The Fein Line

In my last post which summarized the session I ran at the Momentum Summit, I discussed some of the issues involved in scaling up the sales effort.  In this first in a series of follow-ups, I'm going to cover things to think about in setting up a sales commission plan.

All of my sales management experience has been in high-tech start-ups, including Digital Lumens, which is a mixture of high-tech and cleantech. I don't think that my advice would necessarily apply outside of that environment.

First of all, why do sales people get commission?  Everyone who works at a start-up is expected to work hard, and everyone gets measured by results.  Engineers don't get paid by completed working software modules.  Support people don't get paid by completed support calls.  They work hard and work long hours.  Why do sales people get aggressive incentive compensation, and the others don't?

I don't want to get overly philosophical in this post because some people may argue that everyone should get incentive compensation.  And, in some sense, it's traditional that sales people earn commissions.  The best sales people expect it.  So, it can't be avoided.

The one thing about sales that doesn't apply to most other positions is that it can be measured by the numbers.  Trying hard, making lots of calls, doing lots of demos, working long hours and asking for lots of orders doesn't count.  What counts is getting POs that the company accepts (no crazy terms or pricing, etc.).  So, sales, in one sense, is the easiest to measure and to be subjected to incentive compensation.

Also, in most sales jobs, your work is never done.  There is always one more call to return, one more lead to follow-up on, and one more prospect to check-in with.  The incentive compensation keeps you motivated to continue to chase down every opportunity.

Lastly, the company really needs the sales people to hit their revenue targets. Obviously, everyone's job in a start-up is important.  But, once companies get to the revenue stage, measuring revenue vs. plan becomes one of the first things that a Board does.  So, the CEO, who feels the heat from the Board if the targets are missed, really needs to know that the salespeople are doing everything they can to hit the numbers.

But, what numbers are they trying to hit?  The most important thing about sales compensation planning is to make sure that you are motivating the salespeople to produce what the company needs.  In a single product company, it's pretty straightforward.  The company needs to generate a certain amount of dollars of revenue, and that is divided up among the sales teams.  I'd advocate keeping the sales comp plan very simple so that it can be explained in no more than a few sentences.  The more complicated it is, the more likely that the salespeople will find a way to hit their number that doesn't necessarily help the company hit its number.  If that's not clear, let me know in the comments, and I'll try to come up with a specific example.

There are two related ways that I like to structure simple commissions.  In both cases there is a goal or quota for the sales person.  The easiest way to pay the sales person is to give them a percentage of everything they sell up to the quota and then a higher, accelerated percentage on everything over the quota.  Never put a limit on what a sales person can earn.  If you grossly underestimate the sales potential of your product, rejoice in the fact that the salespeople can sell twice as much as you expected and are making a lot of money this year.  In most sales roles I had, I was the highest paid person at the company.  And, the CEO was thrilled to pay me!

The second similar way to structure these plans is to identify what a salesperson's on-target earnings level is.  If they expect to earn $50,000 in commissions when they are 'on-target', you can structure the plan with a floor (i.e., if they sell less than 50% of their quota, they earn nothing), and an accelerator.  Above the floor, whatever share of quota they achieve becomes their share of the on-target earnings they get.  Above quota, the accelerator kicks in and they get a higher percentage (i.e., with 110% achievement, they get 120% of commissions).

I like the second method better because I don't like people to get attached to a percentage of sales.  As your team and company grows, you'll be splitting territories and readjusting quotas and commission plans.  Someone who starts off earning 1% of sales will eventually get less than that.  But, if you target them for $50K in commissions, you can always adjust your quotas so that they have a chance to earn that.

There are lots of other topics coming up, including the split of salary vs. commission, how to compensate teams when multiple people work on the same accounts, how to structure sales compensation when resellers are involved, and more.  Stay tuned.

Posted by Mike Feinstein at 07:49 AM | Permalink | Comments (5) | TrackBacks (0)

Back on June 23, I moderated a lunch-time breakout session at the Momentum Summit at MIT.  The topic of my session was on scaling up the sales effort.  And, since so many entrepreneurs are frustrated with this subject, my subtitle was Lies, Damn Lies, and Salespeople.

My time in sales was very important in my career.  In fact, I'd recommend that every CEO, marketing, product management, or business development person spend time in sales.  There is nothing like having quota pressure and seeing how hard it is to get a customer to part with their money.  I think that my sales experience made me a better marketeer, investor, and entrepreneur.

Every entrepreneur is in sales.  They are selling their idea to investors, potential employees, early customers and partners, and just about everyone else.  In many companies, the founder closes the first deals.  One of the challenges we discussed was how to transition the sales responsibility to a sales team when a founder had done all the initial sales.

To me, the most important thing to understand before you hire any sales people is 'what's our sales model'?  This includes things like:

• What are the best types of leads for us?
• How long does it take us to close a deal?
• Who else tends to be typically involved in a customer decision?
• What is the basis of their purchase decision?  Is their an ROI model?  Or, are you addressing significant needs that can't easily be met otherwise?  Or, what?

In the end, you have to be able to turn the sales process into a recipe.  It's almost impossible to build out a sales team without a well-defined recipe.  A very entrepreneurial salesperson can help define the recipe, but you shouldn't hire more than one of these.  Get the recipe right and then start to scale up the sales team.  And, don't hire salespeople too quickly as it takes some time to integrate each one and make them productive.

Other subjects we covered include how to structure sales compensation plans, what CRM systems to use, how to figure out what level salesperson you should hire for a particular job, how to team up inside sales and outside sales, how do you know when to use resellers or other channel partners, etc.  There are no right or wrong answers to any of these as each company is very different.

I'll try to write a series of posts that cover some of these subjects over the next few weeks.  And, next year be sure to attend the Momentum Summit as the overall event was very valuable.

Posted by Mike Feinstein at 04:07 PM | Permalink | Comments (2) | TrackBacks (0)

Great TED Talk on getting kids starting early as entrepreneurs.  Some great ideas on how to raise your kids to get them to think creatively and to develop skills that will serve them well throughout life.

I'm a big believer in entrepreneurship.  We need it in all fields and aspects of business, as well as in non-commercial organization like non-profits.  Entrepreneurship means that you identify problems and find innovative ways of solving them.  Bit by bit, entrepreneurs improve our world and deliver the economic growth we need to keep our standard of living.  Why not get our kids thinking this way from Day 1?

Posted by Mike Feinstein at 04:03 PM | Permalink | Comments (0) | TrackBacks (0)

I'm a big fan of the TED talk videos.  There are some great ones.

Today's video really resonated with me.  Rory Sutherland talks about how we often focus on really big and expensive solutions rather than small ones that have a big impact.  The talk has many examples and is both provocative and interesting.

I think that attention to detail is becoming a lost art.  In our multi-tasking world, it's harder to focus on the small things that really impact the user.  When you are defining a product or procedure, you really have to concentrate, sometimes to an excruciating degree, on small details.  Little details, small amounts of polish, shortening procedures, making directions clearer, and really understanding user behavior all can have a big impact.  And, most of these things don't cost much money.  They take time and attention.

Enjoy the video.  And then, go think about how you can improve your product or service with a few small, high-impact changes.

Posted by Mike Feinstein at 07:03 PM | Permalink | Comments (0) | TrackBacks (0)

I'm happy to say that I'll be a lunchtime session leader at the upcoming Momentum Summit.  This will take place at MIT's Sloan School on June 23, 2010 from 8:30 AM to 2 PM.  If you hurry and are among the first 25 registrants, you'll get a discount.

The event consists of real-life discussions about how to turn a great idea into a great business.  There's a nice mix of entrepreneurs and VCs covering a range of topics.  My lunch session is entitled "Scaling Up the Sales Effort: Liars, Damn Liars, and Salespeople."  As a sales veteran of many years, I hope to demystify the sales process for entrepreneurs and explain how to transition from early customer wins to a larger scale sales effort.

Thanks to Scott Kirsner for inviting me to participate.  I hope to see you there!

Posted by Mike Feinstein at 09:24 AM | Permalink | Comments (0) | TrackBacks (0)

Posted by Mike Feinstein at 10:07 AM | Permalink | Comments (0) | TrackBacks (0)

After considering several very interesting opportunities, I am thrilled to announce that I have accepted the position of VP of Sales and Marketing at Digital Lumens.  I begin working there immediately.  I'm thrilled!

As is the case with many great opportunities, Digital Lumens has a combination of a great product aimed at a very exciting market, a strong team, and very solid and reliable financial backing.  I worked with CEO Tom Pincince before, at New Oak Communications.  It's great to join a team where you already know someone.  Working with Tom again was a strong factor in joining Digital Lumens.

But, the most compelling parts of the opportunity are the product and market.  Digital Lumens is the developer of the first Intelligent Lighting System (TM), combining an efficient LED lighting source, networking, and management software into an industrial light system that delivers 100% of the light for only 10% of the energy.  This is a compelling ROI for warehouses and factory floors where lighting is a significant portion of operating costs.

Commerical lighting is a multi-billion dollar market, and we are at the start of a major focus on improving the energy efficiency of commercial lighting.  The government is providing significant support and is encouraging the adoption of technology like Digital Lumens to reduce the load on utilities.  Many utilities also offer rebates to industrial customers who retrofit their facilities with more energy efficient light fixtures.

By cutting lighting energy costs by up to 90%, customers can realize a strong return on investment and see lower operating expenses right away.  And, for refrigerated warehouses, the energy efficient LEDs give off less heat, lowering the costs of additional cooling required to compensate for the heat given off by the lighting.

You can read more about Digital Lumens products on the web site, or read our blog to keep up to date.

As for The Fein Line, I'll continue to write about entrepreneurship, venture capital, sports, politics, and anything else that interests me.  And, I'll comment from a full-circle perspective, from entrepreneur to VC and back to entrepreneur.

Posted by Mike Feinstein at 08:00 AM | Permalink | Comments (2) | TrackBacks (0)

My friend, Dave Broadwin of Foley Hoag, has a blog post today which is the first part of his discussion of venture capital term sheet terms that are worth negotiating over.  Dave discusses dividends, partcipating preferred, founder representations, option plan and founder vesting, Board of Directors, and 'drag along'. 

Dave's descriptions are clear, and his advice is sound.  There are very few hard and fast rules about the structure of terms in a venture deal.  Some of this comes down to firm style -- firms tend to like some of these structures, although exceptions can always be made if necessary to win a deal.

The best defense an entrepreneur has is to have options -- alternate offers, or a strategy, perhaps less desireable, that lets you put off fund raising.  You can get VCs to make changes to their standard terms if they have competition.  In the absence of competition, it could be tough.

One of the best arguments against terms like dividends and participating preferred in a series A financing is that it will probably be in the interest of the series A investor to keep these terms out of later financings when more money comes into the deal.  If these terms are in Series A, they'll almost certainly be in later financings.

Dave didn't mention that one pressure that VCs face in eliminating these terms from their deals is the internal partnership dynamics.  Although, in theory, everything is negotiable, if a firm normally gets participating preferred and you want it out of your deal, this may make it harder to get the deal approved by the partners who are on the fence.  Don't assume that every partner in the firm has done a detailed analysis of the pros and cons of your deal and all the terms.  Instead, a reluctant partner may vote No based on something simple like less favorable terms.

I always preferred the cleanest possible deal structure, baking everything into the valuation.  Rather than paying a higher price for a deal and compensating for it with fancy terms, it's better to keep the price a bit lower and keep the deal as clean as possible.  In the end, this works out better for both sides, particularly as more rounds are raised.

In the end, the best an entrepreneur can do is to understand all these terms and do their best to get the best deal they can.  But, it's rarely worth letting a financing fall through because of a stubborn investor on these points.

Posted by Mike Feinstein at 09:33 AM | Permalink | Comments (1) | TrackBacks (0)

Dave Broadwin of Foley Hoag's Emerging Enterprise Center has an interesting blog post about the legal aspects of a company director's fiduciary responsibility.

The key to this issue is that VC investors who take Board seats at small companies have an inherent conflict.  As a partner in a venture fund with compensation tied to the performance of that fund, they are financially motivated to maximize the value of their investment in the company.  As a corporate director, they have a fiduciary responsibility to look out for all the stakeholders in the company.  And, as the Trados case indicates in Dave's blog post, corporate directors should be leaning in favor of looking out for the common shareholders over the preferred.  The preferred shareholders have their rights defined in their stock purchase agreement and, from what I understand of the Trados decision, don't need the additional protection of directors looking out for them.

This creates an obvious conflict, particularly when a company is facing tough times.  What if a company is struggling but has an opportunity to raise money on terms that may be adverse to the existing preferred shareholders?  You can imagine a scenario where, as a Director, a VC votes in favor of this tough financing as it preserves some value for the common stock but, as a preferred shareholder, they vote against it.  That may meet the fiduciary obligations defined in the legal precedent, but sets up weird dynamics.  It's difficult for one person to have two points of view.

What is more likely is that a conflicted director will steer the company away from such a financing because they know that as a shareholder they can't support it.  Is that protecting the interests of the common shareholders?  Unclear.  I was involved in one company that during the 2001 meltdown had to raise an inside round of financing.  It was on tough terms and was structured to motivate existing investors to participate -- put more money in, and you can keep more of what you already have.  Don't put more money in, and you get wiped out (if you are interested in more of the mechanics behind these types of things, say so in the comments.  I'll explain).

One of our large investors made it clear that they had no more money for this deal on any terms.  They were a buyout firm that had been trying their hand at early stage VC.  It wasn't a good fit, and the meltdown confirmed this.  But, even though they weren't going to invest, they were also going to block any sort of financing that diluted their interest.  They were willing to let the company go in order to protect their interest that, without additional financing, would be worth nothing.

We had very complicated discussions at the Board level where each of the VCs was probably thinking more about their firm's stake than about what protected the common shareholders.  Luckily, we were able to convince this firm to let us go ahead with the financing as they were going to get zero one way or the other, unless they changed their mind and participated.  But, the conflict of interest didn't feel good.

Although it's good to have the legal aspect of the conflict clarified -- directors need to protect the common shareholders regardless of what class of stock they hold themselves -- I don't have a good answer for the human side of these conflicts.  The best advice to an entrepreneur is to make sure you go into business with investors and directors who you know, from their past track record, will balance the best interests of the common with their own financial best interests.

Another take on this comes from one of the favorite sayings of one of my former partners (unclear whether the original source of this is John Doerr or Dick Kramlich):

No conflict, no interest!

Posted by Mike Feinstein at 09:30 AM | Permalink | Comments (0) | TrackBacks (0)

My friend, Chris, sent me a link to Why Venture Capitalists Avoid Innovation: They Like Making Money, written by Andy Singleton.  It was interesting reading, but I don't agree with many of the conclusions. 

One of the author's complaints is that VCs "claim to be in the business of innovation, but they also talk constantly, often in the same paragraph, about how much they want to avoid innovation."  However, Singleton is confusing 'innovation' with 'risk.'  There are lots of types of risk with any new venture:  technology risk, team risk, market risk, competitive risk, development risk, sales and marketing execution risk, financing risk, etc.  A brief word on each:

• Technology risk -- The risk that some fundamental new innovation just won't work.  This tends to come up more often with 'hard' technologies like semiconductors, energy, drug development.  This is different from development risk.
• Team risk -- The risk that you either can't build a team with suitable skills or that the team you build won't work effectively together.
• Market risk -- The risk that the market for your product won't appear.  Perhaps you are counting on some market shift in the future.  If it happens, you'll be the big winner because you saw it first.  If it doesn't, you may be dead.
• Competitive risk -- The risk that existing competitors in your market can fill the need that you are trying to fill more quickly than you can.
• Development risk -- The risk that your development team will be ineffective and fail to build a product that works well and/or is done on schedule.
• Sales and Marketing Execution risk --A set of risks ranging from getting the product requirements correct so that engineering builds the right thing to the ability to generate sufficient awareness and demand for the product to the ability to actually get customers to part with their cash in exchange for the product.
• Financing risk -- The risk that you can convince investors, now and/or in the future, to invest in the company in light of all these risks.

There are probably other risks (add in the comments), but these are the main ones I think about.  One problem in Singleton's post is that he equates innovation to risk, and most likely technology risk.  I look at it differently.  I think that an investor looks at any early-stage company and weighs the risks versus the potential upside.  If they can mitigate the risks and the upside is big enough, they invest.  If the risks look too big and the upside doesn't justify them, they pass.

How would you mitigate some of these categories of risk?

• Technology risk -- Is there a proof of concept or prototype that demonstrates the technological achievement?  Has the team demonstrated the ability to project the technology advance in the past?  Is there independent diligence that validates the planned technological advance?
• Team risk -- Have you worked with the team before?  Have some of them worked together before?  Does that validated track record give you the confidence that they can execute the plan?
• Market risk -- Are there early market trends that will tell you if the market is shifting in the direction you are hoping for?  Is there a fallback or interim plan that will keep the company going if the market shift happens later than you predict?
• Competitive risk -- Can you gather some competitive intelligence that will give you a hint of what the competitors' plans are?
• Development risk -- Similar to team risk: Does the technical team have a validated track record of developing similar projects with high quality and on time?
• Sales and Marketing Execution risk -- Another team risk:  Does the Sales and Marketing team have a validated track record in specifying the product correctly, building awareness and demand, and closing profitable business?
• Financing risk -- Does the plan give the company sufficient cushion to ensure that they can get far enough to attract additional investment?  Will an objective new investor be attracted to this opportunity?  Is there room for a reasonable valuation step up in valuation while still leaving room for a new investor to make sufficient money?

From my experience, the most common reason why a venture-backed IT company fails isn't technology risk but sales and marketing execution risk.  Products are poorly specified, requirements aren't honed sufficently, products are positioned poorly and undifferentiated, sales teams are ineffective, etc.  It's hard getting all this right.  If you don't, even the best product won't sell.  In fact, great sales and marketing execution can make a success out of a mediocre product.

The second most common reason is market risk.  Oftentimes start-ups are projecting that a new market segment will open up that they can capture.  If it doesn't happen, or doesn't happen before the start-up runs out of money, you are in trouble.  Hopefully, there is some sort of fallback plan.  If not, you are probably dead in the water.

Most VCs take on some level of technology and development risk as history shows that many times these can be overcome.  In fact, the first thing I read after reading Singleton's post was about Bloom Energy.  If that's not VCs backing innovation, to the tune of $400M, I don't know what is.  Of course, I am sure that these VCs see gigantic potential upside and had plans on how to mitigate the risks before they invested.  And, there are many others in clean tech, drug discovery, etc.

Some of Singleton's comments on the state of the VC business are accurate, but don't impact the calculus around these risks.  Some firms are more risk averse, but they still evaluate deals along all these axes.  An innovator has creative ways to mitigate these risks.  That's the type of innovation that VCs are looking for.  There are very few deals with no risks and big upside.  Instead, most VCs are looking at how some or most of these risks can be overcome.  It may be a high bar and may not always sound reasonable.  Perhaps they are looking for business innovation rather than just technological innovation.

Before you present your company to an investor, make sure you have thought through all these risks and what you would do to mitigate them.

Posted by Mike Feinstein at 10:57 AM | Permalink | Comments (0) | TrackBacks (0)

As mentioned in my previous post in this series, now that I have told the story of the wind down of our investment fund, I'm now moving forward by going back to my earlier background in an operating role.  My investment career spanned almost 11 years, and I learned an awful lot during that time.  But, I think it's time to go back to an operating role.  Here's why.

First of all, the investment world, particularly things related to venture capital, is a shrinking one.  It's well documented that the number of venture funds in the US is dropping, and the funds that are surviving are raising significantly less money than before.  So, like a game of musical chairs, there are just fewer possible jobs in venture capital.  Since I don't have a firm hold on an existing VC job, it's not likely that one will be available for me somewhere else.

Second, I've joined two existing venture firms in the past.  No matter how good the firm is, it's always different on the inside.  Partnership dynamics are much different than corporate politics.  In a company, you clearly know who your boss is.  And, it's easier to move around the company, or even leave if you choose to.  In a partnership, you have a dynamic of shared management and, often, unclear hierarchy.  That can be part of the attraction as you can join and be a partner.  But, some partners are more equal than others.  And, large partnerships are more difficult to manage than large companies.  More importantly, it's not clear that the best investors, who tend to rise in venture capital firms, make the best managers.

For all these reasons, I'm not interested in joining an existing investment firm.  And, I just spent 2+ years trying to start my own.  So, even if I wanted to remain an investor, it may not be possible.

More importantly, I'm not interested.  It is attractive to be an investor for many reasons: 1) potentially high current compensation, 2) spreading your risk across multiple opportunities, 3) challenging and broad work, etc.  But, it's been very tough to be a successful investor in the past decade.  Even many of the best venture capital firms have had few distributions to their partners due to their few successes being diluted by the larger number of meager returns.  There hasn't been as much money made in this business over the past decade as your friendly VC may lead you to believe.  If you've been an investor in a VC fund, you've probably seen this first hand.

I'm much more excited about taking on an operating role and getting something done.  I'm being highly selective about opportunities I consider, but I have seen quite a few very interesting projects in a short amount of time.  I think that right now the best entrepreneurial opportunities are better bets than the best VC jobs.  And, three VC friends of mine agree, telling me that it's better to be an entrepreneur right now than to be a VC.  We'll see, but it sure is energizing.

I've committed to one opportunity with a business partner.  The details are still being kept under wraps, but we've received fantastic customer feedback and some strong investor interest.  When we're ready, I'll talk about that opportunity here.  Until then, I'm sure I'll find some inspiration from my travel through the fund raising process as we get the company off the ground.

