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May 30, 2009

We're #59!

Despite putting no effort into promoting The Fein Line, this blog ended up being #59 on the list compiled by Larry Cheng of the most read VC blogs (ranked by Google Reader subscriptions).

Thanks to all my readers for taking the time to follow this.  And, thanks particularly to those who comment and contribute to interesting discussions.

May 28, 2009

More than the money

With the advent of lower capital intensity business models, there are more entrepreneurs who are building their businesses without venture capital.  This gives them the ability to hold on to more equity and more control.  In the most likely event of a modestly priced exit for the company, they'll keep more of the upside.  That all sounds great, and, if you don't need much outside capital to get your business going, it could be attractive.

But, there are things you get from venture capital beyond the money.  You can add these to your business without a VC investment, but you have to work at it.  Here are some:

  • Independent perspective -- As an entrepreneur, you have to drink the Kool-Aid.  You think that what you're building is great, and you look past all the problems to see the possibilities.  But, some of the time, you need a dose of realism.  You need to find a way to hear the outside perspective on your company.  You can achieve that with one or two independent directors on your Board, or an active advisory Board.  Go beyond your friends and current stakeholders.  If you can't attract an industry insider from your segment to work with your company, you may not be good enough at networking, or have a strong enough value proposition, to be successful.  And, that's the kind of 'tough love' feedback you should expect from an independent perspective.
  • Deep contact network -- You also need to be able to attract talent who really knows your marketplace.  Most VCs have great contact networks that they have developed over years (or decades).  You need to be a great networker to find this talent for your own company if you aren't getting value-add from a VC.  For some, networking comes naturally.  For most of us, it takes work and attention.  That may mean carving time away from other things to go to an industry event, conference, or meetup.  As an entrepreneur, it's essential.
  • Relationships with key customers and partners -- After you have sharpened those networking skills to bring talent into the company, you'll need to make contact with more customers and potential partners.  No company has enough of these.  Business people you add to the company should come with some of these contacts, but there is always the potential for more.  Another value-add you can get from independent directors is access to their contact network.  I like having an independent director that is a recently retired senior executive from one of the big customers or partners in your sector.
  • Keeping you honest -- I like people with attention for detail.  At least one Director of your company should be motivated to go over everything you are doing with a fine tooth comb.  They can give you feedback on how to improve and be a sounding board for future moves you are considering.

Whether you are going it alone (without venture investment) or evaluating whether a particular VC really brings something more than money to the table, think about these types of value-adds for your Board.  Your company won't improve with a Board full of your biggest supporters.  Mix in a couple of independent, well-connected, detail lovers.  You'll be glad you did.

May 21, 2009

Technology is the answer, not the problem

On today's PE Hub, guest columnist Joe Weisenthal wrote about how Internet start-ups will accelerate deflation, which is a bad thing for the government, and, ultimately the country.  I don't know Joe, so I don't know if this is tongue-in-cheek.  If it is, I didn't get it.

But, there are economists who are worried about deflation, and they should be.  Although the idea of prices dropping sounds good, it can have a crippling effect on the economy.  For a short period, deflation is fine.  Everyone likes it when prices drop and their dollar goes further.  But, what if deflation becomes systemic?  What if you knew that prices would drop over the coming year?  Wouldn't you wait to buy things you didn't really need today?  After all, they would cost less in six months.  This mindset brings an economy to its knees.

In the technology sector, prices have dropped while performance has gone up.  This has hollowed out some markets, but it has also expanded them.  When PCs cost thousands of dollars, you'd live with your old one for a while.  There was a pace of change of technology, but it didn't seem as fast as it is today. 

Now, when PCs cost hundreds of dollars (and these are dollars that are worth less), it's not as significant of a purchase.  You know that in a year your PC will be outclassed by the next wave of technology.  But, since the investment isn't as significant, you live with this obsolescence.  Chances are, the PC you buy today is so much faster and better than the one it is replacing, you get your few hundred dollars of utility out of it, despite the fact that it becomes obsolete so fast.

Since PC technology moves so fast and has come down in cost so fast, the market has gotten a lot bigger.  Sure, it's ultra-competitive, and margins are thin.  That happens in any large commodity market.  But, it still is a bigger business, and creates bigger industries around it (semiconductors, software, services, Internet applications, etc.).  To Joe's point about tax revenues, I'm willing to bet that the overall tax revenues on the bigger, more commoditized PC business are higher than in the smaller, higher-margin PC business.  Don't forget to count all the forms of taxes -- payroll taxes, sales tax, and corporate income tax.

In general, I think that Internet applications will do the same thing.  We can't and won't suck all the money out of all these industries.  If we do, no one will earn a salary.  And, without salaries, no one will do the work.  Now, there have clearly been missteps that have hollowed out industries quickly, such as the music industry not paying attention to music downloads, causing a whole generation to get used to paying nothing for music.  Or, the newspapers giving away all their content for free without figuring out how they would pay for it.  But, there are also companies like Apple that make a lot of money on downloaded legal music.  And, there are media sites that have a lot of traffic (driving advertising dollars) that sell value-added services (a model that the newspapers could follow for their large online traffic).

So, I don't worry about the acceleration of technology causing deflation and leading to the collapse of our government and economy.  In general, our economy has been propped up by expansion of productivity (the positive way of looking at getting more for less).  In fact, this type of technology innovation is critical for us to get back on track.  We need to continue to press ahead with Internet businesses that have real revenue (no government support required).  We also need to develop a wide range of green energy businesses that lead to products we can build here and export.  This does require some government help in the short-term as the capital markets aren't ready to fund this fast enough, and some basic research for longer-term gains is best funded by the government.

