Category: Entrepreneurship

EntrepreneurshipVenture Capital

Strategic Investors-the Good, the Bad, and the Ugly

Posted on by Ed Sim

I had the opportunity to speak on a panel today at the Corporate Venture Capital Summit. There was an interesting crew of speakers representing corporate-related venture activities for companies such as Hitachi, Intel, Nokia, Panasonic, Siemens, and Kodak. While one moderator cited numbers showing that the amount of corporate venture investing in terms of dollars is down 50% from 2000, in my mind, that does not seem that different from the change in the general VC market. While there are less corporate investors today, there are also less VCs. From the 3 panels today, it was very clear that the nature of corporate investing, if I can lump all the different players in one bucket, has changed. Like today’s VC, they are doing less deals. However, the deals that they are doing need to be more strategic and less opportunistic. This means that someone in a product group needs to somehow get behind the company and act as an internal sponsor. This does not mean that a company looking for funding will get a strategic partnership before a financing.

One of the questions I was asked today was how an early stage company can make a strategic investment successful. Here is what I had to say:

1. Show me the revenue-I would rather have an OEM or reseller deal than a strategic investment. Strategic investments do not mean anything if you are not going to generate revenue for your company and for your partner. In addition, when you sign a reseller or OEM contract it means that the hard work has yet to begin-an early stage company has to throw resources behind a partner to make things happen.

2. Go in with your eyes wide open-what is strategic for you may be tactical for your partner. In addition beware of deal terms that may limit your ability to be flexible. These include rights of first refusal, exclusivity, and other non-standard VC terms.

3. A strategic investment is not an exit strategy-in many cases, it could actually limit your exit opportunities as other competitors to the strategic investor may not want to partner with you.

4. Do your due diligence-how successful has your strategic investor been in setting up relationships for other companies, how much juice does the strategic investor have to make things happen?

5. Manage expectations-constant communication between both sides is key to maintain a healthy relationship.

I could go on and on here but I just wanted to highlight a few of my top of mind thoughts. Suffice it to say that looking at the 30+ companies we have funded, partnering with strategics has been a mixed bag. There have been some that have worked out well and others that have not. However, if done right, I do believe that both sides could substantially benefit from a relationship as long as there are real dollars being generated.

Entrepreneurship

Corporate DNA

Posted on by Ed Sim

Like individuals, every company has its own DNA. Every company possesses a unique team with a unique culture, rhythm, and way of doing business. What many of us forgot during the last few years is that it is awfully hard to change one’s DNA. What do I mean by that? Well, a number of companies big and small attempted to recreate their business models by morphing from either a consumer-focused company to an enterprise-focused company or from a hosted software company to a licensed software company. The problem is that one cannot just decide to make a strategic change and expect the whole company to follow suit. For example, selling to consumers and selling to enterprises are 2 completely different models. It requires different sales people, different marketing, and different product management discipline. How can a company that does not have this talent and DNA expect to compete with companies who do? Many companies selling software in the enterprise space have a hard enough time getting customers. Changing from a hosted software model to an enterprise licensing business is not any easier. While you may be selling to the same customer it will require some drastic changes in how you develop, sell, market, install, and ultimately support the product.

I am not saying that this cannot be done but it will require more time and money than you initially think, especially because something called DNA will have to be changed as well. As you know, changing a company’s ingrained culture is not easy to do. This lesson equally applies to large companies as it does to small. Yahoo’s announcement that it was shutting down most of its enteprise business is a recent example of this. Another example includes Ask Jeeves sale of its enterprise business to Kanisa. It is clear that in both cases that having a small enterprise business live within a consumer-focused company with consumer DNA did not work. So before you make any drastic changes to your business model, know your Corporate DNA and take that into account when you evaluate your execution risk.

Entrepreneurship

The Perfect is the Enemy of the Good

Posted on by Ed Sim

Yesterday, I was in a meeting with an early stage company reviewing the product development plan with the management team. While the plan was well thought out and defined by process, there was one major problem-it would take too damn long to get a product in GA (generally available to sell!). There were 2 problems-an overemphasis on process and a burning desire to build the ‘perfect product’ at the expense of getting to market. Let me address each problem in turn.

While having the right development process is absolutely critical, I do have concerns about early stage companies being too focused on process. An early stage company’s lifeline is to outinnovate its larger competitors. In any market worth caring about an early stage company will also find other start-up competitors as well. If a company is overfocused on process at the expense of getting to market, I guarantee that it will be climbing uphill against companies that place more emphasis on speed to market. Trust me, I have seen this movie before. At the same time, I am not advocating that you build product with no process either. Balance is key!