Posted by Mike Feinstein at 08:27 PM | Permalink | Comments (0) | TrackBacks (0)

Here's the next chapter in my 'What happened to Sempre' series.  If you haven't been reading along, the previous posts described why we decided to pull the plug, a look back at how we got started, building the team, and a discussion of our initial strategy of VC-style investing in public microcap stocks.

Once the market melted down in September 2008, we had to re-trench.  Our investor traction was gone, and we felt that we had to re-examine our proposed strategy in light of changing times.  As you may recall, there were a lot of people thinking that our economic world was coming to an end in the fourth quarter of 2008.  We decided to not do much fund raising during this time due to the high level of uncertainty.  Instead, we thought about alternative strategies.

First of all, our strategy of investing in microcap stocks had to go.  Although still economically viable (and remaining so today), there was no appetite for this type of strategy on the part of investors.  They were worried about continued downside risk and didn't see a lot of upside in a straight equity-only strategy.  That was coupled with increased risk aversion on the part of investors.  If we continued to pursue that strategy, we were dead in the water right then.

As some of our potential investors pointed out, one of our partners, Tim O'Loughlin, had an extensive background with venture debt.  This type of financing was very much lacking in the marketplace, particularly for later stage companies that may have trouble borrowing from banks.  We spent some time investigating this strategy and decided to pursue it.  Here's why:

First of all, most venture debt funds focus on lending to very early stage companies that have strong VC backing.  As a company, I never understood this.  If I am so early that I have no revenues, why would I borrow money to finance my product development?  Shouldn't my equity investors put more money into the company rather than use their funds to pay interest on a loan?  Here's the rationale that a venture debt firm will give you:  We will give you additional money so that you can get more work done on your Series A funding, hopefully earning you a higher valuation on Series B.  In exchange for that, we'll earn some interest and take a small warrant (option) position in the company in preferred stock.  If everything works out fine, that's all true.  The initial investors and management team will end up somewhat better off in this scenario.

But, not enough people think about what happens if things don't work as planned.  And, how often do things work as planned at a start-up?  If you fall behind plan, your lenders will get nervous and perhaps consider taking your last amount of cash in order to satisfy their loan.  At the least, they'll take up a lot of management and Board bandwidth getting reassured that additional capital will be coming into the company to service the loan.  Hopefully, the investors will realize that the lenders are expecting to get repaid and won't try to force them to convert their loan to equity.  This can lead to a game of 'chicken' being played with the company.  No one really wins these games. 

Why do venture debt players do this?  Because they are essentially loaning money to the venture capital firms and not the individual companies.  This 'off balance sheet' leverage can be helpful to a VC firm, and the risks are pretty low as long as the lender and VC investor have a good working relationship.  Despite this, I don't think that companies should borrow very much money until they have revenues to pay the loans back.  The issues and risks of the downside scenario don't balance out the upside opportunity.

That's where Sempre's Capital Access strategy fit in.  We were going to loan money to companies that had revenues and were at or near cash flow break even.  Most venture debt firms don't loan to these companies because they perceive the warrant upside to be smaller than with the early stage companies.  However, because capital is scarce, the interest rates you can charge are very attractive.  And, the risk of loss is likely to be lower.  Even if the company fails, they have a real, revenue-producing business that is more likely to have salvage value than an early-stage pre-revenue start-up.  Tim's track record bore this out, with consistent IRRs that would rival that of any tippety-top tier venture fund.  The money is returned to the investors (or recycled into new investments quickly), so the investment multiple might be lower than a venture fund.  But, assuming you can put the money to work again and again, an high IRR is the way to measure investments.

I won't go into the nitty gritty details of our strategy, but we certainly found a very strong deal flow of companies that had $4-$40M in annual sales and were at or near cash flow break even.  They were, in most cases, 'equity worthy' but couldn't or didn't want to raise additional equity capital.  Maybe their exsiting synidcate didn't have sufficient capital reserved for the deal.  Or, maybe the company had never raised venture capital and didn't want to start now.  In any event, we proved to ourselves very quickly that this was a viable strategy, and probably with higher caliber companies than we had at first anticipated.

Fund raising in 2009 was, of course, difficult.  Most investors had very limited liquidity to allow them to make new commitments.  And, first time funds always come under scrutiny.  We did find some investors who liked and were looking for venture debt, liked our strategy, our team, and our track record.  But, as chronicled in my 'pulling the plug' post, we couldn't get this over the finish line.  Traditional venture debt strategies tend to have returns that go up and down with VC returns.  They have been out of favor for many investors.  Sempre's strategy has been shown to be much more consistent, but it turned out to not be a benefit to be in the venture debt bucket.

The last chapter of my Sempre story will cover what I am thinking of doing next and why.  Stay tuned.

Posted by Mike Feinstein at 09:57 AM | Permalink | Comments (0) | TrackBacks (0)

Back to my series documenting the story of how we tried to raise a new, innovative investment fund in a historically bad climate.

I wrote earlier about how we got started and how we put our team together.  After a short time, we settled on a strategy.  We decided to do something that hadn't really been done before:  we would take the venture capital model to the public stock market.

What does that mean?  First of all, I think of the venture capital model as one of being an active, engaged investor who works with a company to build value.  You need to have a significant stake in the company and perhaps a board seat to ensure that your interests and the company's remain aligned.  This is usually applied to private companies where the VCs own a controlling stake in a company.  They usually buy a preferred class of shares to ensure that they get their money out first in the event of a sale or liquidation.  Most of these private company ideas wouldn't work in the public markets.  More on that below.

Our targets were public information technology (IT) companies that had market capitalizations between $50M and $250M.  These stocks are largely ignored by public market investors and have low trading volumes.  Until a company is worth about $500M, most money managers won't buy the stock.  Public investors value their liquidity -- the ability to sell quickly.  Like venture-backed private companies, these smaller public companies were not very liquid.  You could definitely get in and get out, but you had to do it carefully and over time.  Too much buy side or sell side pressure, and the stock could move a lot.  Not good for your investment strategy or your reputation.

We wanted to be constructive and have a positive reputation with companies.  Our approach was to identify companies that we felt were significantly undervalued in the public market as measured by both their financial metrics and their product offerings.  This required more than typical public market diligence -- you had to evaluate their financials and look at their business and how it could be restructured or improved to increase value.

Once you find such a company, you have to approach management to see if they were receptive.  Since we were 'constructive activists', we needed to get management, the existing board, and perhaps some of the larger investors to buy into our strategy for the company.  We generally found a very positive reception, but sometimes the companies wanted to keep doing what they were doing, despite the lack of appreciation by the public market.

The companies we liked best usually didn't need more cash.  So, we didn't invest directly in the companies.  Instead our plan was to purchase shares in the company in the open market to build up a position.  We found that we would have to work with trading partners who specialized in this type of transaction.  They could buy stock in illiquid companies without driving the price up (or sell without driving it down).  If we liked a company, our strategy was to buy 5-10% and perhaps take a Board seat.

We were planning to be long-term owners.  We'd own the stock for 2-3 years.  We didn't plan to short stocks -- we were 'long only.'  This kept us on the same side as management and differentiated us from hedge funds.  In fact, we were more like a late stage VC -- buying a position in a company that had revenues but had the potential for significant value creation. We'd hold onto the stock until we had built some value, which helped all the stakeholders.

The benefit of doing this in the public market was that you always had the opportunity to change your mind if you wanted.  Although not always easy to sell your position, it was sellable.  VCs generally can't sell their position in private companies at prices near the market value.  When they do sell, there is generally a significant discount.  Being able to control the exit timing was a critical element to this strategy.

Another benefit of investing in public companies is that you could chat with other investors to get their thoughts on a company.  This isn't collusion, just a discussion of what you thought of a company's public information.  We learned a lot by talking to other public market investors, particularly as we were new to the game.  Our VC skills would help us once we invested, but there were nuances of the public market side we had to learn.

Our historical analysis showed that there have always been significantly undervalued public IT companies, independent of the overall market cycle.  During down markets, there are just more of them, and they are even more attractive.  We did put some money to work in some companies we liked, and we did very well.  We struck up some constructive relationships with some management teams, but without outside capital, we couldn't build up a big enough position to have a real say in the companies.  We'd need about $12-15M per deal and a $250M fund to make it work.

It was tough getting investors to appreciate what we were doing.  One of our biggest problems was the 'bucket' problem.  Most institutional investors have buckets, or categories, for their investments -- venture capital, buyouts, international stocks, real estate, etc.  Our firm was a cross between late stage venture capital and public market investing.  Some investors couldn't do any public market investments.  In other firms, the two buickets were managed by different people.  And, our public market strategy was different than what they wanted -- they valued liquidity in public stocks even while they tolerated illiquidity in private company holdings.  It was rare to get an investor who understood VC and was willing to consider public stocks.

We did start to build some traction but were stymied by the market maltdown in September 2008.  Our traction went to zero, and we waited out the worst of the market to evaluate our plans.  Even so, it was frustrating to not get further before the meltdown.

In addition to the bucket problem, we also faced the first-time fund, first-time team problem.  Investors are very wary of backing new teams (will they stick together?) and new funds (do they know what they heck they are doing?).  These are valid concerns, and we had our strategy for overcoming them.  But, it took a long time with each investor, and we didn't make it over the finish line before the race stopped with the market meltdown.

In looking back, perhaps we were wrong to try to do something new.  However, it was also clear that investors weren't looking for 'more of the same.'  That fickleness was frustrating and explains why it's so tough to get a new firm off the ground.  There is still an opportunity for this type of microcap venture-style investment.  Some VC firms dabble in this now, and perhaps someone will take our strategy and make a lot of money with it.  That would be satisfying.

Posted by Mike Feinstein at 11:24 PM | Permalink | Comments (2) | TrackBacks (0)

After taking a break for the holidays, I'm back at my series that attempts to share some lessons learned from the Sempre experience.  See links at the bottom for previous entries.  This entry is about building the team.

It's hard to build a team if you don't know what you're trying to do.  No one fits into every situation.  The strategy and the team have to fit.  Things at Sempre weren't quite done that way, but we knew that when we started.

My two partners and I hadn't all worked together formally before.  I had looked at some deals pretty actively with one partner.  That partner was my main link to our third partner.  We felt that our skills and styles complemented each other, but we needed to put some time in to make sure that we'd make a good team.

We had some ideas on various strategies to pursue.  We decided to work together to vet those ideas as a way to make sure that we were as sound of a team as we felt we were.  You learn a lot when you work together to make decisions, particularly where we didn't always agree and didn't all have the same style.  We also discussed how to structure the firm -- who, if anyone, would be in charge?

Investment partnerships aren't like corporations.  The hierarchy and reporting relatioinships are generally not as straightforward.  In investment partnerships, I think that there are only two sustainable organizational structures:

• The small, equal team.  Up to ~5 equal partners who agree to make decisions together (unanimously) and share all the economics equally.
• The iron fist.  One partner who is firmly in charge and makes almost all the decisions.  Everyone who joins the firm knows this walking in.

I'm not a fan of the second model, but it clearly works.  The best thing about it is that it is unambiguous.  Everyone knows who makes decisions.  It's not as satisfying if you are not the owner of the iron first, but this structure can scale fairly well until the strong leader is streteched too thin.

We adopted the former model.  As a team of three, we decided that we'd only go forward if we could agree to keep things equal.  We wouldn't have a Managing Partner and would instead agree on how to divide up various tasks -- finance, IT, marketing, presentation and private placement memorandum preparation, fund-raising lead, etc.  I think that this was a great test of our team.  Although in the end we were all glad that we chose this structure, it wasn't the first instinct for all of us.  We talked our way through it over several meetings.  In the end, the fact that we all agreed on how to structure our firm proved to be a great test of our team dynamics.  It encompassed economics, ego, organizational comfort, trust, and potential politics.  If we could navigate through that decision, we knew we could make it through other tough ones. 

Before we committed to each other, we decided to do thorough diligence on each member of the team.  We knew that potenial limited partners would make a lot of calls on us.  We wanted to hear what the LPs would hear before we formally launched ourselves as a team.  All of us have people who like us and people who don't, people who would love to work with us and people who wouldn't.  The key was to hear all sides of the reference check to make sure that, on balance, each of us would check out with LPs.

We each put together formal reference lists and bios.  Then, we exchanged this information and started doing our own diligence on each other.  We contacted many blind references on each other, as well as some obvious 'tough' references on each other.  When we finished, we got back together to compare notes on what we had heard.  We tried to filter out obivious biases that some references may have.  Luckily, in the end, we each checked out.  Since we had found all of our own skeletons, we knew that it was unlikely that LPs would uncover more.  And, as time went on, there weren't new issues on any of us that came up.

I like the culture that we created at our firm.  It may not work for everyone, but it worked for us.  We are all direct and blunt, although polite.  We brought tough issues directly to the forefront and dealt with them head-on.  We all did our best to not take things personally.  We trusted each other that we were all working together for the best outcome for the firm.  Since we were equal partners, that should turn into the best outcome for each of us.

As we worked on different investment strategies, we compared the skills of our team to what was required for those strategies.  At times, we considered adding people to our team, both at the partner level and at more junior levels.  We agreed that, if necessary, we'd consider adding a partner at the beginning.  However, in the long run, our goal was to cultivate partners from within the ranks of our firm.  I think that promoting from within is one of the best ways to ensure that the culture of a firm endures.

Although we weren't ultimately successful, the strength and make-up of our team was by far our strongest asset.  We liked working together and all hung in there through the ups and downs because we wanted to find a way to stay together.  That experience is the best thing that I got out of trying to get Sempre off the ground.

Next Chapter -- Looking at Microcap stocks

Part I - Pulling The Plug

Part II - Getting Started

Posted by Mike Feinstein at 01:36 PM | Permalink | Comments (0) | TrackBacks (0)

As I wrote yesterday, we've pulled the plug on our investment firm.  As part of the wind down process, I thought it would be worth going back and describing the journey we went through in putting the firm together, trying to raise money, and the ultimate decision to suspend our fund raising.

Today I'll go back to the beginning.  It was early 2007.  I had left Venrock without much of a sense of what I was going to do next.  Although I considered some operating roles at that time, most of my effort was spent considering investment opportunities.

I made a real aggressive effort at networking.  I attended networking events, particularly Open Coffee Cambridge and the Web Innovators Group.  I met with anyone and everyone, from potential entrepreneurs to VCs.  I wanted to get a sense of what was going on in the market.  And, each person I met was a potential referral to someone or something else.  As I learned in the VC business, you just don't know where the big idea is going to come from.  Everyone should carve out some time for networking in their industry.  It's an investment in your future, and it keeps you current and connected.  With an open mind, you can always learn something from meeting a new person.

As part of that networking, I became an advisor to a bunch of start-ups.  This wasn't a job -- there's no cash compensation.  Some of them offered up some stock options.  Others I did as a labor of love.  I decided not to be an angel investor as I didn't know what I would end up doing.  I wanted to both minimize my formal entanglements and keep my personal capital available for potentailly starting up something on my own.  Also, not investing allowed me to be more direct with the entrepreneurs -- I was only giving them feedback because it's what I thought was right.  It didn't have to do with protecting my investment.

I thought about joining an existing investment firm (if they would have me).  But, I had joined two VC firms previously, Atlas Venture and Venrock.  It's very hard to get a good read on a VC firm from the outside.  You have to spend a lot of time working with them directly to understand the internal dynamics.  The target list of firms I could join pretty much went to zero when you considered the number of firms that would consider having me join that also had sufficient capital to justify adding another partner that I was also interested in joining and that was willing to go through a long 'dating' process to make sure that it was a good fit.

But, during this time, I started working with what became my Sempre partners, Bob Fleming and Tim O'Loughlin.  I had known Bob for some time.  He was the common link between Tim and me.  We started spending time together, initially strategizing about potential investment strategies, but really just getting to know each other better.

We found that we made a great fit.  We complemented each other's skills.  Our personalities meshed perfectly.  We came to a shared vision in how to run a potential partnership.  We each felt that as a team we were better than the sum of our individual parts.  We decided to enter the due diligence stage on forming a team -- gather the same diligence on each other that a potential LP would gather, develop an investment strategy that was compelling in the early 2008 market when we would likely kick-off official fund raising, and figure out if this strategy was compelling to us personally and was a great fit for our skills.  This would take time, but we needed to do this to confidently tell prospective LPs that we were a strong, committed team.

The final diligence and strategy development will be the subject of my next post.

Posted by Mike Feinstein at 03:58 PM | Permalink | Comments (0) | TrackBacks (0)

As some of you already know, a couple of weeks ago my partners and I decided to pull the plug on our investment firm, Sempre Management.  This post will include the short version of the story, but over the next few posts I plan to tell the story from the beginning in more detail.  There are good lessons here for any sort of entrepreneur.

The bottom line for us is that this is a horrible environment for raising investment money, particulalry for "first-time" funds.  While we were raising money, we followed the standard advice of not publicizing what we were doing.  The SEC worries about raising money from the general public.  Since we aren't raising money any more, I can talk about what our strategy was.

We were raising money for a variant of a venture debt fund.  Venture Debt means loaning money to companies that would typically be backed by venture capitalists.  In practice, most venture debt loans are made to very early stage companies.  These companies often don't have revenues to pay back the loans.  Instead, the venture debt firms count on the investors to put additional capital into the company to pay back the loan.  The hope for the company is that the company will make more progress with the borrowed money and will therefore earn a higher valuation for that follow-on investment.  More on that when I get to the chapter on venture debt.

Sempre was targeting companies that had revenues and were near break-even.  We were not looking for investors to put in additional capital.  Instead, we were looking for good businesses that were trying to cross the threshhold from losing money to making money and needed some additional cash to do it.  Most would be worthy of an equity investment but, for a variety of reasons ranging from investors out of money to not wanting to suffer additional dilution, the company would prefer to borrow money rather than take on more equity capital.

To cut to the end, we found out a few weeks ago that our potential lead investor had to delay their commitment to us for another six months due to issues around the timing of liquidity in their own fund.  They decided that they needed to raise a new vehicle in order to invest in Sempre.  Our other potential investors couldn't step up in their place and were likely to wait for some other lead to emerge.  This additional time and risk on top of everything else we've been through in this crazy time was the last straw.  We decided that we would stop now rather than carry on for 6+ more months with an (always) uncertain ending. 

Although we had a great strategy, a solid and current track record in implementing that strategy, had worked together as a team for more than 2 1/2 years, and were willing to fund the start-up of the fund out of our pocket, we still couldn't get over the bar in this tough fund raising environment.  Being a first-time fund is very tough -- many investors refuse to consider you.  And, we believe that 2010 will be even worse for first-time funds as many big name VCs will be in the market and the availability of capital isn't likely to improve.  The first-time funds will continue to get squeezed out.

Each member of our team is now embarking on their own path.  For me, I plan to return to an operating role.  I'd like a senior management position in a young company, ranging from a company about to collect its first revenue to one that is looking to add to its management team in order to scale.  I'll stick to the information technology and clean tech sectors where I have the most experience.  Likely titles for me would be CEO, COO, or VP of Sales and Marketing.  If you know of something that looks like a fit, let me know.

We plan to keep our Sempre Management contact info alive, so no need to update your contact info on me.  I look forward to reconnecting with many of you soon.

Over the next week or so, I plan to tell the story of how our team came together, how we chose our strategy, how we dealt wtih the market meltdown in the midst of fundraising in 2008, and how we revised our strategy and continued fund raising in 2009.  This won't be any sort of 'tell all', but will focus on lessons that apply to any entrepreneur.  I look forward to your feedback.

Posted by Mike Feinstein at 03:51 PM | Permalink | Comments (0) | TrackBacks (0)

If you live in Indy, check out the new bakery, Sweeties Gourmet Treats.  I tried this place when I visited Indianapolis recently.  It was started by Tiffany Colvin, the wife of ex-New England Patriot Rosevelt Colvin.

I got to know Rosevelt through LinkedIn.  He's quite a good entrepreneur.  When we visited Sweeties during their grand opening, Rosevelt was very hands-on, helping the staff fill orders and work with customers.  He was nice enough to spend some time with us, talking about the upcoming Colts-Patriots game at that time.

I love seeing real entrepreneurs in action.  He had invested money in getting the bakery started and was there for the start.  It may not become a huge business, but these are the types of companies that keep a lot of people employed.

And. more importantly, they have delightful sweets.  Try the Turtle Brownie!

Posted by Mike Feinstein at 10:25 PM | Permalink | Comments (0) | TrackBacks (0)

Some people are natural leaders.  It might even be true that the best leaders are natural leaders.  I always have respect for people who take on tough problems and can motivate others to join them.  Here's an example:

One of my favorite television shows was The Wire.  It was a very compelling story of what goes on behind the scenes in Baltimore, a city with plenty of troubles.  There were plenty of people in leadership positions in the show, but few real leaders.  In fact, almost all the characters were a realistic mix of good and bad.  Well worth watching the series from start to finish on DVD if you haven't already.

Much more interesting is a real-life story that is similar -- Brick City, the story of urban renewal in Newark, NJ.  This story has a real leader, mayor Cory Booker of Newark.  Maybe you saw him on the Colbert Report in 2008 and 2009 (2009 interview embedded below, along with a Brick City promo video).

In watching Brick City, I found Cory Booker to be inspiring.  He leads by example and builds a strong team which he needs to solve the city's very tough problems.  My favorite scenes are of his police director being very tough on the cops when they aren't doing strong investigations or reporting their crime statistics accurately.  These have direct parallels to The Wire.

