Entrepreneurship

More reasons to watch your burn

Posted on by Ed Sim

Despite these tough times, there are still some bullheaded companies who think they can grow their way out of this mess or find the right M&A partner to bail them out.  I can guarantee you that this is a recipe for disaster.  I was on the phone today with the CEO of one our portfolio companies, and we were joking that we were in unprecedented times since we have been approached by a number of bankers about buying companies that are much larger than us.  So if these bigger private companies are hawking themselves looking for a deal, where does that leave a small startup?

It goes back to my one of my themes about building a business – focus on what you can control and don't try to find a savior by looking at external forces.  What this means is figure out what your core business is and take a scalpel and lop off the areas where you do not see an immediate return on investment.  If you believe you will find a strategic partner to buy you, forget about it because every other private company that has been funded during the last 5 years is trying to do the same.  In addition, I can also promise you that any large or small company looking to buy a startup does not also want to pick up a large burn rate.  Even on a private-private merger, most of these VC-backed companies will do nothing unless the deal is cash flow positive on Day 1.  Do yourself a favor, build an expense line where getting profitable can happen with the cash that you have.  This way you can control your own destiny and also even make yourself a more attractive strategic partner to any company in the future.  One other point for all of those advertising related startups-go find some other revenue streams like becoming a platform for partners via cobranding or hosting fees which scale with usage or find some other premium model because the ad market is drying up and the dollars will flow to some of the larger, more established platforms.

Entrepreneurship

A ray of light in this environment?

Posted on by Ed Sim

I did an interview with Rich Maguire of Datamation last week which he just posted yesterday.  While the markets seemed to get excited for a day about the bank bailout, attention is turning toward an even bigger problem for startups, a potential recession.  The consumer no longer has that ATM called their house and confidence and spending to boot are down.  So what's an entrepreneur to do these days and are there any pockets of opportunity?  Trust me, I am not going to give the party line that it is great to start a company now because, you know what, it really is hard to go out and do that.  However, if you are brave and bold enough to do so, I will tell you that you could be well positioned 18 months from now when the economy does get back into gear.  This market will truly separate out those who are just in it for the money, and those who are out their to build an insanely great product or service.  As for the article from yesterday, here is an excerpt and hope you enjoy.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that spectrum as well.”

EntrepreneurshipVenture Capital

Be prudent but don't panic!

Posted on by Ed Sim

The alarm bells are ringing in Silicon Valley and start-up land today with Sequoia Capital and Ron Conway telling companies to prepare for the economic meltdown and to raise cash by cutting their burn.  This is not new news as being in New York we started to feel the real economic impact in mid-September as Lehman melted down and as Merrill Lynch was bailed out by Bank of America.  This is all prescient advice and something I have been espousing to my portfolio companies for awhile – see my last post from mid-September on Doing More with Less, a mantra that all startups should live by.  All that being said, it is not time to hit the panic button.  Don’t go out and fire everyone wholesale and skinny down just because everyone else is. Do it because it is right for your business and because all of your leading indicators tell you to do so.  Do it the right way by not making a 20% cut across the board but by thoughtfully thinking about your business, your priorities, and where you need to focus your capital and resources to grow your revenue but conserve cash.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before.  As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related.  It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality.  For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses.  Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market.  Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

Entrepreneurship

Delivering on Q3 forecasts!

Posted on by Ed Sim

I received some incredible news last night from two portfolio company CEOs updating me on our Q3 numbers.  They not only hit their respective forecasts set early in the year, but they beat them.  Normally I expect our portfolio companies to hit their numbers, but I am ecstatic because we delivered in the midst of the largest financial crisis we have ever seen.  While much news on the technology world is of doom and gloom, and while I too have been advising portfolio companies to conserve cash, it is nice to see that companies are still willing to spend if you deliver a strong value proposition.  More importantly these numbers speak to the commitment of the respective teams to do anything possible to deliver on the Q3 forecasts.  In each company, sales reps and executives flew out to key prospects and knocked off obstacle upon obstacle until they walked away with an order.  Ok, it is not as dramatic as it sounds as there were numerous meetings and technology proof of concepts before getting a sale, but the point remains that the companies that delivered did not wait for the orders but went out and got them.  There were a number of stories of sacrifices that were made including one sales rep who was expecting his third child yesterday but was at a prospect getting the contract inked and another one of a sales rep and sales engineer who camped out at a client’s office all day and wouldn’t leave until they had a signed contract.  Extraordinary times require extraordinary measures, and I hope that stories like these inspire you to keep fighting the good fight and to go out and make things happen.  Startups need to be scrappy and tough to survive!