What I saw yesterday was also a desire to build the ‘perfect product.’ This is another crucial mistake that companies can make because you can end up overdeveloping and adding features that nobody needs. Once again, an early stage company must balance between getting the right product out with speed to market. An overemphasis on the ‘perfect product’ will only land you on a treadmill chasing your competitors’ constant barrage of new offerings. Having a ‘good product’ many times will suffice and give you the ability to have your sales people sell, bring features and functionality ahead of your competition, and get real world feedback to further improve your offering. Like an old, wise entrepreneur once told me, “The perfect is the enemy of the good.”

EntrepreneurshipGlobalization

NYC Entrepreneurs and Offshore Resources

Posted on by Ed Sim

Having met with a number of NYC entrepreneurs recently, I am refreshed to see that many of them are utilizing offshore resources to develop their products. Yes, this is not a new phenomenon, but in a city that lacks hard core developers willing to work for options instead of cash like the Wall Streeters, it is significant. New York has always been known as a strong new media capital and not known for development of real hard core software. New York is also known to have one of the greatest customer bases in the world. Combine access to customers with an ability to manage and use offshore resources effectively and you really get a good opportunity to build some interesting companies in New York.

EntrepreneurshipVenture Capital

NYC 2.0

Posted on by Ed Sim

I recently spoke with Richard Adams, founder of Referral Networks, which was later sold to Peopleclick. He has started a new venture, RipDigital, which does the dirty work of converting CD collections into MP3 libraries. Basically all you have to do is place an order on the website and the company ships a box to you, you pack your CDs into the box, RipDigital does the conversion, and then ships your new library on either a DVD or portable hard drive along with your CDs. It is truly frictionless commerce. While interesting, this is not the only project that Richard is working on these days.

I have also been staying in touch with Owen Davis who co-founded Sonata (Thinking Media) with Vid Jain. Owen and Vid are back at it again with a new company, Petal Computing. Petal, according to its website, provides software that allows a dedicated group of PCs to operate like an enterprise server or mainframe. Its solutions are further optimized for the high performance needs of the financial world, including modeling, cash management, risk analysis and pricing. In other words, Owen and Vid have created cluster computing software which is highly specific and focused on the financial sector. While the cluster computing space is a competitive market with some established players, I like their approach to building the business. They have actually been working on the software for the last 2 years.

In fact, many NYC 2.0 entrepreneurs (those NYC veterans on their second venture-I hesitate to use the word Silicon Alley since that leaves a bad taste in many people’s mouths) are starting companies with a new philosophy to build businesses that uniquely solve a real customer problem. Embedded in the new way of starting companies is strong financial and product discipline. In other words, NYC 2.0 entrepreneurs have learned to keep the burnrate low until they have a great product they can sell repeatedly with feedback from living, breathing beta customers. With this philosophy, these entrepreneurs just may have a better opportunity to create some real businesses that will generate meaningful cash flow.

BTW, I placed my order with RipDigital today for 250 CDs today and will report on the finished product at a later date.

EntrepreneurshipVenture Capital

Price isn’t everything

Posted on by Ed Sim

I had breakfast with a friend the other day, and he was in the process of a bankruptcy filing for his startup. We started talking about why his wireless company had failed and one of the main reasons he cited was that the price was too high. Many of you may ask why is that a problem. Isn’t getting a high price a great thing? The term sheet that the company signed was led by a strategic investor and contingent on finding another VC as a co-lead. While he had some strong interest, no other VC or purely financially driven investor was willing to step up at that price. The only other term sheet he had was at a much lower valuation but in his mind a little too onerous. He was willing and ready to take the term sheet, but he had made a promise to his team of 10 that he would make sure they got some backpay as part of the deal. While it was a hard decision, I applaud him for sticking to his deal with his team. Consequently, the company had no other choice but to shut down since it was not at a stage to generate meaningful revenue. So what can other entrepreneurs learn from this?

1. Price isn’t everything-sometimes too high of a price can cripple your company. Other investors may not want to fund the company, and you may set unrealistic expectations for you, your employees, and your investors.

2. VCs like sweat equity. Don’t hire people that expect to get paid back salary. Isn’t the whole point of working at a startup to build real value through equity? If your employees want backpay then you probably have the wrong people for your stage of company. It is a tough proposition for us to fund a $3mm round and have $500k get paid out as salary. This is easy for me to say as a VC, and it may sound self-serving, but it is true.