The very best leaders have 'it' -- that special quality that makes you want to follow them.  They are intelligent, articulate, and totally committed visionaries.  They can connect with people at all levels but never lose sight of their overall goal.  They sacrifice to get the job done and inspire others to sacrifice as well.

I've met a quite a few people in my life who have this quality in various degress, but none more than President Jimmy Carter.  His post-presidency work at The Carter Center is an amazing example of dedication to helping make the world a better place.  In the very brief time I've spent with him, I came away inspired to commit more time to volunteering for causes I believe in.  He lives this every day, even into his mid-80s.  If he has time to do this, I'm sure I do, too.

I think you can teach people leadership skills, but those can only complement the innate qualities that make someone a strong leader.  Just watching Brick City makes me realize how much we can each do in order to be better leaders and make a difference.

Posted by Mike Feinstein at 04:00 PM | Permalink | Comments (0) | TrackBacks (0)

Every time there are new venture capital performance statistics announced, lots of people, including me, decry how over-funded the segment is and claim that it has to shrink.  And, over time, it will shrink.  But, what does this environment mean to entrepreneurs?

The fundamental problem with the venture capital business is that the VC investor's expectations are no longer aligned with that of an entrepreneur.  According to the latest statistics on exits from venture-capital backed companies, the average merger exit this year is $92M (and that's only for the ~25% of the deals where the transaction size is announced).  I'm willing to bet that the unnanounced transactions average a much lower price, although there are always some significant deals where the value isn't announced for various reasons.  Let's be optimistic and assume that the average for ALL venture M&A exits this year is something like $70M.

Now, if you and your co-founders could start a company from scratch and make it worth $70M, you'd think of yourself as being pretty successful.  But, to a VC, that's a marginal return.  Assuming that the VCs own 75% of the company by the time of the exit, they would take $52.5M of your $70M exit.  If the total investment in your company was $25M, the VC's profit would be $27.5M.  20% of this goes toward the VC's carried interest (assuming that their overall fund was in the black), leaving $22M for the LPs (the VC's investors).  That's a 1.88x multiple for the LPs.  Not what the VCs are shooting for, but not a disaster.

If you look at the historical returns I linked to above, you'll see that, on average, the VC industry has delivered a less than 1x return to LPs year after year from 1999 on.  They've lost money for a decade, so the average deal is worse than what I described above.  It's worse because there has probably been more money poured into the deal.  Maybe the real average exit is less than $70M.  And, my analysis above doesn't include the VC's 2%/year fee which also drags down returns.

What most VCs do to combat this is either 1) raise a lot less money and invest only in very capital efficient deals or 2) take really big risks that have a chance to deliver gigantic returns.  One huge return can overcome the losses of many deals.  But, if you aren't lucky enough to be part of one of those big wins, your returns (as a VC and an entrepreneur) suffer.

As an entrepreneur, your interests are more directly aligned with the VC that raises less money and is careful about the capital that they invest.  When your revenue-stage company gets to the point where it needs some additional capital to get over the 'cash flow break even finish line', you won't want to take that in as equity capital.  That's what pushes you into the overfunded category and lowers your return.  Instead, you may want to consider some venture debt that is tailored to meet the needs of companies at this stage.

The benefit of this type of debt is that it doesn't really change your share (or the VC's share) of the upside proceeds when your company achieves its exit.  The venture debt typically includes some warrants (or options to purchase shares in the company upon exit), but not a large stake.  If your company grows as planned, you should make more after repaying this venture debt then if you sub-optimized your growth without the debt.  The downside is that you have to service this debt which adds to the short-term cash burn.  As long as your company is growing faster than the added burden of the debt service, you should be able to repay the debt and capture the upside.

Of course, if you've never raised venture capital money, this type of debt instrument is just as applicable.  You may not want or have the option of taking additional equity investment to finance your last stage of growth.  Venture debt gives you the capital you need while allowing you to maintain control of your company.

In another case of mismatched expectations, most venture debt firms don't want to invest in revenue stage companies.  They prefer to invest as early as possible when the top-tier VCs invest.  Essentially, they are loaning money to the VCs, not to the company.  That can make sense if you have a new company with top-tier venture backing.  But, for the other 99% of the private companies out there, venture debt isn't really available.

There's clearly a nice opportunity here for both the private companies and the right venture debt investor.  More to come soon.

Posted by Mike Feinstein at 02:26 PM | Permalink | Comments (0) | TrackBacks (0)

So many leaders can tell you the right thing to do, but the best leaders lead by example.  And, that example trickles down throughout an organization.  When employees see the boss 'doing the right thing' when it comes to tough choices, they'll do the same.  Conversely, when they see the boss cutting corners and treating people poorly, it sets off a lot of dysfunction.

When I was in fifth grade, we had to memorize a poem.  It's probably the only poem I every memorized.  Amazingly, I still remember much of it today.  The poem was If by Rudyard Kipling.  It starts like this:

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don't deal in lies,
Or, being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;

I re-read the poem today, and, other than the sexist ending (you'll be a Man my son!), it has a lot of application to today's entrepreneurs.  Maybe that's why it stuck with me.

I thought of this today when I heard this interview with Tom Brady, QB of the New England Patriots.  This is Brady's weekly interview on WEEI in Boston.  But, since the Patriots didn't play yesterday, they asked Tom about his off-field life and, particularly, how he deals with all the harrassment he gets from fans and papparazzi.

I came away from the interview very impressed with Tom Brady's level-headed approach to dealing with having such a public life.  And, I'm sure that his leadership style has influenced many other Patriot players.  He's the kind of guy you'd build a team around, on and off the field.  He fits the mold that Rudyard Kipling had in mind.

By the way, here's a line from the poem particularly suited to entrepreneurs:

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;

Posted by Mike Feinstein at 03:07 PM | Permalink | Comments (0) | TrackBacks (0)

There have been a few more posts recently describing structural problems in the venture capital business.

Fred Wilson called out VCs who claimed that they need to own at least xx% of a company to justify an investment.  xx is usually 20% or more.  Most VCs think this way because they have a large fund and want to have a manageable number of investments to worry about.  Each deal may need to ultimately represent $10-15M over time.  In order to justify that, you may need to own 25% of a company (or invest in much later stage companies).

Josh Kopelman explained why big funds will have trouble generating strong returns for the large bulk of money they have.  Here's a great quote:

Take a $400M venture fund.  In order to get a 20% return in 6 years, they need to triple the fund -- or return $1.2B.  Add in fees/carry and you now have to return $1.5B.  Assuming that the fund owns 20% of their portfolio companies on exit, they need to create $7.5B of market value.  So assume that one VC invested in Skype, Myspace and Youtube in the same fund - they would be just halfway to their goal.

Both of these posts are worth reading in full.  I'm going to cover some trends from the VC's investors on down that highlight structural problems in the industry.

Most VCs raise money from ranges of institutional investors (endowments, 'funds of funds' which manage large pools of capital for other investors, pension funds, wealthy individuals, etc.).  Collectively, these are the Limited Partners in a venture fund, which is managed by the General Partners.  There are several issues impacting LPs these days:

• There has been a long term trend of lots of capital being available to invest, and therefore a desire to invest more into venture capital.  As every LP increased their allocation to venture capital, they ended up increasing the amount they wanted to invest in a fund.  Some LPs have minimums of $20M up to $50M (present economic difficulties excluded).
• LPs often don't want to be more than 10% of a fund.  So, their minimum investment levels imply fund sizes of $200-$500M, at a minimum.
• However, LPs also don't like large fund sizes because they think that the VC General Partners make too much money from their fees (typically 2% of committed capital per year).  So, here's the first conflict -- we have to invest $20M or it isn't worth our time, but we don't want you to have a large fund (or at least not a large fee income).
• As Josh pointed out, it's hard to make money with a big fund as you need many big exits.  This gets easier with a small fund as the sizes of wins required goes down proportionally.  But, small funds aren't interesting to many LPs as they can't invest money in them to be worth their time.
• And, in today's economic climate, there is a shortage of liquid assets available for LPs to use to meet their existing fund commitments let alone make new ones.  That's one reason why new fund commitments are so low.  Also, with VC returns being fairly low for the past decade, many LPs are moving out of venture capital or lowering their allocation, except for commitments to proven very top-tier funds.

There is also a structural problem with compensation.  As you might know, VC General Partners get a salary from their management fee and then a piece of the upside on the aggregation of the deals in the fund.  Typically, the partners would split 20% of the profits in the fund (not in each deal).  The whole fund has to be above water for this to happen, and some top VCs have a 'carried interest' of 25% or even 30%.  LPs are trying get everyone pushed back down to 20% if they possibly can.

Many LPs are compensated in the same way.  They get a management fee from their investors and then get some level of 'carry' if their fund is profitable in the aggregate.  If you think about this, it compensates everyone for achieving fund multiple, regardless of how long it takes to get there.  You might think that an LP would be thrilled if they could send you all of their money and you could reliably return 1.25x their money in 12 months.  Logic would assume that they would do that year after year.  But, their compensation system keeps them from doing that.  They'd only make 6.125% of the committed capital as a profit (you'd have to generate a 31.25% return, keeping 20% of it, 6.125%, and sending them the remaining 25%).

They'd rather let you hold the money for 5-8 years in hopes that you can return 2-3x their money, even if it means that you might lose half their money.  That doesn't make much sense, but that's the basis of LP and GP compensation.  If you generate a 2x eventually (to net 2x, the VC has to generate 2.25x and keep .25x for themselves as your carry), and raise a new fund that tries to do this every few years, you can eventually earn more money.  But, chances are something that can generate a 2x return can also lose half its value.  And, that's what's been happening in the venture space.  LPs and GPs are trying to generate high returns and living with the losses.  The glut of capital in the sector is one factor in driving down returns.  For the VCs and LPs, their high management fees buffer this for them, but their ultimate investors are getting tired of it.

I expect there to be lots of changes.  Foremost, capital will continue to drain out of the venture capital space.  Second, there will be pressure on the venture fund terms, pushing down management fees so that the GPs only make significant money if the investors are also earning a profit.  This will force the GPS to do the math that Josh Kopelman did and raise a smaller fund.  That will force many funds ts close and many people to leave the business.  Ultimately, it will be a healthier market, but it will take some time and a lot of gnashing of teeth before it gets sorted out.

Posted by Mike Feinstein at 02:37 PM | Permalink | Comments (0) | TrackBacks (0)

There has been a lot written lately about the shrinking of the venture capital market.  Here are some stats from recent posts across the web:

US Private Equity fundraising plunges 70%

Only 17 venture capital firms raise money in Q3 — fewest in 15 years

Some of this is cyclical.  VCs usually only raise a new fund once every 3-5 years.  So, one slow quarter or even a slow 3 quarters doesn't foretell the end of venture capital.  But, it's clear that the VC business is shrinking in several ways:

• LPs (limited partners or investors in venture capital funds) are commiting less money to the venture capital sector.  This means that there will be fewer funds and those funds will be smaller than before.
• LPs are getting tougher on the terms that they pay to VCs, particularly on larger funds.  This is affecting the fixed management fees, which pay VC office rents and salaries, and the carried interest (share of the upside of the investments), which is how VCs used to make most of their income.  LPs don't want VCs making big salaries off the management fee and want some level of return for themselves before sharing with the VC.
• VCs are slowing down their investment to push out their fund raising into the future when, hopefully, things will be better.  Also, some LPs are asking their venture capital funds to slow down their investment as the LPs are short of cash from liquid investments to use to make their capital commitments to the venture funds.  Even multi-billion dollar endowments can have a cash crunch!
• The old guard VCs are having an easier time raising money than upstarts.  Much of the money being raised is by brand name funds or brand name investors.  Innovative new funds are getting pushed aside due to the cash crunch at the LPs.  And, poor performing funds will struggle to raise money.
• Due to the slow exit environment, more companies are having to fund their growth internally or with their existing investors.  As those investors old funds start to run dry, it will become difficult for even good companies to get access to the cash they need to grow.  Some will sub-optimize their growth and others will be forced to sell before they would otherwise want to.

What does this mean to an entrepreneur?

• You need to get your company to revenue faster and close to cash break-even faster.  VCs are still going to be needed to get companies off of the ground, but it could be tougher to count on them for expansion stage capital.  Of course, there are still other ways to get a company off the ground -- bootstrapping it, angel financing, etc.
• Choose your syndicate carefully.  VCs who are unable to raise a new fund will slowly whither away.  The lack of sufficient new capital to invest and the associated management fees will cause partners to leave.  Old investments in old funds get put into caretaker mode and will have trouble squeezing new capital out of the investors.  Make sure your investors are healthy and have a long runway.
• Look for other sources of capital as you get closer to break-even.  If you have revenues and hard assets, you can consider debt to fund your business rather than equity.  Don't over-leverage your business, but a modest amount of debt in a growing company is a good thing as it preserves the existing equity structure and is a source that can be tapped again as the debt is repaid.  However, too much debt or debt in a non-growth company can be a killer.  You need growth to repay the debt or the debt service will crowd out your operating expenses.
• Don't count on your investors or board to solve this for you.  They can be helpful, but the company's leadership needs to ensure that the company is financed, in partnership with the investor base.

Overall, I think that the start-up financing arena will be a place for innovation.  There will still be plenty of venture capital for the best ideas and teams, but entrepreneurs will also be challenged to get their companies going without venture capital or plentiful late stage financing.  One of the keys to success is keeping your company financed, and those who do so have a big advantage.

Posted by Mike Feinstein at 11:37 AM | Permalink | Comments (0) | TrackBacks (0)

It's not secret that this has been a tough economic climate, particularly for raising money for an investment fund.  Luckily, we're starting to see some positive signs.  Some investors are still very tight for cash, but others are opportunisitcally making commitments.  This has been coupled with an improving economic environment.  We're not back to euphoria, but I think that most people think that we have at least bounced off the bottom.

At Sempre, we've been lucky to get great support from several partners who have helped us along while we are in a start-up phase.  I'm overdue for publicly thanking and recommending them.

Foley Hoag and their Emerging Enterprise Center in Waltham, MA -- Foley Hoag is our law firm, but they are also gracious hosts for our offices.  There are so many industry events at the Emerging Enterprise Center that you could probably meet most of the Boston-area high-tech industry just by hanging out here.  And, the attorneys at Foley are very interested in working with entrepreneurs.  They have an interesting blog as well, with interesting insights for entrepreneurs from the legal perspective.  If you need a law firm for your company, Foley is a great place to go.

Delta Capital Partners and Mark Duffy have been great partners of ours in managing the back-office side of Sempre.  They are very experienced and flexible.  It's critical for start-ups to have part-time and experienced resources to round out their team.  Mark has worked like he is part of our team, bringing his considerable experience to the internal side of Sempre.

Rebecca Fagan of Fagan Design has helped us maintain a professional look to our materials and web site.  There's not much there yet, but you can check out her considerable body of work here.  Rebecca is efficient and flexible.  She's also sensitive to tight budgets, able to scale up her efforts if budgets allow and make practical trade-offs when they don't.

We're working with the Boston office of KPMG for our audit and tax filings.  They won't be doing a lot until we're really up and running, but they've already provided great advice and some valuable introductions.

Most start-ups get some help and sponsorship from their vendors.  Don't forget to thank them and, if possible, refer some additional business to them to reward them for betting on you.

Posted by Mike Feinstein at 02:24 PM | Permalink | Comments (0) | TrackBacks (0)

Posted by Mike Feinstein at 06:32 PM | Permalink | Comments (0) | TrackBacks (0)

Going back to the 2008 Presidential election, change has been in the air and in our vocabulary.  Candidates from both major parties promised some sort of change, and I think that one reason Obama won is that he seemed like the bigger change of the two.

It's interesting now that our legislators and much of the general public is getting very tentative about change.  Healthcare reform is a huge change and should be scrutinized carefully.  But, it seems now that almost any sort of change is running into resistance even though that's what the majority of the electorate voted for.

Working with change is the subject of this post (not healthcare reform).  Many organizations and groups I am working with are struggling with changes.  People often talk about the needs for change as it is easy to identify problems with the status quo.  It's much harder to embrace the changes that address those problems.

And, in the dynamic environment we live in today, change is a constant.  In fact, you have to accept changing conditions as the status quo.  I think that the best leaders are the ones who are the catalyst for change and who build their organizations to incorporate changing conditions into their normal work expectations.  Change isn't an irritant that causes you to do or learn something new.  Instead, change is an exciting element that keeps you always thinking and on your toes.

I was first exposed to these ideas back in 1987 when I first read Tom Peters' Thriving on Chaos.  That book is a bit out of date now, but it opened my eyes up to a different way to manage people and organizations.  I still think about things I learned from that book.  It taught me that you could empower the people who worked for you to respond to customer and market demands dynamically.  This is key for many organizations and still applies today.

The CEO needs to be the catalyst for change.  If the CEO has trouble dealing with changes or is slow to react to market changes, it will stilt a company's growth.  Instead, the CEO should be pushing for rapid reactions to market conditions and customer requests.  Procedures and approval processes are all subject to regular improvement.  If the CEO models this, it will trickle down.

One thing that empowers employees is knowing that anyone can come up with new ideas that will be embraced by the organization.  This is critical for a strong company culture.  You want to leverage the ideas of the people who are closest to the product, process, market, or customer that you are dealing with.  This is regardless of rank or status.  Of course, new ideas have to be vetted before they are implemented.  But, they should always be considered.

An environment where positive changes constantly occur is one that is more engaging for the employees.  Change should be thrilling and shouldn't be loathed.  It keeps you mentally sharp.

If you are having trouble accepting change, I recommend the clean sheet of paper approach.  Throw out everything historical that is holding you back.  Make no assumptions based on the way things have always been done.  Instead, think of how things would be if you were starting from scratch.  Once that's clear in your mind, you should make that your goal.  If it's the optimal solution, you need to get there.  And, you need to blast through the roadblocks that are hanging on to the status quo.  Don't accept "we've always done it that way" as a reason for continuing.

If your organization is still resisting change, shake things up.  Switch where people sit in your weekly meeting, change the time or agenda of regular meetings, and move around desks or offices.  Be the catalyst for new thinking and adopting change.  Or, you'll be left behind by your competitors who do.

Posted by Mike Feinstein at 11:30 AM | Permalink | Comments (0) | TrackBacks (0)

I spent a lot of time yesterday thinking about the passing of Senator Ted Kennedy.  He was elected to the US Senate when I was 1 year old and had always been a visible public figure in my life here in Massachusetts.  Whether you agreed or disagreed with him philosophically, whether you forgave or were horrified by his personal troubles, there was no doubt that he cared deeply about the people he represented.

I am always most moved by the Ted Kennedy stories where he put his own time into helping or comforting some 'regular' person.  He wasn't doing this as a quid pro quo for a donor or political ally.  He wasn't doing it for the press coverage as there was usually none at the time.  He didn't brag about it later in speeches.  He just did it because he thought it was the right thing to do.  This personal empathy for his constituents is an important lesson for all of us.  So few leaders exhibit tihs quality today.

Here are two stories from today's Boston Globe which highlight this aspect of Senator Kennedy's life:

His compassion lifted many

A man who knew pain eased it in others

And, a couple of quotes from the second one:

There was no use arguing.

It was Aug. 18, 2008. The senator read in the paper that two servicemen from Mashpee had died in Iraq and Afghanistan. He knew their grieving families would be together that afternoon, gathering for sandwiches and fortitude before a candlelight service at Mashpee’s veterans memorial.

It didn’t matter that he was in the middle of yet another chemotherapy treatment at Massachusetts General Hospital. It didn’t matter that he was clearly exhausted. It didn’t matter that people would understand if he couldn’t make it. He wanted to be with them.

“When you think it’s the moment not to call, that’s the moment to call,’’ he always told his aides. “The sooner, the better.’’ He wanted the relatives to know he was there if they needed him and to tell them he had lived their pain.

And

The ailing senator was in no hurry to leave. He had words of comfort for every person in the house that afternoon.

“It gave me great admiration for him,’’ Maria Conlon said, “that somebody going through such a hard time with his own life, and for everything he’s suffered in the past, and still, he took the time to go to the family’s house, to sit there, not for five minutes, but for hours.’’

He wanted to attend the candlelight service, he told the families, but it was best for him to stay away.

“If I go, I’ll be in the spotlight,’’ Vicky Baron, Paul’s aunt, recalled him saying. “I don’t want to take away from what these young men did and what they gave up.’’ 

And so the senator hugged the grieving families goodbye and left the house, unseen.

I find these types of personal connections inspiring.  They remind me that in everything we do, it pays to take the time to have a personal touch.  I've done a bunch of fund-raising for various charities.  In looking back, the approaches that have worked the best have been the phone call, the in-person meeting, and, the most effective of all, the hand-written note.  Taking the time to write something by hand in this era of word processing and email and Facebook and Twitter shows a real commitment to the cause and to the recipient.  Personal commitment elicits a response, whether it is from donors, customers, partners, or investors.

If Senator Kennedy had the time to do this, we can all find the time.  It's a matter of putting our time into what's important.  And, a personal touch is one of the most important things of all.

Posted by Mike Feinstein at 09:49 AM | Permalink | Comments (0) | TrackBacks (0)

Q: What's the one thing in common among every business plan that has ever been pitched to an investor? 

A: The plan is wrong.

