Open Discussion on early stage funding options

Recently, Dave Berkus, Frank Peters and yours truly participated in a round table style podcast on the the Frank Petes Show -- click here to listen. http://www.thefrankpetersshow.com/

You may find it interesting.

Additionally, Graeme Thickins did a nice summary of the podcast on his blog at: http://graemethickins.typepad.com/graeme_blogs_here/2007/11/raising-startup.html

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Entrepreneurial Case Study: A true failure story.

… and it happens everyday - different people and different businesses.

A year and change ago, I was asked to make an investment in a venture – a couple of smart technologist with previous management experience creating a VOIP related company. I knew the entrepreneurs and was absolutely convinced that they are smart and dedicated. The business model, however, did not make sense to me and I did not invest.

The company raised around $500K. A few months later, they are looking for money and are considering a change in the business model… and later, a new angel investor with another $500K or so has influenced the team to focus on an originally tangent mobile technology to create a novel consumer application.

The new business model and technology was intriguing and reached for my check book! But before signing, met with the two founders and the recent addition to the team, a brilliant new CEO with big telecom and carrier experience.

So, I met the team and my check book was quickly back in my pocket. The founders were showing early stages of the “founder disease” – we are in love with what we are building, we know exactly how it should work, if we only need money to scale the product and market it, the company is worth millions and WE will build it into a new giant. In short, I found the team non-coachable and looking only for a check book and not a partner. I also found the new hotshot CEO Was suffering from the “big company syndrome” -- very limited early stage experience; I did it at XYZ so I can do it here, we had a $100 mil budget, over 300 developers and delivered the product in only 3 years - oopps there is no mega dollar budget, only a few developers, a very limited and rapidly depleting bank account – no room for error.

Later news … the team had made some progress and a pilot demo was built, VCs were approached and a term sheet was received at a great valuation (dilution of about 30%).

The team did not accept the term sheet. One of the clauses (standard in almost 100% of VC term sheets) was the ability for the board (not the VC alone) to augment the management team, if needed -- the team was offended!

A few months later the team is disassembled, the hot shot CEO is after the next big dream, my simple investigation indicates that the mobile product is falling far short what was promised, the founders are doing some consulting to make the ends meet and are looking for someone to buy the Intellectual property. What a shame! Very smart people, so many hours of hard work, over a million dollar down the drain, a great business concept (the second version), and a true failure story.

The question is who’s fault is it? The founders are of the opinion that they had a great team and a great idea and that the VC’s destroyed their dream company and that the angel seed investors failed them by not giving them more money.

I guess my opinion is rather clear… what do you think?

Entrepreneur Effectiveness alert - The curse & bliss of emails; mundane but important

This topic may not be sexy or intellectually challenging, BUT, I think it is important. As emails go, I think we are confusing effectiveness and speed.

I get in excess of 250 emails a day. So often important issues may be ignored due to volume and unimportant matters may take a lot of time. And I am not the only one inundated with so much volume.

The problem is that simple issues that can be resolved in minutes with a quick personal conversation actually take multiple emails. Important issues that require real discussion is boiled down to snippets of responses – the result is that decisions are most likely not as comprehensive and often based on either partial information or influenced by the desire to quickly get to a yes / no answer. We achieve speed of exchange but in a lot of situations lose effectives. I can’t count the number of occasions when efforts are duplicated because some one acted on partial information exchanges in emails and had to re-do things. Now, add the complications of global operations, language barriers and time zones and you have a real challenge on your hand.

There are clearly two schools of thought 1) short, abrupt, and to the point emails vs. 2) verbose and detailed – focusing on CYA. Some write so much stuff that makes me wonder, if they have nothing better to do, and others are so quick to rush to an answer that makes me wonder if they truly care about how their answers may effect the company results and effectiveness.

NO, I am not suggesting to go back to the dark ages. I am suggesting, however, that people are essential to execution and confused people can only produce confused results and effective communication is the only way to get to clarity of direction and purpose. One of the ten commandments of effective execution is effective communications – emails are effecting execution!

