind using the tools to provide customer value is the key to making these tools worth using. Changing a look and feel for the sake of using the tool is as bad a decision as shaving your head because your favorite movie star has a shaved head in his (or her) currently released motion picture. Shaving your head in a quick decision may be done in minutes, but it can create months of uncomfortable interpersonal circumstances. What's the payoff compared to the risk?

There are companies seeking funding based on some variant of technologies that loosely fit the Web 2.0 concept. Some are trying to build tools to sell to tool users, competing against Open Source alternatives and the make-or-build decision process of software developers. Some are putting up sites with massive video content that is all the rage today. Can you find your (or your father's) pet rock? While Richard Nixon installed a bowling lane in the White House, setting off a national craze, many people lost a lot of money investing in bowling alleys in the 1960's. Bowling is still fun. Cabbage Patch dolls was an enormous success followed by a calamitous second year when the craze did not carry over. Following a craze, like the dot-com sock puppet business ethic of the "new economy" where you spend more money to make the sale than you see in revenue, can be a devastatingly stupid thing to do. If you are in the "craze" business, then you have experience with the cyclic nature of the products or services that you sell. If you are in a more standard line of business, then you don't want to get caught by the latest business or technology craze. The business model has to make sense in the classical way of forecasting the revenue and estimating the expenses resulting in a net positive that is large enough to allow for unexpected problems and money for reinvested.

The opportunities are out there. Mix the creative with the analytical to find a new opportunity to build a business. Your business metrics must measure the meaningful causalties so that you can tweak the variables to have the greatest effect on the business. If you do this the classic measures will show the business is capable of standing on its own and prospering, whether you are using Web 2.0 tools or not.