Don't worry about the plan being wrong.  The plan represents a set of assumptions that hang together to produce a business venture that, if everything went according to plan, will generate positive returns for the investors and other stakeholders.  It's impossible to get all of the assumptions right.  It's management's job to adjust the plan as the assumptions don't line up.  Somethings go better than you expect.  Other things go worse.  And, there will be factors which emerge that you never considered.  That's what makes being an entrepreneur fun (and stressful!).

One of the most common mistakes that entrepreneurs make is failing to recognize that things are going off track until it is too late.  Entrepreneurs are optimists, generally.  You need that optimism or you'd never try to get a venture started.  Objectively, the odds are against you.  But, it's the thrill of the opportunity that motivates most entrepreneurs.

You can't panic when you miss your first milestone or your first assumption turns out to be false.  But, you should objectively analyze the impact.  If your development project is starting to fall behind, can you really make up time in the coming few weeks?  Or, should you re-adjust some of the features and change priorities to add more slack in the schedule?  If your revenue generation is behind schedule, can you realistically make that up in the remaining months of the year?  Or, should you ratchet down your initial assumption to match the reality.

There is no easy answer for this.  But, here are some things to keep in mind as you analyze.

• Don't dismiss any missed milestone or projection as 'no big deal'.  You need to find the root cause and assess whether other assumptions you have made are wrong.  One of the most common occurrances is the cascading of missed objectives.  An optimistic assumption in one area is usually coupled with optimism in other areas.  Even when you re-double your efforts, it can become hard to avoid falling behind faster due to the inherent optimism in the original plan.
• Get objective input.  It's very hard to avoid drinking your own Kool-Aid as an entrepreneur.  You are the visionary that sold everyone on this plan.  You convinced everyone that you could overcome the obstacles.  So, as the new obstacles appear, you still believe you can overcome those, too.  I'm not saying that you shouldn't try.  But, you need to get someone outside the daily fray (board member, advisor) who can assess the situation and give you objective feedback.
• Listen!  Your board members, advisors, and team members are probably trying to give you some subtle messages about adjusting the plan.  There's a fine line between giving up on the plan and making the right adjustments.  A key skill for the CEO is to be able to listen objectively to all input, question their own assumptions, and then make the right decision.
• Act early, act often.  Early action when a plan is going off track is your best friend.  By taking early action (adjusting sales plans, reallocating resources, cutting expenses, etc.), you are buying yourself the most time to get back on track.  If you make up your shortfall or catch up on your project plan, it's not hard to ask the resources back that you may have given up.  Or, you may find that you can get by just fine with less.
• There's no shame in adjusting the plan.  The real shame is in failing to adjust the plan.  Again, here is where the entrepreneur's passion can become their weakness.  You've overcome so many obstacles to get your business to this point.  Of course, you can overcome the current obstacle, too.  What you have to think about is, what if we can't?  Am I spending too much money for the case where we don't get back on track?  Chances are, the answer is yes.  Way more companies have gone out of business by spending too much money than by spending not enough.  Keep the odds in your favor by adjusting your spending as quickly as possible when you start to go off track.
• Don't wait for the Board to force you into making changes.  Most times, the Board will defer to management as management has much more detailed information.  So, if you believe that you can make up for a miss, the Board will usually give you a shot.  But, just make sure you aren't fooling yourself first.
• Most of the 'misses' with a plan are negative, but you may also exceed aspects of a plan.  This is great when it happens.  Don't be afraid to adjust a plan updward if you are really confident that you are ahead of the curve.  If you really are growing ahead of plan, no one should object to ratcheting up the spending proportionately, too.

I'd be interested in other approaches that people have taken when your best laid plans go astray.  Please share them in the comments.

Posted by Mike Feinstein at 09:46 AM | Permalink | Comments (0) | TrackBacks (0)

Scott Kirsner has a very interesting blog post today entitled "Why Waltham Doesn't Matter."  His opinion is that most of the local VC's (particularly those with offices in Waltham in what Scott calls Mount Money) are dinosaurs that are out of touch with the latest happenings in the local tech community.  They don't pay attention to young entrepreneurs and don't fund ideas in the coolest new technologies.  Like a bad doctor, Scott has the symptoms correct but the diagnosis wrong.

Most of the more established VCs do tend to focus on areas that have been successful for them in the past.  And, they'd prefer to work with entrepreneurs who have been successful in the past, too.  There are so many risks with early-stage start-ups, why not increase the chance of success by limiting the places where you will fail?  And, there have been plenty of strong returns in recent years from following this formula.  I'd submit that the list of local IPOs and large acquisitions is dominated by companies in this category.  There are exceptions, but this is where the money has been and, for many, continues to be.

There are other VCs who can't break into this space successfully.  Or, perhaps they decide that to make their mark, they'll venture into some riskier waters.  The jury is still very much out as to whether they'll make money from these deals.  There are some good exits to date, but not enough to prove the point.  The contrarian in me will argue that they have a better chance of long-term success as these areas should be less crowded and will attract less capital in the short-term.  In fact, if every local VC flooded these new areas, they'd probably overfund a lot of mediocre companies, which would hurt everyone.

I've focused on the exits because that's what VCs and their investors (limited partners) care about.  Market development, fostering young entrepreneurs, networking events, etc. are nice.  I actually like them and have participated in more than my fair share.  But, they don't pay the bills unless they lead to deals that generate big returns.  Some VCs may feel that they do.  Others may feel that they can generate large returns without them.  I don't see the point of bashing one strategy over the other, particularly when I think that the old-fashioned way is still generating stronger returns.

I like Scott.  He's on a mission to have us all invest more in developing our local market.  Many of the VCs he's bashing do that, but perhaps not in the way he'd like.  They sponsor entrepreneurial events at MIT and elsewhere.  They've all done at least some deals in newer technology categories (even if they don't take the brave step of having the recent college grad run the company).  It might be nice if more of them did even more.  I think that seeing strong returns from the upstarts will make that happen.  Until then, Scott's 'dinosaurs' will continue to do pretty well for their investors and themselves.

And, don't be blinded by all the market development activities that Scott mentions.  At least some of those firms do these mostly for marketing appearances.  They want to appear to be more 'early-stage' and 'leading edge' than they really are.  Check out how many of these early-stage, seed-stage, wet-behind-the-ears deals that these firms really do.  Some, but not a lot.  Just like the dinosaurs.  They just do a better job marketing themselves doing it.

I'd love to see more VCs networking with young college students and entrepreneurs.  I've done a lot of mentoring of first-time entrepreneurs.  Although they are passionate, most of them don't deserve to be funded (just like most business plans put forth by experienced entrepreneurs).  It's a very fine sieve that filters out most of these unworthy ideas and leads to the small number that do get funded.  There are also a bunch of interesting ideas that don't fit the 'venture model' and have to get funded by other means -- angels, bootstrap, etc.

I think Scott would be more successful if he was less harsh.  He can heap praise on all the nice market development activities that he is in favor of.  But, he should also recognize the deals that become the strong exits that pay the bills.  Once some of the upstart firms that back upstart deals generate outsized returns more consistently, you'll see even more activity, even by the more established firms.  Until then, the dinosaurs and the evolving new species will co-exist.

Posted by Mike Feinstein at 09:35 AM | Permalink | Comments (4) | TrackBacks (0)

Both Fred Wilson and Brad Feld have written recently about Board meetings.  Having been to many Board meetings myself, from both sides of the table, I thought I would weigh in, too.

I totally agree with Fred on the value of face-to-face meetings.  I also admire Fred's determination to be at out-of-town Board meetings in person.  To me, that is a must.  I have been in many Board meetings where someone was on the phone.  It's a distraction, and you know that they aren't paying 100% attention.  I don't blame them.  It's hard to follow a multi-person conversation over the phone.  Of course, you miss out on the body language, too.  My own personal attendence record at Board meetings is above 95%.

Just as VCs tend to have a higher hurdle for out-of-town deals, I think that entrepreneurs should have their own higher hurdle for an out of town investor.  What evidence is there that an out-of-town investor will put in the face time to get to know the company?  Do they have a network that can be helpful to you?  Many times, non-Silicon Valley companies try to add a Bay Area investor to get some visibility and access to contacts in the Valley.  That makes sense to me, but most of your Board members should either be local or have a track record of showing up.

I also liked Fred's comment on putting in time beyond just the meeting to get to know the company and the other directors.  I have seen others do the same.  One person I brought in as an independent director at a past investment flew in to every meeting and planned to spend about one full day beyond the meeting with the company -- meeting with management, having dinner with the CEO, one-on-one meetings with other directors either before or after the formal meeting, etc.  This made them a much more effective director.

I'm less in synch with Brad on his point of 80% of the meeting being forward looking.  I think that some directors gravitate to that -- they don't have the patience for operational details.  I haven't been on a board with Brad, so I'm not describing him.  But, I have been on boards with other directors who only pay attention to the big strategic points.

I'd favor more of a 45% operational, 45% forward looking, and 10% administrative split.  I think that there is a ton to be gained by looking at how the CEO and management team are running the company.  You can spend a lot of time discussing strategy, but if the company is dysfunctional, it will never be able to execute against these great strategies.  I believe that more companies fail due to poor execution than due to a failed strategy.

One good approach is to have an operational overview at each meeting, with an emphasis on different departments on a rotating basis.  This also gives the Board a chance to see some of the other executives in action as each executive should present their department details.  You can also learn something of the team dynamics to see how all the executives interact.

Another lesson I have learned is that the CEO has the opportunity to control the meeting and the agenda.  Only a weak CEO loses this.  The best CEOs keep the meeting on track and communicate surprises in advance.  This allows the directors to get their emotional reaction out of the way in advance of the meeting.  The focus of the meeting should be to build consensus among the board members, or at least have a discussion which leverages their broad points of view.

One last thought -- there should be detailed action items captured in a Board meeting, with reporting back at the next meeting on the status of these action items (even if the CEO decides to abandon a particular item).  Don't lose the decisions that are made at these meetings.  Early stage companies probably have board meetings once per month, so there are probably a lot of short-term decisions made.  Later stage companies slow down to once per quarter, and the decisions probably have more long-term impact.

I'd be interested to hear in the comments about other things people like or don't like in Board meetings.

Posted by Mike Feinstein at 01:38 PM | Permalink | Comments (1) | TrackBacks (0)

The arrest of Harvard professor Henry Louis Gates by the Cambridge police has turned into a much bigger story than I expected.  Even President Obama weighed in.  I think that was ill-advised as he almost certainly did not have all the facts in this case.

I'm very sympathetic to minorities being targeted by police.  I'm sure it happens, and we shouldn't tolerate it.  But, just because it does happen doesn't mean that it happened in this case.  We need to have an open mind.  It would be great if both participants in the case did, too.

There's an interview with the Cambridge police sargeant on Boston's WEEI this morning.  The interviewers are very sympathetic to Sgt. Crowley, and he does most of the talking.  He certainly sounds like a reasonable guy.  But, he refuses to apologize as he thinks he did nothing wrong.

Professor Gates undoubtedly feels vindicated as charges against him were dropped.  He certainly won't apologize for anything he did that day, either.  And, for me, the lack of apology from both of them is an indicator of a problem in our society right now.

From everything I have read and heard about this, my sense is that both people were at fault at some level.  That's almost always the case in these types of situations.  Professor Gates probably jumped to conclusions about the motives of Sgt. Crowley.  He may have not been as composed and cooperative as he could have been.  And, it's likely that Sgt. Crowley should have shown even more restraint before arresting Professor Gates for disorderly conduct.  Once Sgt. Crowley determined that a crime was not occurring and that Prof. Gates wasn't going to cooperate, he could just turn his back and walk away, despite any verbal harrassment he may have been receiving. 

We should all treat police officers with respect, but, unfortunately, they have to have very thick skin to deal with those of us who don't.  However, given Professor Gates's age and physical condition, he probably didn't represent anything other than a verbal nuisance to Sgt. Crowley.  It must have been clear pretty quickly that a crime was not occurring.  If, as Sgt. Crowley says, he was also concerned that Professor Gates may encounter a criminal in the house, he could have told that to Professor Gates.  Who would refuse help from a police officer in that situation?  But, if he does, then Sgt. Crowley could just leave.

What disappoints me most is that one of these men should approach the other and say "let's both agree that this situation got out of control and that we both share at least some of the blame.  Why don't we shake hands and mutually apologize.  Getting this incident behind us is in everyone's interest and actually sends a stronger message of tolerance than any hardened position that either of us would take."

Instead, neither one wants to back down.  They are 'right' and so the other person has to be 'wrong'.  And, you'd never apologize if you thought you were right.  I don't buy that.  The better person is willing to put their ego in their pocket and look for higher ground.  How powerful would it be in calming race relations to have a press conference where they mutually apologize and shake hands?  Both can admit some level of fault, without having to argue about whether it was 50/50 or 99/1.

Things have become very polarized in our world.  Obama gets attacked when he says he's willing to talk to some of our enemies (even attacked by his now Secretary of State Clinton).  Politicians view every issue as a winner-take-all moment.  Admitting some level of fault, even 1%, is perceived as a sign of weakness.  But, this type of intransigence makes it almost impossible to resolve issues.  Whether it is a personnel issue, a business dispute, a civil matter, or a diplomatic issue, there is much to be gained by taking the high ground.  Suprisingly, we usually admire those who have the courage to do so.  We call them leaders.

Posted by Mike Feinstein at 11:00 AM | Permalink | Comments (1) | TrackBacks (0)

As Bijan wrote, the Massachusetts House was greatly watered down House Bill 1794 which was written to make Massachuseets law on non-competes similar to the law in California.  The new version, which Bijan describes, restores much of the effect of non-competes.  These stifle innovation and mobility of entrepreneurs in Massachusetts.

When this issue first came up in 2007, my initial reaction was to oppose the change.  As a VC, I saw how non-competes gave us piece of mind that our entrepreneurs and other employees couldn't leave our companies to start a competitor.  As someone who was actually sued under one of these agreements in 1990, I understood this from the entrepreneur's point of view.  So, I always made sure that our non-competes were narrow and targeted.  I initially thought that narrow and targeted non-competes should be allowed.

I was wrong.  When I read all the arguments in favor of eliminating non-competes in Massachusetts, I was convinced.  The most compelling argument is that entreprenurship and successful VC-backed companies abound in California where such agreements are not allowed.  Note that agreements protecting intellectual property and prohibiting people from soliciting employees once they leave are enforceable in California and would be in Massachusetts.  We are just talking about the ability to leave and practice your employment at a different company in your field.  As long as you don't solicity your fellow employees and protect your former employer's intellectual property, I think it is healthy to encourage such movement.

Massachusetts employers who oppose the elimination of non-competes are being disingenuous.  They have significant presences in California where these agreements are not enforceable.  And, they thrive there.  Bijan includes some examples, such as EMC.

If you agree, you should join the list of supoprters.

There are some Boston VCs on the list, but not many.  I'd love to hear the arguments from those who are against making this change.  If you know where some of these arguments are posted, please put a link in the comments.  Otherwise, I think that all Boston VCs should take a stand one way or the other.

Posted by Mike Feinstein at 09:26 PM | Permalink | Comments (2) | TrackBacks (0)

Fred Wilson blogged today about how areas outside Silicon Valley seem to have an inferiority complex about whether you can build a successful start-up if you aren't in the Bay Area.

I agree with Fred that you can be successful almost anywhere, as long as the area has what you need (more on that below).  Realistically, there have been more really big wins in Silicon Valley than elsewhere, but Fred lists plenty of non-Silicon Valley big successes in his post.  And, there are many more.  Silicon Valley will probably always have the most as that's where there is more investment.  But, it also has the most competition for people and capital.  So, your chance of success might be higher there due to the overall critical mass there, but you also have a higher chance of being beaten by a local competitor.  I think that in terms of odds, it's about even.

So, don't blindly move to Silicon Valley because you think that's where you have to be.  You almost certainly need a sales and/or business development presence in Silicon Valley if you are in the information technology business.  That's a big market, and there are many big partners there.  Plan on having someone with those skills based there, or traveling there very, very frequently.  But, what about where to base the rest of the company?

1) Founding team location.  The founders are the most important people in the company.  They have the vision, make the biggest sacrifice, build the culture, and provide the early momentum.  I don't like virtual companies where people are scattered all about from the start.  You lose many of the benefits that being small and nimble provide you as you spend time and money getting together.  It can work, but the odds of success are lower.  You probably can't move all the founders to one place without upsetting family life, etc.  That wears on the founders, too.  Hopefully all the founders are in a place that meets the other criteria below.

2) Access to qualified people.  You'll need to build a team, and you don't want to count on people all having to move to some remote location.  Your company should be based in a place where there is a pool of qualified people that have worked in similar companies.  And, you'll need people at all levels and across all skill sets -- engineering, sales, marketing, operations, etc. 

3) Access to capital.  Most investors like to invest locally, so it will be much easier to get funded if there are sufficient local VCs or angel investors to give you a good chance of getting funded.  Areas that have a good base of VCs include Silicon Valley, Boston, New York, Austin, Atlanta, Washington DC, Seattle, North Carolina, Chicago, and more. 

4) Feeder companies.  I find it very helpful if there are other companies in your area that are in similar or adjacent markets to yours.  This helps with the talent pool, but it also means that all other service providers (lawyers, accountants, bankers, real estate brokers, etc.) understand the basics of your business model.  And, feeder companies are great training grounds for your future hires.

5) If you aren't in a major area, it's really helpful if you have good access to an airport that can get you there quickly. 

There are probably other factors, so feel free to comment with your thoughts.

The most important thing isn't where you locate, it's the quality of your idea and of your founding team.  If that's strong enough, you can be successful.  And, being a strong player in a less-frequented location can actually make you stand-out much faster.

Posted by Mike Feinstein at 02:20 PM | Permalink | Comments (0) | TrackBacks (0)

Back from Japan, I'm finally able to look around and see what's happening in the world.  I came across this great article about AIG Financial Products Group in Vanity Fair by Michael Lewis.

The article was spurred on by Jake DeSantis from AIG's Financial Products Group, whom I previously wrote about when he wrote an op-ed for the New York Times.  It describes how things evolved at AIG's Financial Products Group and now the risk level grew so large that it dragged down the company and many of the large Wall Street banks.  Behind this increase in risk was group head Joseph Cassano.  In Lewis's article, you can read how Cassano's lack of understanding of how their underlying business worked and his over-aggressive personality drove AIGFP to take on way too much risk.

There is an important lesson here for any executive and board of directors.  Companies take on the personality and the ethics of their leaders.  If you have an executive who will 'win at all costs,' you will end up with a company that will also win at all costs.  And, the costs may be more than you are willing to bear.  When I hired CEOs, I always focused on ethics and responsibility since those were characteristics I wanted to see throughout the organization.  Being aggressive and driven is also very important, but you have to keep those in check with some responsibility.

No one in the article accuses Cassano of being corrupt.  But, he didn't understand the risk he was taking, and didn't seem to care when it was pointed out.  That's when the greed overran the responsibility.  That's a bad trade-off.  But, that's what you get when that's the personality of the person running the company.

Posted by Mike Feinstein at 02:34 PM | Permalink | Comments (0) | TrackBacks (0)

Whether you are a manager, Board member, Advisor, or a parent, you always wrestle with the question of how much rope to give someone when they are making decisions?  Do you keep them on a tight leash, or give them enough to hang themselves?

As a manager, where you own direct responsibility for the outcome, you can justify a tighter leash.  You want to encourage the people on your team to take risks.  Failure is the best way to learn, and most people fail before they succeed.  But, if failure has a big consequence, or your own success depends on the success of the people you manage in this instance, you may want to closely monitor what is going on and keep them on course.  Let the innovations be their idea, but don't let them drive into the ditch.

In a situation where you don't have such direct managerial responsibility, this is a tougher question.  As a Board member or Advisor to a company, you can't jump in an run things, unless you are explicitly asked.  The company needs to stand on its own, and the company's management needs to make the final decisions.  You can give input, make suggestions, and provide strong debate, but you can't overrule the team.  About all I ask for in these instances is that they listen to me (if they don't want to do that, why have you as an advisor?).  If I'm heard, it doesn't matter as much if I'm heeded.  In fact, as a Board member, I prefer that management make their own decisions.  Then they can be held accountable if their decisions are wrong.

If you are an advisor or Board member and act very heavy-handed, you can probably convince management to do things your way.  But, you'd better be right.  If things don't work out when you have 'overruled' management, you can't really hold them accountable.  The dynamic I prefer is to start off trusting management's judgment.  If they do something I don't agree with, and it works out, then I've learned something.  If it doesn't work out, I lose some faith in their judgment.  If it happens a few times, then maybe the company needs new management.

Your approach also haas to be moderated depending on what the stakes are.  If the company is going to go over the cliff and its survival is threatened, then maybe a heavy handed approach is required.  And, replace the management for almost taking the company down with them!  But, most decisions don't have that level of impact.  You need to let the people closest to the situation make the decisions, and then measure them accordingly.

As my kids have grown up, I see parallels with parenting.  Every kid is different than their parents, and they make their own choices about how hard to work in school, pursuing job opportunities, and taking part in extra activities.  You can't make your kids act the way you would.  Just try to get them to listen to you and learn from your experience.  That can be a big enough challenge sometimes!  But, if they make a few mistakes and learn from them, they'll have a stronger foundation on which to succeed in the future.