I share Joe's concern about the size of our systemic government debt.  The short-term stimulus part of the debt doesn't worry me.  But, the debts for the coming 5-10 years are terrifying.  We need to find things that the government does not do and drop them, and we need to be realistic about taxing ourselves to pay for what we need.  We can't grow out of a large deficit.  And, inflation won't solve our systemic deficit.  It devalues our old debt, but drives up the interest costs of carrying our new debt.

Economies seem stable with very modest inflation.  When we can keep that under control, we can focus on building new industries that expand and restructure markets, leading to goods we can build and export.  And, technology advancement, including Internet applications, is the key to that.

May 15, 2009

Plan for yourself, not the VC

There have been a few VCs writing about whether or not you need a business plan to make a venture capital pitch in response to an artilce in the New York Times.  As Angelo points out, most VCs focus on the team and the market, not on the detailed plan.  I wouldn't advise an entrepreneur to develop a full business plan in order to raise money.  Normally, a good PowerPoint presentation with some projected finances is enough formal material.  Also, be prepared with a good market and competitive analysis.  The VC will learn alot about you from how well you prepare this information.

An early-stage investor knows that the market will change a lot before a new company's product is available.  It's impossible to anticipate what will happen.  So, most investors focus on how you approach things.  How do you react to the suggestion of competitive threats?  Are you overly optimistic?  How customer focused are you?  Do you realistically assess the risks in the plan?

You'll have to do a lot of planning to produce the slides and financials.  You will need to understand the market well, even if you don't do formal market research.  You can learn from customers and other market participants.  You'll have to have a development plan, a sales and marketing plan, and an operational plan.  You don't have to pull them all together into a glossy document with lots of prose, but you better be able to talk about it as if you've written one.

And, once you have funding, you'll need an updated operating plan.  This will keep your team coordinated, make priorities clear, and make sure you have enough money to get it all done!  Don't wait for your investors to ask for a plan.  Produce a plan for yourself, and keep it current as the world around your company changes.

May 14, 2009

Hilarious, but not for the Politically Correct

Last night I went to the opening of David Mamet's Romance at the American Repertory Theater in Cambridge (disclaimer:  I am on the ART's Advisory Board).

This play made me laugh more than I have at the theater in a long time.  It was an outrageous depiction of a court room.  There isn't much of a story, more like an evolving situation.  But, the play makes fun of some of our institutions as well as our own biases and tendency to try to be politically correct.  If you take pride in being politically correct, you'll be offended.  The play goes out of its way to offend just about everyone.  And, that's the point.  We all have aspects of our life that aren't totally correct.  So, we should be careful before we criticize others.

The acting was fantastic.  Wll LeBow plays the judge.  His comedic timing was excellent.  He got the most laughs.  If you are a fan of The Wire on HBO, you'll recognize Jim True-Frost, who played Prez on that series.  Overall, the show really highlights the strength of the ART's acting company.

If you want to spend 90 minutes laughing at our society's political correctness, you'll enjoy Romance.  Laughing at the ethnic jokes is a guilty pleasure.  Luckily, just about everyone gets theirs during the show.

May 05, 2009

Be True to Your Brand

As a marketeer at heart, I spend a lot of time on positioning.  Every product and every service has some sort of market positioning.  Companies try to define it for themselves, but it ends up being a combination of your own marketing efforts and the response of the marketplace.  You can keep telling the world that you have a premium product, but if the customers' experience doesn't match that, your image in the market will be tarnished.

I was fascinated to read Fred Wilson's American Express Blues a few days ago.  You should go there and read it, including the comments.  Fred has a lot of active commenters on his site, which makes an incredible conversation.

Fred describes his experience with Amex.  He, his various funds, and his family have Amex cards.  He's been a 'Member' for 26 years and never had a late payment.  However, one of the funds (Flatiron) paid an Amex bill late.  And, Amex shut off ALL of his cards without notifying him.  Here's my favorite part:

When I called American Express to figure out what was wrong with my cards in the middle of the Flatiron situation, I was told it was their policy to shut down all accounts if there was a late payment on an account. I asked if my 26 year perfect credit with them was material to the situation and I was told it was not. I hung up on them.

The comments on Fred's blog include person after person who has had a similar experience.  After being a good customer for a long time, something happens (which may be the customer's fault), and the response from Amex seemed very drastic.  For a company that tried to position themselves as an elite brand, they aren't treating their customers like the 'Members' they purport them to be. 

Nothing bothers a customer more than being betrayed by a brand that they bought into.  If you are a customer of a premium brand, you want to be treated like a premium customer.  You aren't surprised when the low-end retailer has poor service.  You shop there for the lowest price.  But, if you go to Nordstrom's, you expect fantastic service (and, since Nordstrom is successful, you almost always get it).

I've been betrayed by some brands over the years.  I tend to hold very long grudges against these companies.  The stories are so out of date that they aren't worth retelling here.  And, some of these brands have gone out of business (no surprise).  But, I won't do business with my own 'hate list' of brands in the future.

I decided to write this today after hearing a show on NPR yesterday about the future of the Republican Party.  The story there was the same from the Republicans on the show.  They had lost their way and gone against the fiscal bedrock of their party.  Since they weren't true to their brand, their voters aren't true to them.  I think that fiscal conservatism can and should be a strong force in the country.  But, between not sticking to that and expanding their message beyond it, they alienated a lot of old-time Republicans and failed to attract a lot of new ones.  They need to rebuild their brand, which should be interesting to watch.

For every entrepreneur starting a company, be sure that you can deliver on the implied promises that your brand is making to your customers.  If you do so, your customers will be loyal.  If you betray them, you are dead.

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