Entrepreneurship

Doing more with less

Posted on by Ed Sim

Being in New York, it is hard to escape the realities of the ailing financial sector.  When I took the train into the city this morning I could see the somber look in people’s eyes knowing what had just happened to Lehman Brothers and the uncertainty of the financial markets and economy.  Given this state of play, it is clear that capital is becoming scarcer by the minute and that we don’t know when we may come out of this mess.  The mantra for most businesses is to just wait and see rather than make any real decisions, especially when that requires a commitment of capital.  Then I get an email from Bill Morrison at ThinkEquity today outlining his views that we are in Phase II of a Media Recession:

In our experience, media recessions typically develop in three phases. First, marketers reduce spot market activity and eliminate quarterly budget flushes. Then, marketers begin canceling "up-front" commitments and previously signed advertising contracts. Lastly, marketers begin to rationalize/reduce budgets for future years. Our research suggests that we entered phase two of the current media recession during 3Q. Our recent conversations with online publishers revealed a significant number of advertisers that have cancelled contracts or significantly reduced commitments for the second half of 2008. The majority of industry contacts we spoke with this quarter said fundamentals weakened from 2Q to 3Q.

Trust me, I am not a doom and gloom guy and on the contrary believe that now is a great time to invest and build for the future.  That being said, it is also time to be smart and highly efficient. It is a great time to look internally and think about your priorities, your processes and whether or not you can do things better. 

In this backdrop, I had a couple of board meetings last week and as you might have guessed, one of the recurring themes was needing more resources.  While the companies were quite different, I seemed to be in the same meeting with each department head giving an overview and goal tracking from the previous quarter and each presentation ending with, "I need more resources."  It’s not that I am against hiring more people for portfolio companies, since I am all for it.  My only point for all entrepreneurs and managers is that when you put together the hiring plan to make sure you think about the fact that you should always be under resourced and have more things to do than can get done.  What this really means is that you have to do an incredible job of prioritizing your goals. Always ask yourself how you can do more with less and you will find that you and your team will become incredibly resourceful and stretch your dollars a lot farther than anticipated. 

Speaking from experience, I have repeatedly seen situations where managers ask for additional hires, we tell them to wait a quarter, and then they miraculously are able to manage for the quarter. In fact, I was joking at one meeting the other day saying that it was incredible that we had half the staff from a year ago and have more revenue today that we did before.  If we cut in half again, I mused, perhaps we could grow even more.  OK-that is quite extreme, and we did agree to end up hiring a few more resources in various departments.  What really struck me was the fact that when we hit the wall over a year ago everyone thought we weren’t going to be able to make it and grow our business.  What changed was that management became maniacally focused in prioritizing opportunities, not chasing every customer, being ruthless about how they spend their time, and consequently reengineering a number of their internal processes.  We are now a much healthier company with a better operational platform that merits more investment.  While I am not advocating that you starve your business and recognize that every company is different, I am suggesting that doing more with less is a mantra that you should subscribe to regardless of the economic environment and that in the long run it will yield tremendous results for you.

SaaS

Selling to large enterprises costs big dollars no matter how frictionless your sale is

Posted on by Ed Sim

I have written a number of times about frictionless sales and how on-demand companies have a huge opportunity to reduce their sales and marketing costs and subsequently scale their business more efficiently.  Here is an excerpt from a prior post:

Frictionless sales means reducing the pain for customers to adopt and use a service/product and consequently reducing the cost of sales and marketing to get a customer and generate revenue.  As I mention in an earlier post, "The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow." The lowest friction sale can be a user clicking on a web page and the content owner getting paid for it.  The highest friction sale is spending lots of money on marketing and trade shows and having a large, direct sales force of expensive reps pounding the pavement for months trying to close a large deal with an enterprise customer.  Follow that with a 3 month implementation process to get the customer happy.  There are various grades of friction between these two extreme points like open source business models, software as a service, and reseller/OEM-type models as other forms of packaging and delivering a product/service.  And of course, each of these models requires a different methodology and way of marketing and selling to a customer. Ultimately what you want is sales leverage where every $1 you spend on sales and marketing equals multiples of that in terms of revenue.

The perception that it is much easier to scale definitely holds true if you are selling to consumers, small businesses, and workgroups within large organizations.  However, it seems that many public on-demand vendors are feeling the pressure to deliver growth and ultimately need to feed the revenue machine by going after larger customers.  And what many companies are learning is that no matter how on-demand your software is, if you are selling to huge enterprises you are going to have to spend huge dollars in sales and marketing.  Sales cycles are long no matter how you slice it and even if there is no massive hardware and software installation, many large companies want to have their service customized and integrated, even lightly, with other systems.  in other words, many of these high flying on-demand vendors are starting to look more like the old software companies they are trying to replace.  As per a Wall Street Journal article today, it seems that many of these public on-demand companies are finding out the hard way that no matter how frictionless your sales process is, the bigger the company you sell to, the more it is going to cost you. 