Posted by Mike Feinstein at 10:48 AM | Permalink | Comments (0) | TrackBacks (0)

June 2009 is New England Innovation Month.  Of course, I think every month should be Innovation Month.  But, this month there is a real focus on networking and connecting with other entrepreneurs as a way to focus on what's possible in this economy rather than wallow in the negativity of what's happened.  And, there is a list of great innovation-related events on the New England Innovation website.  One of the best ways to find something innovative to do is to network with others who are looking to do the same.

Many of the events on the list are free, so get yourself out there and support innovative ideas in New England.  Maybe I'll see you there!

Posted by Mike Feinstein at 02:36 PM | Permalink | Comments (0) | TrackBacks (0)

Today, Boston-Power announced that it plans to build a state-of-the art battery manufacturing facility in Auburn, MA, near Worcester.

Like many companies these days, Boston-Power has applied to the federal government for a grant of about $100M to help build the factory.  The facility would be used to build a new product, Swing, to be used in hybrid electric vehicles.  If the federal government is going to spend money to subsidize industry, this is the type of thing the taxpayers should be funding.

First of all, we need new batteries to power hybrid electrc vehicles.  These vehicles lower our dependence on imported oil.  And, we need to build these batteries in the US to be close to US manufacturer supply chains.  Also, we can export these batteries to international manufacturers.  Lastly, Boston Power plans to hire 600 people at a factory in central Massachusetts where new jobs are generally lacking.  Getting good jobs building stuff is a key to our economy.

We need to continue to develop new technology that we can manufacture here and export elsewhere.  It's so much harder to solve our employment problems with service jobs, which generally are lower paying.  Instead, our economy needs to find high-margin, innovative products that we can build here.

One key part of building them here is that the rest of the supply chain needs to be here.  Boston-Power also manufactures laptop batteries, including supplying batteries for the HP Enviro Battery.  But, these batteries are manufactured in Asia to be close to the rest of the laptop supply chain.  Even if we could build laptop batteries more cheaply in the US than in Asia, you'd lose money shipping the batteries from the US to where the laptops are built.

Let's hope Boston Power is awarded these grants so that we can start to build more high-tech stuff in the US (and Massachusetts).

Disclaimer: I was a board member of Boston-Power for several years and am currently an advisor to the company.

Posted by Mike Feinstein at 07:52 AM | Permalink | Comments (0) | TrackBacks (0)

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.

Posted by Mike Feinstein at 01:07 PM | Permalink | Comments (1) | TrackBacks (0)

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.

Posted by Mike Feinstein at 09:50 AM | Permalink | Comments (0) | TrackBacks (0)

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.

Posted by Mike Feinstein at 02:14 PM | Permalink | Comments (0) | TrackBacks (0)

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.

Posted by Mike Feinstein at 11:55 AM | Permalink | Comments (1) | TrackBacks (0)

I want to highlight an upcoming event that looks like it could be a great networking opportunity as well as a great chance to hear about what the big trends are in technology, particularly in Massachusetts.

What's Next in Tech will be held June 25, 2009 at Boston University's School of Management Auditorium (595 Comm Ave, Boston).  Here's the description:

Whether you're starting a business, investing, or looking for your next career opportunity, you won't want to miss this jam-packed evening of networking and conversation. Led by a stellar group of entrepreneurs and venture capitalists, we'll separate hype from reality -- and explore which technology areas are actually growing and creating big opportunities for the future. The evening will begin with an hour-long networking reception, continue with two high-energy discussion segments (one with venture capitalists, one with entrepreneurs), and conclude with plenty of time for Q&A from the audience. We'll talk about specific companies that are becoming leaders in our area, how hiring is happening in 2009, and what's shaking in mobile software, videogames, robotics, social media, cleantech, and other fast-growing sectors. We'll also ask you for your take on what the most promising new areas are.

Speakers will include:

- Michael Greeley, General Partner, Flybridge Capital Partners

- Mike Dornbrook, COO, Harmonix Music Systems (makers of "Rock Band")

- Helen Greiner, co-founder of iRobot Corp. and founder of The Droid Works

- Brian Halligan, social media expert and CEO of HubSpot

- Tim Healy, CEO of EnerNOC

- Ellen Rubin, CEO of CloudSwitch

- Bijan Sabet, General Partner, Spark Capital

- John Simon, Managing Director, General Catalyst Partners

The conversation will be moderated by Scott Kirsner, Innovation Economy columnist at The Boston Globe.

These are great conferences because you get a chance to network with some of the top VCs and entrepreneurs in Boston as well as participate in the discussion of the tech direction in Massachusetts.  Definitely recommended!

Posted by Mike Feinstein at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)

One of the things I hate about politicians is that they almost always make a sweeping generalization when faced with an issue.  They'll take bold swift action and miss out on the nuance.  Here's the latest example:

There seems to be some corruption involved with placement agents who grant access to the NY State Pension Funds.  Bloomberg writes about it here.  The NY Attorney General has banned the use of placement agents that help funds get access to the states $121.9B pension fund.  It sounds like a good idea -- get rid of the intermediaries and remove a source of possible kick-backs.  But, it will actually constrict the access to those funds.  Most fund managers don't have direct contacts with the NY State pension funds.  They need to hire intermediaries who have those relationships.  That's not a problem.  The problem is if those relationships are misused.

So, rather than banning all placement agents, the government should require transparency when it's money is placed through placement agents.  I would name both the placement agent firm and the principals of that firm.  Then, political connections and donations would be apparent.  As I have mentioned before, I am not a fan of regulation that restricts activity.  Instead, I think that regulation should be focused on reporting and transparency.  If the information is available, the public can decide if there is a problem, or it can be checked by some oversight board.

By the way, avoiding sweeping solutions is important for entrepreneurs.  Too many times an executive will make a sweeping decision without understanding the nuance.  While appearcing decisive and strong due to the broad action, they may be making critical errors if they miss out on the nuance of the situation and how they should be taking advantage of it.

Posted by Mike Feinstein at 11:49 AM | Permalink | Comments (0) | TrackBacks (0)

The best part of designing a product is if people can get lots of use/enjoyment/benefit from it.  And, it's very rare that technology products last for 5 or 10 years, let alone 27.

In 1982, John Mracek and I finished the first video game we designed while working at GCC, Phoenix.  It was based on the arcade game and worked on the Atari 2600 Video Game System.

Out of the blue today, I was contacted by someone who just set the world record on Phoenix, 2,344,018 points.  That's an awful lot for a game where you score 100 or 200 points at a time.  Much better than I ever did!

Here's a video of the record holder, ZimmZamm, rolling the score over (scoring more points than the game was designed for and rolling it back to zero again).  What could be better than building something that gives people so much fun?  It's amazing that people still love playing this simple game from so many years ago.

Posted by Mike Feinstein at 11:22 PM | Permalink | Comments (1) | TrackBacks (0)

I've met a lot of entrepreneurs in my 27 years of working at and with start-ups.  Good entrepreneurs have natural leadership capabilities and are often visionaries.  They have high energy and can attract and build strong, effective teams.  Most of them are great at selling their idea to investors, employees, partners, etc.  Even with all the strong entrepreneurs, there are a select few who you meet and just are compelled to follow.  They excel in the areas mentioned above and then have an intangible quality that makes them someone that people are compelled to follow.

These types of people can be in other careers besides high-tech.  The most recent person I met with these qualities is Diane Paulus, the new Artistic Director at the American Repertory Theater.  (Disclaimer: I am on the Advisory Board of the ART and have been a subscriber since 1982).  Diane is like a force of nature.  Anyone who meets her is compelled to follow.  And, as befits her position, she is innovative and creative.  Although not a salesperson per se, she has no problem selling her vision.

Today, the ART unveiled their 2009-2010 season.  The vision is big and bold -- multi-performance festivals that expand the ART into the community and linking to other arts organizations around the Boston area.  At the press conference today that showcased the new season, there was real excitement in the air.  I can't wait for these productions to come alive, starting in the fall.  There is nothing like a great live theater performance, and Diane is known for getting the audience involved, as she describes in this video from the ART web site.

See you at the theater!

Posted by Mike Feinstein at 08:03 PM | Permalink | Comments (0) | TrackBacks (0)

I've written about good2gether before, but they have some big news today.  But first, some background on the company.  Here are some problems worth solving:

Suppose you are a non-profit organization that is struggling to connect with users over the Web because you don't have a media budget.

Suppose you are a local destination site (often associated with the local newspaper) that is looking for unique, sticky content that you can monetize

Suppose you are a consumer brand that wants to associate yourself with good causes to create a positive impression with your customers.

Good2gether solves all these problems.  They provide an online presence for non-profits who can post information about their organizations, events, and volunteering opportunities at no charge.  Good2gether arranges distribution of this content through high-traffic local destinations sites (such as dogood.boston.com).  These sites are happy to give this content premium placement because they can sell sponsorships to this content.  Leading brands buy these sponsorships to improve their brand image.  And, this sponsorship revenue is split between the destination site and good2gether.  Eveyrone wins, and no one loses.

On the good2gether blog today, they announced that they have now partnered with USA Today to create dogood.usatoday.com.  This gives good2gether and their non-profit partners nationwide reach to complement their list of local partners.  The company has done a great job with a very modest amount of capital.

Congratulations to Greg and team on the progress so far.  Keep an eye out for more big news in the future.

Posted by Mike Feinstein at 02:41 PM | Permalink | Comments (0) | TrackBacks (0)

I'm a bit late in writing about this, but my friend, Fred Wilson, wrote a post last week about investing in a company too early.  Certainly being way too early is a 'cardinal sin of the venture capital business', as Fred calls it.  But, early-stage VCs who are too worried about being too early will be overly cautious.  You have to take some risks as an early-stage VC, and timing the market is one of the risks.  If the market is obviously there today, then, by definition, your new startup company is too late.

How do VCs and entrepreneurs mitigate this?  There are several ways:

1) Target an existing market with something that turns it on its ear.  Maybe you can deliver a new product or service that radically changes the value proposition in a market.  Or, combines a couple of adjacent markets together.  Note that I am careful not to say 'is much cheaper than existing alternatives.'  Although it can make a market entry strategy easy, a 10x savings on a $500M market turns it into a $50M market.  The exception is if lower prices greatly expands the market.  Don't automatically assume this to be the case.

2) Deliver something so great that users will happily forgive the shortcomings.  I have an example of this from my background, our remote access products at Shiva in the early to mid-1990s.  We were the best company at letting users dial-in to their corporate networks to get their email.  There were plenty of issues with this (reliability and ease of use of phone connections, speed, PC client configuration issues, etc.)  But, people were so hungry for access that they were willing to overlook all of these issues just to get that email while traveling.  This seems pretty out-of-date in these times, but imagine how thrilled you'd be for any type of access when the alternative is none at all?

3) Plan on matching your service to the market's needs today while you evolve it as the leading-edge customers evolve.  This is a pretty low-risk strategy, but also will likely lead to the lowest upside.  All the other existing vendors can do this, too.  The best way to really win here is to have some insight that others don't have.  Find the leading edge customers who think the same way you do.  Then, hope that you all are right that the rest of the world will follow you in the coming few years.

No matter what, don't get too far ahead of yourself on spending.  And, set some milestones that you stick with.  If you are building a new product, try to get some sort of prototype together that you can test out on customers.  Make sure that you don't have trade-offs that are overly limiting.  Be honest with yourself in case you really are hopelessly too early.

I think that the problem Fred brought up originally wasn't being too early, but sticking with a 'too early' idea for too long.  Some companies are 'too early' but are able to hang in there with a low burn rate and some modest revenue until the market catches up with them.  Those can turn out to be big wins as they'll see it coming before others can react.

Posted by Mike Feinstein at 01:49 PM | Permalink | Comments (0) | TrackBacks (0)

For any of you interested in entrepreneurship, venture capital, and meeting some of the most successful people in those communities, you should attend this year's Nantucket Conference (April 30 - May 2, 2009).  One benefit of attending this conference is that you'll get a chance to meet one of my favorite CEOs, Christina Lampe-Onnerud of Boston-Power.  Another benefit is that the rest of the speaker lineup is equally strong.  Based on my previous visits to the conference, it should be a fun and interesting time.  Also, if you haven't been to Nantucket, you're missing out on a lovely setting.

Scott Kirsner tells me that there are still a small number of spots left, so make sure you check it out today.

Posted by Mike Feinstein at 10:09 AM | Permalink | Comments (0) | TrackBacks (0)

Dave Brodwin's post on the Emerging Enterprise Center blog today made me think about one way to pick out businesses that will thrive for the long term.

Entrepreneurs are usually in business for something greater than money.  I'm not taking the financial gain out of the equation.  I think that's a critical component.  All entrepreneurs take risks and make sacrifices.  It's hard to justify that without the financial reward.  But, rarely is the money the only thing.  Most entrepreneurs have some sort of vision -- seeing their technology adopted by the masses, creating a new market segment, enabling a new business model that changes how a market works, changing people's perception about how a certain business works, or even 'just' building a growing business that can employ a lot of people in good jobs with good compensation.  I put the 'just' in quotes because I don't want to minimize the importance of doing that alone.

It's that mission for something greater than money that really drives entrepreneurs.  Maybe having fun is a critical part of that mission, as Dave suggests.  But, I think that having fun is a byproduct of being on a mission for something greater than money.  Most entrepreneurs want to have an impact and know that their own personal reputation is on the line.

One CEO I know has started a company in a big market that is really a small community.  The technical people in this community are very tight and have a conference every year with just a few hundred attendees.  Reputation in this community matters alot, as it does in most technical forums.  Despite having a very well positioned and growing business on their hands, this CEO has much more at risk reputationally.  If the technology fails or the business goes bust, they'll lose a lot of the reputation that they have built up over 20+ years.  As an investor, this makes me think that this CEO is going to focus on building a sustainable business and not just a quick hit.

Contrast this with the financial products group at AIG.  They are under fire for taking big bonuses despite having their division sink the company.  Without the $170B government bailout which bought us 80% of the company, AIG would be bankrupt and these guys would have received nothing.  And yet, they have no shame about taking their bonuses for 2008.  They must be worried about their reputations because the company won't release their names.  If they were doing something to be proud of, they wouldn't hesitate to get their names out there.

For someone doing it right, look at Paul Levy from Beth Israel.  He appealed to employees to forego salary increases, their 401K match and other benefits to save 450 jobs that would have otherwise been cut.  Paul set the example and got the employees to follow.  They believed that saving the jobs was the best way to achieve their mission of delivering great health care.  They voted against their own pocketbooks in order to achieve something greater than money.  I think I'd be happy to be treated at Beth Israel, but I certainly don't want to buy my insurance from AIG.

Maybe if we all use criteria beyond just money when we make our decisions and buy our products, we'll reinforce the right behaviors and punish those that are just purely greedy.

Posted by Mike Feinstein at 09:14 AM | Permalink | Comments (0) | TrackBacks (0)

It's always fun to mark a milestone at a company I'm involved with.  Today, Boston-Power and HP are formally shipping the Enviro battery pack which works in 70% of HP's notebooks.  You can check out Enviro at the HP online store.  Aftermarket batteries (purchased after you already bought your laptop) are expensive.  The Enviro battery is only $20 more than the standard battery for these same models.  But, the Enviro battery has a 3-year warranty vs. a 1-year warranty on the standard battery.  Judging by the comments the standard battery has received on the HP site, it seems like the $20 premium is a very modest extra cost for the 2 extra years of warranty.

The Boston-Power battery addresses the cycle life problem with Li-ion batteries.  The battery does not lose capacity over time and through charge cycles.  It also has a fast charge feature which allows it to get to 80% charge in 30 minutes.  And, since it is not made with hazardous chemicals and has a very long cycle life (you won't have to throw it away when it loses capacity), it has received the Norid Ecolabel for environmental friendliness.

If you own one of these HP laptops, you should consider the Enviro for your next battery:

HP Pavilion dv4, dv5, dv6; HP HDX 16; HP G50, G60, G61, G70, G71; Compaq Presario CQ40, CQ45, CQ50, CQ60, CQ61, CQ70, CQ71

And, if all goes well, you'll soon be able to order an Enviro battery with a new laptop purchase or buy one at a local HP retailer.

Congratulations to Boston-Power for becoming the first US vendor to get a battery certified by a major laptop manufacturer!

Posted by Mike Feinstein at 12:56 PM | Permalink | Comments (0) | TrackBacks (0)

An article in Sunday's Boston Globe reminded me of some lessons learned early in my career.  The interview with Nick Montfort discussed the early days of home video games, specifically the Atari 2600 game system.  This was the first mass market home video game system.  It used software cartridges for each game, leading to quite a large market for game sales.

Right out of MIT, I worked at a company called General Computer Corporation, now GCC Printers.  The company had struck a deal with Atari to develop home versions of popular arcade games.  As Nick Montfort mentioned, the graphics system of the Atari 2600 was very crude.  If you look at the original games developed by Atari, such as Pac Man, you'd be disappointed.  The graphics, the game play, the sounds, and the whole experience was unsatisfying.  Obviously, having limited hardware made it very challenging to develop a great game.

But, the first lesson I learned at GCC was to question everything I had learned before.  At college, we learned structured programming, which basically means "follow the rules."  It certainly works well and is the right thing to do.  But, it only works when the hardware has the resources to support it.  With the Atari 2600, the hardware resources were incredibly constrained.  It sounds almost prehistoric to say that the system had 128 bytes (not kilo- or megabytes, just bytes) of RAM to store the state of the game.  The cartridges generally had 8K 4K (and later 16K 8K) of ROM to store the game code.  An empty Word document is bigger than this.

When faced with incredible constraints, we had to innovate.  Here's a screenshot from Pac-Man, developed by Atari:

And, a screen shot from Ms. Pac-Man, developed by GCC (not me).

You can see that Ms. Pac-Man had more detail to the characters and the 'fruit' prizes.  And, the main character would rotate when it moved in different directions.  Now, these both pale in comparison to the types of graphics done today.  But, those two games were developed on the same hardware.  The difference wasn't that our engineers were smarter.  It was that we we willing to question all the assumptions.  There was documentation that Atari wrote that described how to use the graphics chip in the 2600.  The early games they wrote took that as gospel.  We took it as a challenge to be overcome.  We looked for tricks and hacks that would let us work around the limitations of that hardware, rather than being limited by it.  It was the most fun I've ever had with a computer!

By the way, Nick Montfort gave a tight schedule as one reason why the original Pac-Man game was poorly done.  Our typical game development time for a 2600 game was 2-3 months with 2 engineers, plus graphics and sound designers.  Time was just another constraint to overcome, mostly with caffeine.

The lesson for today is that we are again in a time of resource limitations.  It's a time to question the assumptions and to use that resource limitation as an opportunity rather than a barrier.  You can do a lot with a little if you think outside the box.  And, that's where the biggest wins will come from.

(Note: GCC had a great team of engineers that I was proud to be a part of.  We worked hard, had fun, and achieved a lot.  The original team inspired me to work harder than I ever did in my life.  Thanks to them, I had many opportunities.  For those of you who are curious, the primary game projects I worked on at GCC were (for the 2600): Phoenix, Jungle Hunt, Battlezone, and Joust (better screenshot here), and for the 7800, Desert Falcon.)

(Second Note: These old games are still popular today because of their simplicity.  Sometimes, you just want to play a basic game that you can walk away from.  You kind of already know how to play, and a game is over in a few minutes.  The casual games are one reason why older people, like me, are back into playing computer games.)

Updated to fix broken Joust links.  Also, my former colleagues confirmed that I was wrong about the cartridge capacity in my original post.  Now corrected.

Posted by Mike Feinstein at 07:39 AM | Permalink | Comments (0) | TrackBacks (0)

I've been traveling this week, so this post is coming one day late.  Yesterday, Ciclon Semiconductor was acquired by TI.  Ciclon manufactures MOSFETs, components used to build power supplies.  Ciclon's technology allows power supplies to be made more efficient (less energy loss, and therefore less heat given off) and in a much smaller size with fewer components (cheaper, more reliable).  The purchase price of Ciclon wasn't announced, but suffice it to say that it was a very nice multiple on the total amount of capital invested in the company.  TI is serious about selling these products as a full information page was prepared before the announcement.  I invested in Ciclon while I was at Venrock.

The Ciclon story is very instructive for today's entrepreneurs.  The CEO, Mark Granahan, identified Ciclon's core technology and orchestrated a spin-out from Agere where it was initially developed.  Mark was very scrappy and negotiated a very attractive deal with Agere.  This technology and equipment gave Ciclon a head-start on product development and allowed a Series A financing to happen in a market segment that is generally viewed as being low-margin and commoditized.

However, despite having two successful financings, Mark kept the company with a very frugal spending plan.  They leased space from Ben Franklin Technology Partners at Lehigh.  This gave them affordable office space and access to additional resources.  As they developed products and captured initial design wins, Mark built a very strong management team without over spending.  Although their customers are not yet announced, I can tell you that they have design wins in very visible products from some of the leading consumer electronics and computer vendors.  The company was able to get to revenue very quickly, including leveraging some legacy products from the Agere spin-out to lower their cash burn.

Some key takeaways from the Ciclon success story:

• A very clear definition of the market opportunity, validated by customers at the start of the project.  It helped that they were targeting a commodity market with a disruptive technology
• Defensible technology, with a roadmap to extend it.
• 'Unfair advantage' derived from Agere spin-out.  Every start-up needs some key advantage in order to counteract the fact that they are a new company with relatively little money
• Maintained frugal mindset despite initial funds raised and commercial adoption
• Hire a world-class team.  Even a company like Ciclon faced many challenges along the way.  Their team was strong enough to overcome technical and manufacturing challenges that might have derailed weaker companies.
• Get to revenue quickly, even if it is with an interim product.  This helped offset some of the cash burn, which benefits both the investors and the entrepreneur.