My advice, LEARN, AGAIN, TO USE THE PHONE for important issues, use the email for things that do not require fact finding and discussion. Be quick on trivial and very diligent on critical matters. Speed is important, but effectiveness is much more important than velocity.

Remember, the faster errors are made, the more errors can be made in a unit of time!

Entrepreneur Issue! - Why do many startups fail?

I got the following question from an entrepreneur and I thought I share it with everyone.

“Why do many startups actually fail? In my observation, i have felt that there are many a startups which have a brilliant idea, a genuine team to execute that and also a good support for the product they intend to build, but still the companies fail to break even. I would love to hear from you your views on why startups fail? cheers, Vaibhav”

There may be a thousand different reasons, but here is an attempt at simplifying a clearly completed question. Here is a stab at a few common reasons:

1- Chemistry: often entrepreneurial teams fail to have the winning chemistry together ; it is a combination of reaching for perfection and greatness and ability to work together to compromise their way to success.

2- Too much Brilliance: a lot of companies fail because the market is not ready for the innovation yet and the entrepreneurs focus on their vision as opposed to what the customer wants or needs – they continue to miss the mark by listening to themselves more than listening to those who pay.

3- Confusing Execution & Effort: a very typical problem in startups is that the team is genuine and genuinely believes that they are executing well, but they are not! Execution is not doing a lot of work. Effective execution is what bridges aspiration and results – simply put, if they were executing well, they would not fail!

4- Not Listening: I have seen this one hundreds of times, Entrepreneurs often think that their situation is different (it is a different market, a unique product, a whatever …) so they fail to listen to their investors or trusted advisors (whom they picked by the way) or listen partially. By the time they begin to listen it is often too late.

Entrepreneur Issue! The viral marketing mystery

These days almost every business plan has a viral marketing component to it.

How do you get customers? Viral marketing to the rescue; there seems to be an “understanding gap”.

I have made it a point in the past few weeks to ask every entrepreneur that brings up the issue “what do you mean by viral marketing?” The diversity of answers and interpretations are fascinating. The responses include, funny videos on Youtube, a page on Myspace, putting definitions on wikipedia, planned message board entries, and of course having a blog. What is interesting is that the definition of viral marketing is reduced to the channels of distributing a message vs. the message itself.

To have a viral marketing campaign, you must first have a message that is viral and contagious like a virus, a message that contaminates others as soon as they hear it, to the point of passing it to others. 93% of all sales are initiated through word of mouth, and viral marketing is intended to ignite this process. BUT, the first question is do you have a compelling message, a compelling story a compelling product, and a compelling value proposition that deserves to be viral. The second question is how you communicate it to your potential customers (the channel).

If you want to have a viral marketing program, the initial challenge is to figure out what is your contagious (viral) message (the virus), do people care hearing about it, are they impressed enough (contaminated) to pass it on (contaminate others). In the process, you must make sure that people are not already immune to the virus – just because it worked for someone else, it will not work for you; a fake message, a “me too” message, and a message without a real value proposition backing it is not viral, it is noise and can be more detrimental than helpful.

Entrepreneur Issue! Nothing wrong with a Life style business!

Speaking to entrepreneurs everyday has lead me to believe that most entrepreneurs really like to build a Life Style business and are not in tune with what motivates Venture Capital firms or Angels to invest.

So what the heck is a Life business?

1. You build it to operate for many years to come
2. It will generate good income for you and you absolutely love doing the job
3. you want to be in control – who needs a boss!
4. This would be a great business for my children to get involved with

If your answer to any of the above questions is yes … well you are on your way to build a Life Style business. Where you do not need a very very large market sizes, you do not need disturbing technology, you do not need a proven management team from Ivy league schools, you do not have to report to a board who is pushing for faster and more aggressive results all the time, and most importantly you do not need to exit (sell out).

So what is wrong with starting a Life Style business – well absolutely nothing, but do not expect making millions in a couple of years, be patient with growth, be prepared to put your name on the dotted line as a guarantor.