There is nothing to install, so workers can start using online software without the aid of the tech department. That makes it easier for companies that sell online software to get into a business than their on-premises competitors.

Seizing on this, investors bought into online-software companies in a big way. During the first 10 months of 2007, shares of 15 online-software companies tracked by Thomas Weisel Partners increased in value 61%. Since then, however, these companies have lost about a third of their value.

Wall Street has realized that it isn’t enough to simply offer online software—you have to have a sales strategy that can make your offering a corporate standard. It is possible to get individuals, project teams or small businesses to buy online software through word-of-mouth marketing, but it is hard to make money from these groups—at least the kind of money necessary to become a billion-dollar company.

In order to get there, they can’t operate like an Internet start-up, letting their technology spread virally as end users hear about it. They need to sell to the same executives and information-technology professionals who made purchasing decisions before online software was an option. Businesses have a lot riding on the decision to use one product or another. And while having pockets of workers advocate for a particular piece of software is a plus, the execs who sign the big checks still want to see demos, vet the seller and do all the things they have always done when they buy software.

So if you are an on-demand vendor, either stick to your focus of scaling with SMBs and consumers which requires a completely different sales and marketing approach more rooted in traditional online budgets and telesales or be prepared to spend some real dollars if you truly want to go after the big guys. 

EntrepreneurshipVenture Capital

M&A – it ain't over till it's over

Posted on by Ed Sim

The economy is clearly slowing down and the IPO market is nonexistent.  As I have always said, this is the time to hunker down and tweak your business to get your model right.  If you are interested in exiting today, M&A continues to be the only viable path along that front.  Having been through a number of acquisitions and potential acquisitions through the years, one point I must remind you of is that any deal isn’t over until its over.  On the surface, this seems so obvious.  And yes, once a term sheet is signed and a price and general terms are agreed to, you are in great shape.  But recently, through discussions with other VCs and entrepreneurs, I am hearing about more situations where strategic buyers may significantly change the deal terms after more serious due diligence or even potentially walk away from a deal.  This can be especially painful if you have spent a number of months meeting with the strategic and going through due diligence in lieu of running your business. Trust me, this happened to one of my portfolio companies last year and reasons cited can include we had a change of strategic priorities and or look at the economy, there is no way we can value you like we did when we started the deal.

While I can offer you no protection from this happening to you, all I can say is to be prepared and skeptical, be willing to walk away, and make sure that you both do enough diligence and meet with the right decision makers before you sign any term sheet and embark on the extended process.  Once the term sheet is signed, run like hell to get the deal closed because the longer a deal lingers the more opportunity there is for it not to happen.  Keep the hammer down and always have next steps and a defined timetable.  In addition, to the extent that the strategic acquirer has made other aquisitions in the past, I would try to leverage your personal network to reach out to some of the VCs or entrepreneurs involved to get a flavor for how the strategic will run their due diligence process and what doozies or surprises the strategic throw at you.  Before you start spending your money from the acquisition, remember there is a lot that can change and that probably will change so keep that in the back of your mind as you go through the process.

Venture Capital

What do I see in venture through 2010???

Posted on by Ed Sim

The Jordan Edmiston Group recently asked me and a few other VCs a few pointed questions about the future for circulation in their July Client Briefing.  As an aside, I worked with JEGI two years ago and they did a fantastic job helping us sell Moreover Technologies to Verisign.  They understand the media and online world, are well connected, and work diligently to get the job done.  Anyway, here are the questions and my response:

Even though there is uncertainty in the credit markets, a stalled IPO market, and few billion-dollar plus M&A transactions, the investment activity level and appetite for quality businesses in the middle-market continues to be vibrant. Venture Capital firms continue to invest in companies that are providing answers to key disruptive market forces and are exiting those investments via M&A. The Jordan, Edmiston Group, Inc. (JEGI) solicited a handful of key VC executives for their responses to the following questions:

1. What are the key market forces you believe will impact your venture activities through 2010?
2. How do you envision capitalizing on or responding to these market forces?
3. How is the environment changing for deal exits (e.g., IPO vs. M&A)?

(My answer is pretty consistent with what I have been blogging about during the last few years.  Here is an excerpt from the briefing and if you are interested in reading more and some of the other VCs responses, you can get it here)

We are continuing to move to a broadband connected world, where everything that we do on a device increasingly lives in the cloud. Our business applications, our music, our videos, pictures, and messaging will be easily accessible from any device, any time, and anywhere. We will continue to see new cloud-based applications and services, and data-driven services will play a larger role in this new world. There will be some great opportunities to invest in companies that take existing data and run algorithms over these streams of data to deliver better and more targeted advertising, personalized recommendations and search, and better overall services for end-users.