Congratulations to Mark and the team at Ciclon.  I am sure that they'll be very successful getting these products further into the market while at TI.

Posted by Mike Feinstein at 05:56 PM | Permalink | Comments (0) | TrackBacks (0)

As I watched the inauguration of President Obama last week, I was struck with the contrast between the euphoria of the crowd and his measured and cautionary remarks.  Others have noticed this, too, and it took me some time to get around to writing this.

President Obama probably has, after FDR, the toughest set of circumstances facing him versus any other President.  Nevertheless, he has a 69% approval rating.  Given the difficult choices he'll have to make, he's bound to disappoint a good number of these people.

If you read his speech, you'll notice it to be relatively somber for a President coming in on such a wave of support.  And I think that's wise.  One of the biggest challenges for any leader is to manage expectations.

During good times, it's very easy to get overly optimistic.  And, during bad times, teams can get overly pessimistic.  A good leader can find the right balance to keep the team challenged and keep the company on a 'high-achievement' posture.

It's easy to understand the problems that can happen to when a management team gets overly optimistic.  This is very common among entrepreneurs as they tend to be optimists by nature.  Entrepreneurs visualize how to solve big problems and can't be deterred by the problems and issues.  Those 'why nots' are why other people haven't tried yet.  But, overly optimistic projections lead to disappointed investors and a lack of confidence in a team's ability to execute, even if they have actually done a great job.

However, sandbagging and setting low targets doesn't work either.  Whether through caution or pessimism, overly low expectations tends to lead to low achievement.  High jumpers don't clear the bar by feet, even if the bar is set low.  People tend to beat their targets, but it's hard to get a company to obliterate their targets.  And, the company's spending level tends to be set with an eye toward expected achievement.  If a company sets a $10M revenue goal, they'll spend commensurate with that.  However, if they could achieve $25M with the right plan, they won't have a chance of doing that with a spending plan that contemplated $10M in revenues.

The right balance that an executive should set is to 'under promise and over deliver'.  Targets should be set high enough to be challenging for the team, but not so high that they can't be met even with superhuman effort.  That's one reason why a CEO needs experience.  Without seeing this goal setting done well and poorly, a CEO won't have the ability to set the right goals for the organization.  And, if the expectations aren't set and managed well, the company is doomed to under deliver.

Posted by Mike Feinstein at 02:02 PM | Permalink | Comments (0) | TrackBacks (0)

This video from TED discusses how mass customization delivers experiences (rather than a commodity, good, or service) and how important it is for an experience to be authentic.  This is a great video for any marketeer to watch.  This approach applies to any type of product or service.  It's critical to deliver something 'complete' that considers the consumers end-to-end experience.  This includes the ordering, installation, configuration, use, and support of the product or service.

Posted by Mike Feinstein at 09:23 PM | Permalink | Comments (0) | TrackBacks (0)

Boston-Power has been in the news quite a bit lately.  Today they announced that they raised $55M in new capital.  This comes on the heels of their announcement that HP is their first customer of laptop batteries.

The new capital will fuel the expansion of their manufacturing capacity.  It's incredible that they were able to raise money in this environment, but that's also a reflection on the quality of the opportunity.  They are playing a high-stakes game, and with $125M of capital raised since the start of the company, they are poised for a large win in a huge and critical market.

This is the third new year in a row where Boston-Power was able to start off with a successful financing.  A great way to get a new year underway!

Posted by Mike Feinstein at 05:22 AM | Permalink | Comments (0) | TrackBacks (0)

In the past few months, I've seen more of my over-40 friends and colleagues get active on Facebook.  At the same time, activity on LinkedIn still continues to be very high.  Many of my less-connected friends ask me "should I sign up for these?", "what's the difference?", and "isn't Facebook really for kids?"  So, if you wonder whether or not you should use these services, here's my take on the answers.

LinkedIn is like walking the halls of a huge industry conference.  It's aimed at business people, with most of the data structured around jobs you've held, education you have, and skills you have.  It's great for trying to hire people as you can easily search for people with certain jobs from certain companies and in certain geographies.  There are ways to recomend the work of others and industry groups to join.  The main purpose of LinkedIn is to expand your professional network.  The site makes it easy for you to leverage your existing contacts to make new ones.  And, if you join a networking group, it's easy to reach out to others in the group.  There is a very good search function that let's you identify people you want to get connected to.

Personal membership in LinkedIn is free, but they sell business memberships that are mostly aimed at recruiting.  I am a personal member, so I am not well versed in the business membership benefits.  If you are doing a lot of hiring, you should check it out.  One nice thing about LinkedIn is that despite having so many people in there, I receive almost no spam.  The messages I get are either from people who know me who want to connect with me on LinkedIn or from those who are leveraging a mutual connection of ours to get to know me.  I may or may not be interested in all of these requests, but none of them are a waste of time.  If you join LinkedIn, you should be ready to expand your network and to help others expand theirs.

There is some amount of social interaction on LinkedIn, but not much.  There is a way to ask questions of your network, and the content of those questions vary.  And, you can post your individual status so that others in your network can see what you're doing.

My analogy for LinkedIn is walking the halls of a big industry conference with your name badge on.  You interact with business contacts you know, and there are a lot of other people around.  You can get introduced to your friends' friends, and most people can see at least your name.  It's a pretty safe environment and very professional.

An example of how I used LinkedIn:  Let's say that I am working with a semiconductor company that wants to hire a new VP of Marketing in Dallas, TX.  It's very easy to search for all of the VPs of Marketing in the semiconductor industry that are in or near Dallas.  If there are names that come up that look interesting, I can quickly see how my network extends to this person.  If I don't know them directly, I can see if they are connected to one of my contacts, or to one of my contacts' contacts.  This indirect network expands quickly.  Currently, I have 1487 direct connections on LinkedIn.  The extended network of my contacts, their contacts, and their contacts' contacts is over 7.5M people.  So, that's a large database to mine when I want to make a new business contact.  Some may say that I am too promiscuous on LinkedIn!

If LinkedIn is the industry conference, Facebook is the cocktail party afterwards (which spills out into the city streets).  As you might know, Facebook started as a way for college students to get in touch, keep in touch with their former high school classmates, and maintain contact after college.  It is very social, and I am sure that the killer app that drove initial adoption was dating.

Facebook is all about people posting what they are doing, what they like doing, how they express themselves, and sharing all of that with their friends.  You can expand your friend network pretty easily, but I find that Facebook has more 'noise' than LinkedIn for business use.  There are still lots of students on Facebook, but more and more of us 'old folks' have been joining.  And, more of my industry contacts are active on Facebook.  My own set of Facebook 'friends' has family, friends, business contacts, high school students (my son and some of his friends), college students (from work I do in and around MIT and elsewhere), high school classmates, and more.  It would be scary if they all met one day!

The subject of the chatter on Facebook is much more like what you'd talk about at a cocktail party -- what are you doing, where are you going, what do you like (music, art, food), what's newsworthy, etc.  It's really easy to jump in and comment on anything that your friends are talking about.  But, you won't find many deep discussions.  There is a lot of photo sharing on Facebook, which is nice if you are keeping up with family and friends.

After playing around with Facebook on and off for the past few years, I've come back to it again recently.  As more of my friends and business contacts are on there, it's a nice way to stay connected.  There is more value than you think in saying "I'm on my way to Texas" and having some people I know in Texas say "Stop by for a drink!"  Or, saying that you don't feel well today and having many people you know wish you well.  I don't find it a substitute for being a friend, but it can make do in a pinch.

As I said, Facebook is like a cocktail party.  There is lots of chit chat, and you can definitely meet new people or just stick to your old friends.  There is probably a wilder side than what you have seen, but you can ignore it if you wish.  It's still a pretty safe environment as you can control who can communicate with you.  But, I still get more random invites that I would consider spam on Facebook than I do on LinkedIn.  Nevertheless, I haven't received anything that I would consider inappropriate or in poor taste.

I had a debate with a colleague of mine today about which one would win in the long-term -- LinkedIn or Facebook.  Quite honestly, I don't see one as a substitute for another.  Ideally, I'd like them to merge, but with a way for me to keep business and personal contacts separate.  That separation is important.  I don't see a need for me to keep my business background a secret from anyone, but I am sure that there are things in my Facebook profile that are best kept to just my friends and cocktail party buddies.

If you haven't joined either one, you are probably missing something.  I'm willing to bet that some of your friends and/or business contacts are already on there.

Posted by Mike Feinstein at 04:07 PM | Permalink | Comments (0) | TrackBacks (0)

Reading about the SEC's many fruitless investigations of Madoff over 16 years has me thinking of due diligence this morning.  It's easy to criticize the SEC in hindsight for not finding anything.  Obviously, Madoff was a master at covering his tracks, making any diligence process difficult.  He also played off of reputation and trust to swindle his clients.  This probably worked on the SEC as well.  I'm guessing that they cut corners on the investigation because of who (they thought) Madoff was.

As an investor, I never stopped the due diligence process, even after making an investment.  Pre-investment, I would try to do 360 degrees of diligence, talking to anyone I could find who knew the people, market, or technology involved in a prospective new investment.  I would try to get them to meet first-hand with the company to get their direct impressions.  I would also talk to previous employers and investors from the founders' companies.  As is the case with anyone, no one gets 100% scores.  You have to weigh issues and risks with the potential upside.

People learn from their mistakes, and I tend to be a forgiving guy (one of my weaknesses, some may say).  I wasn't necessarily put off by a failure in a previous situation, but I wanted to learn as much about it as possible.  It's startling to hear the different perspectives that multiple people can have on the same situation.  On one company, I had one board member tell me that a key person was barely involved with the company while another said that this person was chiefly responsible for the company's success!  How do you know who to believe?

If you talk to enough people, you can form your own opinion.  If you weren't there yourself, you can be like an investigative reporter, digging up as many facts as possible and stitching the story together.  You can listen to your own instincts and see how they line up with what you've heard from others.  But, there are some things I'm not very forgiving on -- honesty and ethics.  If someone lied once, they'll certainly do it again.  That's an almost impossible habit to break.

I'm always amazed at the lack of diligence that some investors and entrepreneurs do.  I've seen some investors back entrepreneurs from failed companies without talking to any of the previous investors.  Maybe they wanted to keep the new deal to themselves, but is that worth the risk of missing out on the other investors' perspective?  And, very few entrepreneurs perform diligence on VCs.  Those investments are two-way partnerships.  If you have a choice of investors, shouldn't you do your homework on them?

As I mentioned before, I don't stop this process after investing.  If I am working with a CEO and I come across someone who knows them well, I'm going to ask a lot of questions.  This has bothered some people who thought I was 'going behind their back'.  But, I just want to continue to learn as much as possible about the people I am in business with.  I always put a much greater emphasis on my first-hand interactions because they are only colored by my own judgment, not someone else's, too.  However, if I can learn how to help a CEO be more effective by understanding a past situation they were in, it only helps all of us for me to take advantage of that.

Also, be very wary of someone who doesn't want their background to be an open book.  I've encouraged people checking my references to call anyone.  And, I don't feel I need to prep my references on what to say about me.  I've got nothing to hide and am happy to discuss any situation I've been involved with, including those that haven't worked out.  I'm guessing that Bernie Madoff didn't consider his fund to be an open book for the investigators.  He certainly controlled the information that anyone could find out, much to everyone's dismay.

Posted by Mike Feinstein at 08:35 AM | Permalink | Comments (1) | TrackBacks (0)

I've written about Boston-Power quite a bit lately.  Their latest news is that they are a finalist for a Crunchie award.  Here's a description of the Crunchies:

In its second year, the Crunchies has quickly established itself as one of the tech industry’s most sought-after accolades – recognizing and celebrating the most compelling startups, internet and technology innovations of the year.  The Crunchies is co-hosted by among the most influential new media outlets. GigaOm, VentureBeat, Silicon Alley Insider, and TechCrunch.

If you are interested in voting for Boston-Power (or any of the other Crunchie finalists), you can do so here.  Voting closes on January 5th.

Posted by Mike Feinstein at 09:35 PM | Permalink | Comments (0) | TrackBacks (0)

My post from last week on lessons an entrepreneur can learn from the Madoff mess was picked up in Scott Kirsner's column in the Boston Globe today.

One additional aspect of how an entrepreneur must 'trust but verify' came in the comment from my friend, Angelo Santinelli:

...I agree with your advice to entrepreneurs, but want to add that Trust but Verify extends into the entrepreneurial organization itself in particular as it relates to direct and channel sales. The pressures on salespeople to make their numbers can cause them to be overly optimistic at a minimum. This also applies to development, where the readiness of a product can be difficult to measure in some organizations. What it all boils down to is the need for policy and procedures to gain some balance between Growth, Profit and Control.

Good point!

Posted by Mike Feinstein at 11:07 AM | Permalink | Comments (0) | TrackBacks (0)

The coverage of Boston-Power's announcement of HP as a customer has been fantastic.  One highlight is yesterday's interview on NPR.

Like one of the commenters on the NPR web site, I disagree with the industry analyst on a consumer's willingness to pay $30 for a battery that is guaranteed to last for 3 years.  Although consumers look at the bottom line cost, anyone who has had to purchase a replacement laptop battery (usually $100+) would probably pay $30 for one guaranteed to outlast several normal batteries.  Obviously, some customers will choose to stick with conventional batteries, but Boston-Power hopes to set consumers expectations that they should expect their laptop battery to ALWAYS last as long as the laptop!

Posted by Mike Feinstein at 08:59 AM | Permalink | Comments (0) | TrackBacks (0)

Here's a great holiday video from First Round Capital.  The story behind it is on Josh Kopelman's blog.  I challenge you to watch this and not smile.  It's a great way to cheer up in spite of the difficult market.  Happy Holidays!

Posted by Mike Feinstein at 01:24 PM | Permalink | Comments (0) | TrackBacks (0)

My friend, Pete Glyman from Geezeo, is going to be on CNBC's On The Money again tonight at 9 PM EST.  You can read about it on the Geezeo blog here.  Here's a clip from Pete's previous appearance.

Disclaimer:  I have a small equity stake in Geezeo.

Posted by Mike Feinstein at 01:09 PM | Permalink | Comments (0) | TrackBacks (0)

The Madoff Mess can provide some important lessons for any investor.  And, every entrepreneur is an investor of either their own money or, more valuably, their time.

Luckily, there virtually no evidence of outright fraud in the venture capital business.  VC deals are well documented, venture funds are generally audited by top-tier accounting firms, and almost every venture-backed deal is also audited by well-established firms.  So, the lessons learned aren't about fraud, but about verifying the facts.

"Trust But Verify" is often attributed to Ronald Reagan.  He certainly used it very often.  And, these are good watchwords for every entrepreneur.  Some examples:

• Don't just trust your VCs reputation.  Verify it through your own diligence, including blind reference checks and discussions with executives of companies that didn't work out.
• Don't trust your VC when she agrees to some additional terms that aren't on the term sheet or promises to 'take care of you' if you are let go.  Verify every deal and agreement with terms in writing.  You never know if the person you make the agreement with will be the one you have to enforce it with.  If the deal is really a deal, no one should object to putting it in writing.
• Don't trust that your VCs will fund your company if you can't raise money elsewhere.  VCs will always promise support for your company, but that isn't the same as wiring funds into your account.  If the VCs are promising to backstop your company with a bridge financing in the event that you can't raise money, get that agreement in writing, including the terms.  Once your company is actually on the brink, the terms may change.  But, if you have a prior agreement, hopefully it will be honored.
• Don't trust the commitments that are promised by customers and partners.  Follow-up with emails confirming, or formal contracts if appropriate.  It may seem overly formal during more friendly relations, but the actual commitment may give you some moral high ground if the going gets tough.

From the looks of it, Madoff's investors (and "friends") trusted him without verifying his results.  It seems like no auditing of his transactions was done.  When you are dealing with 10s and 100s of millions of dollars, you have to verify the results.  A true friend or honorable money manager would never object.

Posted by Mike Feinstein at 10:24 AM | Permalink | Comments (1) | TrackBacks (0)

Boston-Power's HP announcement was covered on New England Cable News (NECN) today, including a guest appearance by yours truly.  See where it all began!

Posted by Mike Feinstein at 07:55 PM | Permalink | Comments (0) | TrackBacks (0)

Boston-Power has announced HP as its first customer for its laptop batteries.  HP will offer Boston-Power batteries as part of its Enviro series of environmentally friendly products.  The Boston-Power Sonata batteries are made from more environmentally friendly materials, making them the only rechargeable Li-ion battery which has earned the Nordic Ecolabel.  And, since the Sonata batteries will maintain their charge capacity for three years, HP will offer an unprecedented 3-year warranty on these batteries.

The Enviro replacement batteries will be available for many HP notebook models, beginning in early 2009.

Wall Street Journal coverage of the story is here.  A more detailed story is in Xconomy.

Boston-Power is a great study in perseverance.  HP has been a vocal supporter of the company from the start.  However, getting a new battery approved for use in an HP notebook is no small task.  Not only must the technology be validated, but the long cycle-life benefits must also be confirmed.  Then, mass production capabilities have to be proven in order to supply a large customer like HP.  And, of course, it is much easier to describe scalable, high-quality, manufacturing than it is to do it, and to do it to the satisfaction of a demanding customer like HP.

Kudos to the Boston-Power team for realizing the first part of their vision.  They are the only US-developed technology supplier to be approved for notebook sales, arguably one of the most demanding applications for Li-ion batteries.  And, to have that realized with a top-tier customer like HP is something to be proud of.

Disclaimer -- I am an indepdendent director on the Board of Boston-Power.

Posted by Mike Feinstein at 09:32 AM | Permalink | Comments (0) | TrackBacks (0)

Scott Kirsner was once again kind enough to mention one of my recent posts in his Globe column today. 

In re-reading my original post, one thing I would add is that you not only have to build a good team, but you have to maintain it.  Team dynamics are organic -- people change and companies change.  As companies grow, they often outgrow some or all of their management team's capabilities.  So, the CEO and Board have to be vigilent about making sure that the team meets what will be required of the company in the future.  And, the CEO has to make sure that the team works well together.  The Board has the tricky problem of assessing whether the CEO is the problem in a team that isn't working well.  This is tough because much of the Board's information about the company comes through the CEO.  That makes it essential for the Board to maintain contact with the entire top management team.  If a CEO is wary of this, that's a red flag, too.

Posted by Mike Feinstein at 09:01 AM | Permalink | Comments (0) | TrackBacks (0)

With all the political emphasis on Obama's 'team of rivals' approach, I've been thinking about what makes a good team.  Politics is different than entrepreneurship, however.  Lincoln had to appease various constituencies to maintain support for his policies.  As the country was at risk of being torn apart, with him as President but relatively unknown, he needed support from other power holders.  In a company, it's very different.

On a corporate team, you want to have representation from various types of experiences:

• In your market, and from outside your market
• In companies your size, and those that are larger (or smaller)
• People from various companies, and not too many from any one company
• Independent thinkers who aren't afraid to express their opinion
• But, also people are are able to 'disagree and commit' if a decision doesn't go their way

Personal chemistry is also critical.  You have to enjoy working with the people on your team, but you don't have to be their friend socially.  In fact, I think it's better if that's not the case.  If you become personal friends, you can lose objectivity.  Be friendly, but not friends.

On a team, it's important to set the right culture.  Make sure everyone has a chance to be heard.  And, make sure that everyone's opinion is respected.  Team members want to feel valued.  However, once the leader makes the decision, that has to be followed.  A good leader is also willing to revisit decisions in light of new information.  You have to be flexible and have the courage to be right, even if you started off wrong.

The way that the leader operates will set the tone for the team.  I always expect very high ethics and integrity in any leader.  They shouldn't tolerate less than that from their team.  If a leader exhibits less than that, it sends a message to others that they are better served by cutting corners to get the 'right' result.  Before you know it, you have Enron.

Another important team dynamic is getting rid of people who don't pull their weight.  Although no one wants to see someone fired, knowing that poor performance isn't tolerated is actually a motivator for the strong members of the team.  It may scare poor performers, but you don't want them around anyway.  Rely on the input from your team in assessing team performance.  They will always know who is great (and who is poor) before you do.

There is no magic formula for the right team, but don't be afraid to hire team members who are even stronger than you are.  They'll make your company stronger.  Would you be worried about hiring someone who turns out to be so strong that they could become your boss?  If so, you probably aren't qualified to make the hiring decision yourself.  From the company's perspective, those great people will lead the company into the future.

What other approaches have you used to build a strong team?

Posted by Mike Feinstein at 05:02 PM | Permalink | Comments (1) | TrackBacks (0)

Angelo Santinelli has a good post today comparing the Team of Rivals approach that Obama appears to be taking in putting his team together with an entrepreneur putting a team together of A players, including people strong enough to lead on their own.  As Angelo says:

...President Elect Obama is surrounding himself with “A” players, because this is what confident “A” Players do naturally.  “B” players surround themselves with “C” players, so that they can feel confident about themselves.

High praise from a committed conservative!

Although Angelo talks about this in the context of a crisis, I think that this has to be the everyday strategy of every manager.  A good leader can attract strong team members.  If they hire weaker people, they will never succeed.

I once met with an MIT professor who was looking for advice on starting a company and, eventually, raising venture capital financing.  I asked him what his goals were for his proposed business.  I expected an answer like "make a lot of money" or "see my technology make it into the market" or "use this medical technology to help people."  Instead, he said "I want to always be the boss!"  Well, this is a recipe for failure.  And, no VC would ever fund you (if you honestly tell them this).  But, even worse, you'll never attract A players to your team with this approach.  Sure, you could hire people who worship you and see you as being the boss for all time.  But, they won't challenge and drive you.  Needless to say, the right answer to my question is the honest one, but the winning answer is to want to see the company succeed over your own personal ambitions.

How do you attract A players?  First, you need a compelling vision.  You need to include them in the decision-making process, including keeping an open mind to their advice.  You need to foster team work and a culture of success.  And, you need to cull out people who don't fit this model.  Perhaps I'll write up a follow-on post soon with more details on this.

Posted by Mike Feinstein at 08:24 AM | Permalink | Comments (0) | TrackBacks (0)

A lot of people (including me) are really depressed by the constantly declining stock market.  For some businesses, it does have an impact.  If you are trying to raise money, the freefall in the public markets can make it difficult.  Investors use the public market as a barometer.  New commitments are measured against the public market valuations.  If those keep heading down, a new deal can look too expensive.  It's also tough trying to raise money for a new fund as many institutional investors base their asset allocation decisions on the value of their public market holdings.

VCs and private equity investors who have funds committed have the capital to invest, but at what price?  That certainly makes later stage deals very hard to price.  Early stage deals are usually done at more or less the same price, regardless of market conditions.  But, it's difficult to know what type of businesses will be able to build some initial revenue traction when overall spending is down.

As an entrepreneur, you have to focus on what you can control.  If you need to raise money, figure out how to stretch your current cash as much as possible.  Make sure you can show potential investors as much revenue traction as possible.  Hopefully, your existing investors are willing to carry the company if new investors won't commit.  Make sure your monthly burn rate is absolutely as low as possible so you can make this burden a bit lighter for your investors.

If you have some money in the bank, don't be complacent.  Cut your spending down to push out your 'out of cash date' as far out as possible.  Focus your efforts on generating revenue and reducing the risk in your business.  Cut out non-critical projects and marketing efforts.  It may be difficult to cut staff, but you need to get rid of exta headcount in order to give the remaining employees the best chance of success.  And, most importantly, act NOW.  Don't wait for your cash balance to dwindle or your investors to get upset.  Be proactive.  Every extra dollar you save by acting quickly is money you can spend building some value.

Don't fall into the trap of avoiding expense cuts because "if things turn around, we'll be glad we kept these resources around".  I'll take the risk of having to re-hire new people vs. the risk overspending.  Once that money is gone, it's gone for good.  On the other hand, nothing reinvigorates a company coming out of tough times like hiring a few new people.

I may come across as being panicked.  I'm actually not.  I think that things will be tough for a long time, but that doesn't mean that there are no opportunities.  The opportunities will go to the swift and the lean.  Make sure that you're one of them.

Posted by Mike Feinstein at 05:52 PM | Permalink | Comments (0) | TrackBacks (0)

My friends at the Foley Hoag Emerging Enterprise Center have launched a blog with some great content for entrepreneurs.  Make sure you check it out.  From their announcement:

Posted by Mike Feinstein at 08:25 PM | Permalink | Comments (0) | TrackBacks (0)

Scott Kirsner writes today about how inaccessible many of the local industry groups are to students.  It's interesting that the less formal organizations are some of the more welcoming.  Our local 'old school' mentality among businesses may be leading to us dismissing the contribution that students can make.

It's ironic to write about students on Election Day.  Today is about the future -- both the coming four years and the track that the country will be on for years after that.  At a time like this, we should also recognize that students are the lifeblood to our future success. 

I've had a steady involvement with students since I graduated from college.  I've been involved with my college fraternity at MIT, including some formal advisory roles.  I've been a judge at the MIT $50K (now $100K) business plan competition.  I've also led several i-Teams at the Sloan School, in cooperation with the Deshpande Center for Entrepreneurship.  I've even taught some classes for my friend Angelo Santinelli at Babson.  The most fun was negotiating with students in the Sloan School Early Stage Capital class.

From all of this, I've learned that, although they are often inexperienced in the nuts and bolts, students bring phenomenal new energy and ideas to new ventures.  Mentoring these students is extremely rewarding.  And, students often come up with huge ideas that teams can be built around.  Students are usually not jaded after going through a few major downturns.  They see the possibilities.  When you can temper that with some real world supportive experience, you have a winning combination.

So, any organization that wants to foster entrepreneurship should be welcoming to students and should actually seek them out.  This goes beyond the low admission prices that Scott Kirsner was looking for.  It also means marketing to students and explicitly welcoming them.  And, if the students show up, make sure you get to know them.  From my experience, you'll be impressed.

As someone in my late 40s, I can also tell you that working with students can make you feel younger, not older!

Posted by Mike Feinstein at 03:58 PM | Permalink | Comments (2) | TrackBacks (0)

I don't have or need sponsors for this blog.  I don't have any ads or generate any revenue.  And, I don't have any real costs, either.

Nevertheless, while starting up a new firm, it's great to get help from others.  I want to recognize three of our partners who have been incredibly helpful.  All of them would be great for any new business to work with.

Our office is at the Emerging Enterprise Center of Foley Hoag.  Foley Hoag is our law firm, and we've had incredible support from Bruce Kinn on fund formation, Dave Broadwin as our 'landlord' and expert on small public companies, and John Patterson as our overall sponsor.  In addition, the whole team at the Emerging Enterprise Center has been very supportive, treating us as part of the company.  If you are an entrepreneur and can convince Foley Hoag to host you at the EEC in Waltham, you'll be well taken care of.

Our firm is investigating opportunities in the public markets.  As you can imagine, we do a lot of research on public companies.  Although you can find a lot of this information in free public sources, you can't be productive in this endeavor without a real tool that automates and organizes this research.  CapitalIQ is a fantastic tool for mining data on public companies.  And, our account team has been very supportive during our start-up phase.  In addition, Capital IQ has incredible support -- fast, helpful, and willing to do some custom work on our behalf.  If you have a company that needs to research public companies, you need Capital IQ.

If you clicked through to our sparse website, you got a glimpse of the design work done by Rebecca Fagan of Fagan Design.  We love the work that Rebecca has done on our logo, web site design, business cards, letterhead, and marketing materials.  She's been very easy to work with, gets things done quickly, and meets her commitments.  If you need design projects done, you can't go wrong with Rebecca.

Thanks to all of you for your support of Sempre Management!

Posted by Mike Feinstein at 01:28 PM | Permalink | Comments (0) | TrackBacks (0)

My friend Angelo Santinelli has started a new blog called All In A Day's Work.  He's focusing on issues that entrepreneurs and small businesses face in today's challenging business environment.

Angelo has always been someone to focus on the reality of the situation and not on the emotion.  Read some of his recent posts for his thoughts on what entrepreneurs should be doing in light of the current economic crisis.

Posted by Mike Feinstein at 01:21 PM | Permalink | Comments (0) | TrackBacks (0)

At any company I've been involved with, the front-line people always know what is really going on.  Executives have varying degress of knowledge, but no one fools the people on the front-line.  When a strategy change is announced or someone is fired, you can usually hear people on the front-line saying "FINALLY!"  If people at the company know what should be done, why does it sometimes take the executives so long to figure it out?

The most common reason is that no one listens to the front-line people.  Maybe top executives don't spend time with people on the front-lines.  Maybe they hear things, but their top managers dismiss this feedback in order to deliver their own message.  In any event, if you aren't listening to people on the front-line, you are missing what is really going on.

If you are a CEO, you have to be careful when you try to get this feedback directly.  Employees have to feel safe in bringing up issues with you.  They can't fear reprisal, from you or anyone else.  Also, you have to be careful in how you react.  If you say "we shouldn't do that" when you hear about an issue, that becomes a directive.  I remember a company I worked at once where the CEO (Frank) did a good job talking to people on the front-line.  But, "Frank said" became the way that someone could cut through normal decision-making.  And, "Frank said" usually meant that Frank was empathetic, not making a decision on the spot.  Instead, try "I'll look into it" (only if you mean it).

Here's a current example of top leaders ignoring feedback from the front-lines.  In today's column by Steven Syre in the Boston Globe, he writes about Sheila Bair, head of the FDIC since 2006.  She was trying to raise an early alarm on sub-prime mortgages:

Bair was working in Washington as assistant secretary of the Treasury for financial institutions until 2002. She already didn't like what she was seeing in the mortgage market then.

"In 2002, she had tried to get the Federal Reserve to pay attention to subprime loans," says Tom O'Brien, former dean of the Isenberg School of Management at UMass. "She was worried there was fraud being perpetrated, and she was sure this was going to cause tremendous problems for people taking out the loans. But none of us saw the systemic risk and how it mushroomed. But we used to talk about the fact that she couldn't get the Federal Reserve to take that seriously."

Ben Branch, a UMass finance professor and friend of Bair's, recalls similar conversations in Amherst.

"She was way ahead of the curve on all these problems and trying to get people's attention. Unfortunately, people didn't listen to her so much."

I didn't know anything about Bair until this morning, but it sounds like we have the right person in charge of the FDIC, which insures bank deposits.  The FDIC will be under alot of pressure as some banks fail, but hopefully she'll make the right calls (and listen to people in her front lines).

Posted by Mike Feinstein at 07:32 AM | Permalink | Comments (1) | TrackBacks (0)

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One of the best exercises that a company can do is a lifeboat drill.  When faced with difficult choices of resource allocation, companies need to go back to first principles to decide what to do.  Too often, companies make a choice between the last two things they are doing rather than question some fundamental assumptions.

The essence of the lifeboat drill is like zero-based budgeting.  You begin with no assumptions of what's in and what's out.  It forces you to really assess the priorities of every activity and every person associated with it.  It can be a much bigger job than thinking incrementally, but it is definitely a worthwhile excercise to do, particularly for a whole team.  You may find that other members of your team have different fundamental assumptions than you do.  Getting these base-level priorities agreed upon is critical to getting everyone in the company moving in the same direction.

Another application of the lifeboat drill is when you are forced into a situation where you have to cut expenses, particularly in doing a layoff.  If you really force prioritize every project and every person, it will be easier to make the decision about who you have to cut during these difficult times.  Also, the prioritization drill will make it easier to communicate to your remaining employees why you made the choices you did and what tasks you will and won't do going forward.

Unfortunately, I think that the country needs to do a lifeboat drill, too (sorry, can't get politics out of my mind these days).  I am apalled by our ballooning deficits and by the overextension of our military.  We are waging an ill-conceirved foreign policy on the backs of of people whom we don't sufficiently care for when they return.  The priorities are all wrong.  I'd love to see a new administration really do a lifeboat drill on what our priorities are, ensuring we have our top priorities properly funded and having the discipline to cut off the priorities when we reach the limits of our ability to spend (and not borrow).  If something is really important and beyond our current ability to afford it, shouldn't we be willing to raise revenues to pay for it?

A small thing triggered this in my mind.  If you have visited an office building in a big city, you have undoubtedly gone through security checks with ID's verified, etc.  This level of security has greatly increased since 9/11/01.  Is this level of security really worth it?  Or, did it just make us feel better after we all were so scared seven years ago?  Certainly it wouldn't have stopped the types of attacks that have happened.  And, it is probably easily thwarted by someone determined to do so.  If I were a landlord in one of these buildings, I'd do the lifeboat drill to figure out if this level of spending is really necessary.

Posted by Mike Feinstein at 07:24 AM | Permalink | Comments (1) | TrackBacks (0)

Christina Lampe-Onnerud, CEO of Boston-Power, was interviewed today on NPR's Here and Now.  You can listen to the interview here.

Christina is a real Renaissance woman -- Ph.D in Chemistry, entrepreneur, mom, musician, and a pleasure work with.  She is very well respected in the battery industry, and had the courage to innovate in ways that others were skeptical of.  As you'll hear, the company is doing very well in a segment that is increasingly important.

Disclaimer:  I am on the Board of Boston-Power.

Posted by Mike Feinstein at 02:33 PM | Permalink | Comments (0) | TrackBacks (0)

A lot of the lore of entrepreneurship centers around the leader overcoming all the odds to almost single-handedly pull the team/product/company over the finish line to the promised land.  And, there is no doubt that the entrepreneur has to be a visionary that continues to drive the team to overcome inevitable obstacles.  My point here is not that it is untrue.  Instead, it just isn't enough.

I know of many entrepreneurs who could convince co-founders to join them, could convince VCs to back them, and could convince customers to take a chance on them.  That gets a company off to a good start.  But, the process continues on.

You have to sell to partners who can help build your business.  You have to convince new investors to buy into the opportunity.  You have to convince your existing investors to hang in there during bumps in the road.  You may have to convince investors to give up a little bit of what they have in order to play for a bigger win later.  You have to convince acquirers that they should pay a nice price to buy your company if that is your exit.

Or, you have to convince investment bankers to take you public.  And, institutional investors that they can make money on your stock.  And, a wide range of public market investors to hang in there when you don't meet expectations.  In all these cases, the company leaders have to sell their idea/technology/product/value proposition/investment thesis to someone who is probably more objective about the company's prospects than they are.  And, anyone who knows anything about sales knows that it requires listening and empathy.

This leads to an interesting required balance.  You need to be single-minded in your purpose to get the company going and move it forward.  But, you also need to listen and understand the issues with those you don't believe.  You might get lucky and find that you can find business partners who just get it they way the entrepreneur does.  But, at some point, you need to break down your offering and make it work for someone who doesn't really care about how whizzy it all is and instead wants to see an understandable business model, a way to make money, and predictable results.

It is a very rare person who can do all this.  And, it's also rare for someone to realize that although they could do it all at some point, different skills may be required here as the company develops.  The best entrepreneurs recognize where they add the most value and where they need help.  And, they are willing to listen objectively and take on the help of others who can assist them in this complicated ongoing selling process.

Posted by Mike Feinstein at 08:37 AM | Permalink | Comments (0) | TrackBacks (0)

Another parallel I've seen between politics and business is in the two big things I look for in leaders:  ethics and efficacy.

Not to get off on too much of a political rant, but we've been awfully short on both of these for the past eight years in Washington.  It's clear to me that the country didn't get the full story on Iraq before we were led into war, and war should always be our last resort.  War should never be undertaken capriciously.  Besides the ethical violation, this war has also wasted thousands of lives and hundreds of billions of dollars.

Beyond that, the Bush adminstration hasn't demonstrated efficacy ("capacity or power to produce a desired effect").  Think of both the abominable handling of Hurrican Katrina, but also the inefficient and slow rebuilding effort.

Luckily, I am much more comfortable with the ethics of both of the Presidential contenders.  It's probably not a surprise that I favor Obama over McCain, but I do believe that McCain wants to do what he thinks is right for the country.

It's impossible to judge efficacy.  Both come from legislative backgrounds where you have little ability to really get things done.  I don't count getting legislation passed as being comparable to building teams and running large organizations.  Both campaigns seem to be run very well and both candidates overcame some long odds in order to get their nominations.

The key to efficacy is building and managing the right team.  Experience can help with this, but it comes down very much to personal characteristics.  I think that a leader seeking efficacy must surround themselves with the strongest possible team, listen to all points of view, remain open-minded when faced with problems, rely on their own ability to make a final decision, and be willing to admit mistakes and make changes.  I remember reading in a management book a long time ago:  "give credit, take responsibility"

Contrast that with "Brownie, you're doing a heck of a job"

Posted by Mike Feinstein at 02:25 PM | Permalink | Comments (0) | TrackBacks (0)

Posted by Mike Feinstein at 02:13 PM | Permalink | Comments (0) | TrackBacks (0)

Hard to believe that another week has zoomed by without having time to post something.  Luckily, things slow down before a long weekend, and I have time to finally post a few thoughts that have been rattling around my brain this week.

A lot of my thinking about business lately has been colored by what is going on in the political arena.  No surprise that politics are dominating the news as we are in the middle of the national conventions.  But, there are some lessons to be learned that also apply to business.

I remain mystified by the Hillary Clinton supporters who feel so wronged that they would rather vote for John McCain than Barack Obama.  I've seen varying reports on the real number of Hillary's backers in this camp, but the whole concept doesn't make sense to me.  If you liked Hillary's positions, you can't be too disappointed with Barack Obama's positions.  They are almost the same, and much different than McCain's. 

I thought that Hillary should hang in there until she was really elminated from contention.  Anyone getting that close would do the same.  And, perhaps the media didn't treat Hillary fairly because she's a woman (as well as being Bill's wife).  No one said that running for office was for the faint of heart or for someone with thin skin.  In the end, Hillary capitulated.  And, I thought her speach at the Convention was quite good.  She has little choice but to be a good soldier going forward.

Her supporters who continue to be defiant are in an alternate reality.  This was a race, and she lost.  When it's over, you have to move on.  I've seen this in companies, too.  The management gets stuck in the past and keeps fighting last year's fight.  I am a strong believer that you have to deal with reality in business.  Putting your head in the sand doesn't serve anyone.  I think it was Harold Geneen who called this 'unshakable facts'.  He insisted that his managers make their decisions based on facts, not opinions and emotions.

There are a lot of mature companies today that need to move on to their next fight.  Instead, they continue to fight the last one.  This causes them to squander resources and miss out on new growth opportunities.  The lack of objective, outside, and yet constructive input is one reason why companies can't see this problem themselves.  As an entrepreneur or a company leader, you need to make sure that you are looking at the company's situation as objectively as possible.

On a lighter note, Jon Stewart showed a healing program for Hillary supporters who are stuck in the past.

Posted by Mike Feinstein at 01:51 PM | Permalink | Comments (0) | TrackBacks (0)

Disclaimer:  Although I am not an investor in A123, I am on the Board of Boston-Power, a battery company that does not currently compete with A123, but may in the future.

Last week, A123 filed their S-1 in preparation for a potential IPO.  A123 is an innovative company that spun out of MIT.  They have battery technology that is currently used today in DeWalt power tools.  They are also working on projects for hybrid electric vehicles and other applications.  The company has raised at least $133M of venture capital and has generated lifetime revenues (through March 2008) of about $72M.

I've spent a lot of time over the past year looking at public companies.  Although A123 looks exciting for the long-term, I have my doubts about their ability to either go public or, in the near-term, be a successful public company.  Their business just hasn't developed enough to sustain value in the public markets.

If you study their financials, you'll see that they have approximately zero gross margins.  That means that their selling costs don't quite cover their material costs and manufacturing overhead.  Low gross margins are not surprising for early stage manufacturing companies.  They are not yet selling at high volume and are investing in manufacturing capacity for the future.  But, it's disconcerting to me that even at $10M in revenue per quarter that they have slightly negative gross margins.  On top of that, the company has a significant rate of spending for engineering, sales, marketing, etc. at $13M in the March 2008 quarter.

Clearly, A123 is trying to go public based on their future potential.  And, that potential could be very high.  But, I find the public markets to not be very forgiving of these types of companies.  In fact, it could be tough to go public at all right now.  Now, perhaps the company has some additional deals and information up their sleeve that they would only release when they update their S-1.  Perhaps they are the rare company that can pull off a high-promise IPO in this environment.  If they do go public, they'll have to convince investors on an ongoing basis how they will build into a sustainable business.  Any missteps along the way will likely result in significant stock price punishment.

Ultimately, I wish A123 the very best.  If they can go public and sustain their value with this type of profile, it will bode well for Boston-Power, too.  But, don't be surprised if they proceed with caution toward an IPO.  The market is not a forgiving as it has been in the past, even for companies with interesting technology in a hot space.

Posted by Mike Feinstein at 04:27 PM | Permalink | Comments (0) | TrackBacks (2)

Posted by Mike Feinstein at 01:11 PM | Permalink | Comments (0) | TrackBacks (0)

Yesterday, VCMike wrote about what he called the TechCrunch Ecochamber Disease.  The idea is that VCs and entrepreneurs can get blinded by the things that are interesting in their own little world, rather than focusing on what is important to the broad market.  If you go back to the initial Internet bubble, this is one of the drivers of the big tech run up.  There was some initial adoption of various Web services.  This initial adoption was at a pretty rapid clip as initial adoption goes.  Everyone assumed that the rate of adoption would stay very rapid, into the broad market.  Whoops.

The Internet has had a huge impact on communications over the past 12 years or so.  It just didn't happen in 3 or 4 years.  The valuations of the Internet companies were inflated because they assumed that broad user behavior would change very, very quickly.  It rarely does.

This is the marketing concept that I first heard about in the business classic, Crossing the Chasm.  Geoffrey Moore discussed the problems with assuming that early adoption would turn into mass adoption on its own.  He also gave various strategies on how to move into the broad market.  In the unlikely event that you haven't read it, I would strongly suggest it.

I think that a lot of Web technologies are overhyped because no one is thinking about how they cross the chasm.  Many times, the core technology may need to get embedded in something else in order to enable broad adoption.  An example of this is Tivo.  Tivo's core technology is great.  They have an easy-to-use UI for recording programs and playing them back.  People who owned one tended to love them (including me).  But, they never got broad adoption of their own boxes due to the challenge of educating users on why they needed a DVR and installation challenges.

The cable and satellite vendors had already invested huge amounts of money in their customer relationships.  It was only when Tivo embedded their capabilities into the set-top boxes of these types of vendors (or the vendors developed their own) did the DVR capability become more mainstream.  It simplified the installation and became, over time, embedded in how people watch TV.  It took years, and it took a big investment.  Ultimately, Tivo didn't reap as much of the benefit of this as they probably should have.