One of the next phases of growth and large revenue opportunities will be driven by what is captured every time you click on a page and move from site to site. How companies use this data to improve a user’s online experience is the next game changer. What I love about these kinds of opportunities is that algorithms scale, have high gross margins, and are highly defensible. With our computing world living in the cloud, there will be a whole new generation of mobile applications that leverage the increased computing power and faster broadband speeds that are offered today.

Mobile carrier voice revenue is declining, and data revenue is the next huge growth area for carriers. However, data revenue cannot increase without applications that drive usage. Obviously, there are concerns about carriers’ “walled gardens”, but I see a future where carriers increasingly provide open access to allow innovative apps to drive data growth. In addition, as mobile devices become better, cheaper and faster, we will see an increase in the number of users accessing the web from their wireless devices, as often as they do from their home PCs.

Capitalizing on Disruptive Market Forces
Dawntreader Ventures will capitalize on these disruptions by investing in the entire food chain, from infrastructure layer to the apps and services that touch the end-user. This includes investments in companies like Greenplum, which is powering the back-end data warehousing for a number of high profile Internet companies for targeted advertising; and Peer39, which provides semantic advertising solutions by using natural language processing and machine learning. This technology enables the company to go beyond keywords to understand page meaning and sentiment, to deliver the most effective display and text advertising to end-users.

Exit Strategy

Unfortunately, the market for IPOs is currently “dead”, but it may reopen in 2009. M&A continues to be strong for the right companies that fit a strategic hole in an acquirer’s portfolio. In the end, I continue to tell my portfolio companies that if you focus on what you can control (growing and managing your business), then the external factors (exit strategy) will take care of themselves. However, if you try to force the issue and shop your company, that shows a sign of weakness and more often than not will result in a fire sale. Companies are bought and not sold. For strong, well managed companies, opportunities will always present themselves, as long as you can avoid making desperate decisions.

To read some other VC responses and to get an update on the state of Interactive M&A, I suggest getting the JEGI briefing here.

Infrastructure

Data wars heating up – Microsoft buys DATAllegro

Posted on by Ed Sim

As I have written in previous posts, what you do with data will be one of the next battlegrounds on the web.  Knowing that they had some limitations with SQL Server, Microsoft announced its acquisition of DATAllegro (full disclosure: my fund is an investor in competitor Greenplum) to enter the data warehousing market.  Enterprise volumes across the board are ramping up quickly and this clearly gives Microsoft an opportunity to capture that market.  Being an investor in Greenplum, I always like to see healthy exits of competitors as many believe it will trigger further consolidation.  When a competitor is acquired, the first reaction from many is often asking themselves why it wasn’t them and fear about competing with a juggernaut, but my perspective is quite different as it usually opens new opportunities.  As I have written before, many acquisitions fail and companies are usually so distracted for the first 6-12 months trying to integrate operationally and technically, that this gives others in the market a nice window to continue executing on their business plan.  So I tip my hat to DATAllegro and look forward to an exciting 12-18 months ahead as the data wars are clearly heating up now. 

Entrepreneurship

Your reputation matters – how to handle reference calls

Posted on by Ed Sim

The world that we live in trades on reputation.  What that means is that eventually whether you are raising capital or landing new customers, your references will matter.  If you are an entrepreneur, a VC will want to do some deep reference checks on you and also on any major customers or partners.  If you are trying to land that big customer, naturally the sales propsect will ask to speak with other customers to get a better understanding of the technology and your service.  How you handle and manage these reference calls is crucial to moving to the next step in a funding round or to closing a sale.  I have seen some entrepreneurs take the nonchalant approach, feeling quite secure in their relationships, and freely passing on contact information for their personal references and partners/customers.  Many times these calls will turn out just fine but there is still a big chance that they might not turn out as planned.

In my opinion, the best way to deal with reference calls is to carefully manage the process.  First, I would identify the 4 or 5 best references (customers/partners/personal) and have a call with them to make sure they are willing and have the right attitude and to pre-screen them with questions to make sure they convey the right information to the interested party.  Secondly, I would make sure that you don’t inundate your references with too many calls as they may tire of helping you after awhile.  Finally, I would also set expectations and be quite clear with the VC or potential customer about what to expect from the call.  For example, I was talking to a CEO yesterday, and he mentioned that our strategic partner would take a call from a VC but that the partner was not the most effusive individual and would clearly state the facts but nothing more.  Well, if that is your only reference for that partner, make sure you convey this to the interested party to set expectations (see my earlier post about that). 

As a side note, a couple of my portfolio companies gave pretty big discounts to their first customers but also made sure that as part of the deal they would serve as lead references for other prospective customers and for VCs.  The discounts got the customers to take the leap of faith to buy the portfolio companies’ products and also got them quite excited to freely promote our technology to others.  The point is that you should always think about your reputation, who will be your best reference, and then to cultivate them to really make sure that they can help you grow your business.