Services like Twitter may suffer the same fate.  I like Twitter, but haven't really found the indispensible user for it.  For me, it is still interesting, rather than important.  However, I think that the core capability of having controllable broad instant messaging can be real important.  It just has to get shaped and embedded into the right broad market service in order to really catch on.  Like Tivo, a lot of people outside of the tech industry hear about Twitter and say "why would I want that"?

If you are starting up a web service that you think can have broad applicability, make sure you listen to a broad range of users, not just your techno-centric buddies (like me).  Taking off these blinders can give you some insight into how you need to get your service embedded into something that users really want.

Posted by Mike Feinstein at 10:32 AM | Permalink | Comments (0) | TrackBacks (0)

The Boston Globe ran an article today about the venture capital environment and late stage VC investing.  Basically, because the exit environment is uncertain (very few IPOs, M&A exits are at low prices, etc.), companies are raising more late stage capital in order to remain private longer.  Although it can seem nice when a company raises a large round of financing (the companies cited in the article raised $40M+), it also changes the equation for everyone involved.

Even if these rounds are done at pretty high valuations, they still represent dilution for the management team.  And, for the existing investors, they have to commit capital to the company that they were hoping to keep in their pocket for other deals.  You can argue that this is balanced out by the ultimate exit being higher as the company will be even more mature, but I am skeptical of that for most companies.  The slow exit environment can also mean a slow customer spending environment, which can delay a company's growth.

Instead, many companies raise more capital than they should, which dilutes the exit returns for everyone.  What can you do about this?

The most important thing to do is to get to profitability as quickly as possible.  By being very cautious about what you spend and matching it with your revenues, you can minimize the amount of capital you need.  This will improve the investment return for everyone involved.  Of course, you shouldn't starve the company for capital, but it is much more common for VC-backed deals to be overfunded vs. underfunded.

The worst situation is the company where the investors are reluctant to put in additional capital because they don't see incremental return.  They are more likely to pressure the company to sell, even though it may not be the best time.  Being forced to sell a company too early can be discouraging for everyone, but, to the investors, it may make sense economically.  What can you do in this situation?  Make sure you don't get there by ensuring that your investors all have sufficient investment capacity for your deal, that they remain enthusiastic about your prospects, and that you carefully monitor your spending.  Am I sounding like a broken record?

I think that the late stage VC market is pretty challenging right now.  There is a lot of capital out there searching for deals, and valuations on good deals are going up.  With the exit environment remaining very tight, many good companies will struggle to raise capital because their company progress hasn't kept pace with their capital spending rate.  In other words, it's hard to justify further investment in the company as the upside looks limited.  Existing early-stage investors may be forced to provide additional capital to companies to keep them going until the exit window re-opens.  And, this is not helpful to entrepreneurs as they see their future returns going down.

The moral of the story -- spend slowly and get to profitability quickly.  That give you the most choices.  And, as a VC, keep plenty of dry powder and make sure your companies develop at a rate commensurate with their spending.

Posted by Mike Feinstein at 11:52 AM | Permalink | Comments (0) | TrackBacks (0)

Yesterday, Fred Wilson wrote about Transitions in start-ups.  In general, I agree with Fred that transitions in companies (start-ups or otherwise) are better if they come from within rather than being forced from the outside.  However, in my experience, many times transitions have to be forced.

One question that VCs often ask entrepreneurs, particularly technically-oriented and/or first-time entrepreneurs, is how they would react if a professional CEO is needed at some point when the company grows.  The best entrepreneurs define themselves by the company's success and will want to bring in whatever new management becomes necessary as a company develops.  Companies go through stages where the needs are different.  The professional CEO could rarely start a company from scratch and the technical founder usually can't run a $50M company.  The companies change, and therefore management probably has to change to deliver the optimal outcome.

Some entrepreneurs get this.  I've worked with quite a few who knew what their own strengths and weaknesses were.  They realized that, if they were successful, the company would need more experienced management.  That didn't indicate weakness on their part, but rather success in that they had moved the company from a standing start to some level of success.  Overcoming those odds is the first victory a company must achieve.

However, it's often difficult for an entrepreneur to see this from the inside.  Even if they indicate that they are open to this type of change at the onset of the company, once they are in the heat of the battle their objectivity is compromised.  Many times founders will point to the fact that they haven't made a significant mistake as a reason why they should continue to run the company.  I remember telling one entrepreneur that if I waited for him to make a mistake before we made a change, then I would have made one, too!  The Board's job is to be proactive in assembling the right team around the company, rather than reactive.

These can be some of the most difficult decisions that a Board can make.  Usually, the Board prefers to have the founding CEO continue in some other role at the company.  Sometimes, the founding CEO poisons the ground with their actions, forcing them to have to depart.  This is always bad for the company as the founding CEO is often greatly responsible for the success that gets a company to this transition point.

This is why having an active, engaged, and objective Board is critical to a company.  Generally, VC's bring this to a company.  Non-VC backed companies often make a mistake by not bringing on outside directors who are truly objective.  Also, these types of directors rarely will take action against the founder who brought them in.  And, many public company boards are populated with people who either don't want to rock the boat or are beholden to the CEO.  This creates opportunities that many activist investors try to take advantage of.  For the company's sake, they are much better off with a constructive or operational activist than the alternative.

Companies and Boards should take a hard look at themselves to make sure that there is a truly objective view on the company and the management team at the table.  And, they have to plan on transitions.  Companies should be frequently changing, and that may mean occasional changes in management, too.

Posted by Mike Feinstein at 09:37 AM | Permalink | Comments (0) | TrackBacks (0)

I listened to an interview with Bill Bishop, author of The Big Sort: Why the Clustering of Like-Minded America Is Tearing Us Apart.  This reinforced my belief that one of America's greatest strength is that we are a melting pot.  But, if we all gravitate to communities and social circles where everyone is just like us, we will all miss out on the benefits of the diversity.

When I think about entrepreneurship, I always associate it with new ideas, high energy, and commitment.  This is exactly what you get with new immigrants who come to the US to make their lives better.  My grandparents were immigrants, and my paternal grandfather was an entrepreneur.  He built up a pretty big wholesale and retail grocery business after coming the country with very little.  While there is nothing stopping native-born Americans from being just as entrepreneurial, our privileged upbringing probably removes some of the inner hunger that an immigrant who has to overcome large obstacles probably has.

But, even more important than making sure we continue to have a steady stream of immigrants coming into the US with new ideas and new energy, we all need to continue to expose ourselves to new people and new ideas to avoid complacency.  We tend to settle into our comfort zones where life is predictable and less challenging.  That's a recipe for stagnation.  Instead, we need to force ourselves to meet new people, from different backgrounds, and embrace new ideas.

Unfortunately, it seems that too many people are pulling back into a comfortable cocoon of familiarity.  Even our news sources are reinforcing this, with opinion and news being all mixed together so that our minds are made up for us.  You have to work hard to get multiple points of view on an issue.

The more we learn about other people, other cultures, and other ideas, the better we will be able to deal with the world's problems.  The more innovative we will be.  The better our solutions will be.  So, fight the tendency to stay with your comfort zone and push out of it once in a while.  Travel to really different places and countries.  Push into social circles with people of different backgrounds -- ethnic and financial.  And, make sure your kids do the same.  You'll understand the world in different ways.

This brings me to Barack Obama.  Despite my real disappointment that he zig zagged on the FISA/telco immunity issue, I still think that he is the rare candidate that can pull the different parts of the country together.  He's not perfect, and he's not as experienced as some people would like.  But, I think that we are all going to have to sacrifice somewhat to solve the big problems facing the US.  It will be easier to sacrifice with someone who really unites us at the helm.  I think that one reason Bush won in 2000 was his 'uniter, not a divider' line.  If only it were true. 

(PS - read the Salon article from the last link.  Is that really the same person who has been President for the past seven years?)

Posted by Mike Feinstein at 12:56 PM | Permalink | Comments (2) | TrackBacks (0)

Good2gether is getting a lot of traction.  I'm real happy for them.  They launched on Boston.com and will soon be launching in some other major cities on the largest local aggregation sites.

Boston's Fox 25 interviewed Bob Kempf from Boston.com about their DoGood channel, powered by Good2gether.  It's great to see the media partners take this on as if it was their own.

I first saw this on Greg McHale's Good2gether blog.  If you want to rack up some vicarious frequent flyer miles, track Greg's travel schedule on his blog.

Disclaimer: I am an advisor to Good2gether.

Posted by Mike Feinstein at 12:24 PM | Permalink | Comments (0) | TrackBacks (0)

Boston-Power is featured in the BusinessWeek cover story about American manufacturing.  The overall subject matter of how to reclaim American manufacturing jobs is important, but there are many factors which are beyond the realm of American cost competitiveness.  For example, Boston-Power manufactures laptop batteries.  The company may be able to make these cost effectively in the US, but the rest of the laptop supply chain is in Asia.  So, making laptop batteries in the US would still mean that they would have to be shipped to Asia to have them assembled into battery packs and laptops.  Until more of the supply chain shifts to the US, it doesn't seem likely that laptop batteries will be made here.

However, there are many other applications for batteries where more the supply chain is here, and those would be ideal areas to re-establish some American battery manufacturing capability.

Full disclosure:  I am on the Board of Boston-Power.

Posted by Mike Feinstein at 10:14 AM | Permalink | Comments (0) | TrackBacks (0)

I recently caught up with a couple of CEOs I know.  Both are at companies that are about the same vintage and have spent about the same amount of money over that time.  They have different amounts of progress, but both companies are at least somewhat behind the plans that they had pitched to investors when they last raised money.

However, at one company, the Board is very supportive of the business and, although concerned about some of the progress issues, is sticking with the company and working hard to make it successful.  At the other company, at least one member of the Board has lost patience and is pushing for an exit at a pace that doesn't feel natural to the CEO.  Of course, there are always two sides to each of these stories, and I am just hearing from the CEO in each case.

The CEO of the company under pressure was wondering why their Board member had changed his attitude about the company so quickly.  I don't really know, but one issue that most entrepreneurs overlook is internal firm dynamics.  It can be hard to tell from the outside, but many times decisions at VC firms are influenced by the status of the particular fund the investment is in, the status of the partner at the firm, and partner-to-partner dynamics.

If a particular fund won't return all of its capital to investors, or the deal in question can't make a big difference one way or the other, the VC firm may be ready to give up on a deal just to free up the partner time.  This can happen with an older, small deal in a big fund.  The outcome just won't move the needle, and the VC firm is probably focused on newer funds that can generate carried interest income for them.

If a deal has lost its initial sponsor, or a partner at a firm sees some other deal as being the key for his or her ascendancy, it's possible that deals can get ignored by the partner on the Board.  Also, if partners are being tough on each other over deals in internal discussion, there may be retaliation where other deals are targeted to get even, rather than to maximize returns.

The fundamental issue is with deals that don't turn out to be as large as first thought.  However, these can still make some money for the firm and the entrepreneurs.  This kind of deal may not matter in some cases to the VC firm, but will matter a lot to the entrepreneur.  This misalignment of interest can cause problems.

What can an entrepreneur do about it?  First, do your best to know the people who will be involved in the deal, as well as to know the reputation of the firm.  Some people and firms can separate internal dynamics from how they manage deals.  Others can't.  Second, keep communications open so that if you sense these types of problems coming up, you can try to bring them into the open.  Most VCs won't acknowledge internal issues, but may be willing to minimize their time by appointing someone outside their firm to their Board seat.  This isn't ideal, but is better than getting pushed prematurely to the exit.

Also, you may be able to use other Board members and investors to keep each other honest.  No VC wants to look like the one who is the weak member of the syndicate.  Don't let a VC ringleader emerge if you can help it.  Instead, keep everyone engaged and have a lot of one on one conversations so that each person has to express their own opinion.

VC deals are like marriages, except that it is even more difficult to get out.  So, choose your partners very carefully!

Posted by Mike Feinstein at 01:43 PM | Permalink | Comments (0) | TrackBacks (0)

A company I advise, Good2gether, has just crossed a major milestone.  If you go to the Lifestyle section of boston.com, you can click on DoGood.  This will bring you to the DoGood channel which connects you with non-profit causes around Boston.  This is the first of a series of roll-outs for Good2gether around the country. 

Good2gether connects people to causes and makes money from sponsors who want to attach their brands to these connections.  As is the case with any web service, the business model only makes sense if you can get some meaningful traffic to your site.  It's very difficult and expensive to establish your own new brand in the mass market.  Start-ups need a business model that lets them leverage existing destination sites, like boston.com, that have their own traffic.  This has to make business sense for sites like boston.com as well. 

By going live with boston.com, good2gether has shown that they have a nice working product and that boston.com thinks that this makes business sense for them, too.  Hopefully, this will be the first of many roll-outs around the country.  Very few start-ups get a good partnership with such a large portal.  If you live in the Boston area and are looking for information and volunteering opportunities at a non-profit, check out the DoGood channel at Boston.com.

Posted by Mike Feinstein at 03:18 PM | Permalink | Comments (0) | TrackBacks (0)

Every company I have worked with has faced its share of problems.  If everything is easy, it probably means you aren't trying hard enough.  Whether you are trying to push technology into areas not yet explored, selling to customers who are wary of small companies, forging a partnership with a much bigger company, or just trying to be as productive as possible with a small amount of resources, every small company faces problems.

I don't judge companies by their problems (or lack of problems).  Instead, I look at their response to problems.  What communication style does the CEO and management team employ?  Does the CEO start making all the decisions, like a field general?  Or, does the CEO pull the team in close and forge consensus on the path forward?  You can find successful examples of both styles, but I bet that the second style has a higher chance of success.

One key to me is how much the company is willing to change in order to focus on its key priority.  Will they get employees to back off from their normal tasks in order to put more effort onto the big issue?  Can they keep up morale as people do jobs that aren't their top desire or main occupation?  During these times of crisis, you can learn a lot about how a company really works.  These are the times that the wheels can fall off of the bus if you don't have a strong team.

Another great indicator is how the CEO deals with the Board and other advisors.  Do they get defensive and keep information to themselves?  Or, do they open up and bring in outside help?  This is one of the trickiest questions because the outside help can also take up a lot of time and be a distraction.  There is usually no shortage of people who can offer help if only you can spend several hours bringing them up to speed.  If you do this a few times, you have wasted a lot of valuable time.  This is where the CEO has to triage with one or two key Board members to gain agreement on the action plan.  Bringing in a couple of key people from outside can make a huge difference in some situations.  But, bringing some partner from your venture firm up to date so that the person on your Board can cover their butt is a waste of time.

I usually like to have one or two engaged outside Board members on every company Board of Directors.  I like experienced executives who come from the company's industry and have good mentoring skills.  These people will already be up to speed on the company and can provide a lot of targeted advice during difficult times.  And, the CEO should already trust them and be used to opening up to them. 

One of the hardest things to do is to plan ahead for crises.  You can't be sure what type of crisis may come up, but at least make sure you have some good independent Board members and advisors who stay up to speed on the company so you can put them to use quickly when you really need them.

Posted by Mike Feinstein at 08:17 AM | Permalink | Comments (0) | TrackBacks (0)

I am so used to being online all the time, I take it for granted.  This past week I have been beset with an unreliable laptop and non-functional hotel Internet access.  I kept up with things on my Blackjack, but it's not a substitute for laptop access.  I hate falling behind on work, and there are some things you need your own laptop to do (writing and editing documents, etc.).  If someone sends you a long document that you need to read and edit, there is no substitute to having your own laptop on the plane to get it done. 

There are several online solutions that should let you use any computer to get access to documents that sit in the cloud.  Those services are great, but the world doesn't use them broadly yet.  If I knew in advance that I was going to have such problems, I may have been able to prepare something to make my online life this week easier.  But, going warm turkey (I did have some intermittent access, so it wasn't cold turkey), has shown me how hooked to being online I am.

Email, news, RSS feeds, podcasts, access to a Slingbox to watch the Yankees on my home TV (although that hasn't been worth doing this week!).  Even having a reliable PC to watch DVDs on a long plane ride is something I take for granted.  Without all this, I have, caught up on some reading.  But, I've also wasted a lot of time trying to troubleshoot things and limp along.

Ordered a new laptop, which should come in soon.  In the meantime, don't be concerned if I don't get back to you as fast as usual.

Posted by Mike Feinstein at 02:50 PM | Permalink | Comments (0) | TrackBacks (0)

Everyone talks about how start-ups have to move quickly.  And, if you have worked at a start-up company, you know that things move at a frenetic pace.  One of the strongest assets that a start-up has is a singularity of purpose.  Everyone knows (or should know) what the goal is.  There aren't competing objectives and hopefully no individual political agendas.  This helps the company operate at high speeds.

But, what happens when a more mature company has to make changes?  Both big and small companies can hit dead ends or come to the end of one growth path.  Changing direction, refocusing, or restarting can be difficult times at a company.  But this is the time when actions have to be the swiftest.

During the decision-making process when the Board and management are deciding what to do, it is natural for the rank-and-file employees to lose productivity as they engage in their own discussions and debates on direction.  Or, they wonder if the hard work they are putting in will see the light of day.  If the project looks doomed, why put in another long day of work on it?  This kind of attitude can quickly permeate an organization.  While I think it is best for management to be open with employees about the existence of a process to re-evaluate strategy, a message must also be delivered about the importance of carrying on with day-to-day work until a new decision is made.  Hiding the strategy evaluation from employees will lead to speculation that something far worse may be up.  The best way to keep productivity up is to squash rumors before they start.

But, there will inevitably be discomfort and uncertainty during this process.  So, make sure that it happens swiftly.  Set deadlines for gathering data and making decisions.  Then, stick to them.  The price of inaction is usually much higher than the price of a sub-optimal decision.

Once a new direction is set, take action switfly.  If the company is going to focus on a new direction, find a way to quickly get rid of products and projects that don't fit the direction.  Maybe they can be sold off or spun out.  Investigate this on a tight time frame.  If not, they have to be cut.  Make sure to deal with any people affected fairly.  No one likes participating in either side of a layoff.  But, if decisions are made in the context of the best long-term health of the company, resentment is usually kept to a minimum.  However, the way you treat employees on their way out will also set a tone for those who stay.  I've been involved with layoffs that, after a few days, reinvigorated a company with an exciting new focus.  And, I've been involved with layoffs that felt like one more step on a downward spiral to failure.  You need to reinvigorate a company if you want to retain the key talent.

Of course, slow decision-making is also a drain on the company's finances.  Projects that drag on for too long waste hard dollars.  But, they also waste the soft dollars of management attention.  Distractions probably exact a 25-50% penalty on the hard time they take up.  It takes mental and physical effort to shift gears, to stay abreast of unimportant projects, and to continue to evaluate options that should have been long since decided.

One trap is that entrepreneurial management and visionary board members may not be the best people to make decisions around a restart.  Entrepreneurs and early-stage VCs tend to be optimists.  But, cutting back on a company or making a radical direction shift requires some pessimism.  When faced with these situations, I have often felt that I should have cut a bit deeper and made decisions a bit faster.  Don't be afraid to bring in some outside help to objectively analyze the situation.

When making the hard decisions on a layoff, I would advocate cutting a bit deeper than you think you might have to.  Make sure you cut back on the workload to accomodate this, too.  But, it's good if the remaining people feel very busy.  And, if things start off OK, it's not a bad idea to hire a couple of new people a month or two after a layoff.  Chances are, when pursuing a new direction, you need some different talent than you had previously anyway.  Bringing in some new blood can reinforce the message that the company is reinvigorated and pursuing something exciting.

Overall, you have to measure twice before you make a cut or a change of direction.  Just make sure you measure quickly and move decisively.

Posted by Mike Feinstein at 07:35 AM | Permalink | Comments (0) | TrackBacks (0)

Wow, I can't believe another week has gone by.  I have always prided myself on time management.  I consider myself responsive and efficient.  I don't think I've lost that, but the number of things to get done has exploded.  One thing that has suffered has been my regular blogging.  I need to refocus on it as I am not yet ready to give it up.

This is the fun of being an entrepreneur.  You are never done.  When I come home late from work, my kids ask "Why are you home late?  Why couldn't you get your work done on time?"  My kids think that work is like school -- you have some tasks to do and, if you are focused and fairly smart, you can get your tasks done in the allotted time.  Although I don't have a boss these days, my kids assume that someone, or something, is assigning me some amount of work.  And, if i am home late, it must be because they gave me too much work or, perhaps, it took me too long to get it done.

I love the fact that being an entrepreneur means that you are never done.  You are always short on staff and long on work.  Your 'top priorities' still can't get done in a normal day.  Every day is triage, with vicious prioritization required to figure out what to do each day.  It's ever changing and exciting.

Couple that with sales dynamics.  Always prospecting, pitching, following-up, overcoming objections, and closing.  You go where you have to when you have to in order to get the deal done.  When you are making good progress, it's very satisfying.

It's been great starting up a new investment firm.  It couples the investing I love with the entrepreneurship I have missed.  I thought that being a VC would keep me in touch with entrepreneurship, but I think that there is no substitute for being on the firing line yourself.

Posted by Mike Feinstein at 03:38 PM | Permalink | Comments (0) | TrackBacks (0)

Geezeo announced today that they have taken a $1.2M strategic investment from thestreet.com (TSCM).  The formal announcement gives some of the details.  And, this blog post from Geezeo gives some hints of what is to come from this partnership.

The founders of Geezeo, Shawn and Pete, have really done a great job in bootstrapping the company with only a modest amount of capital.  They have built a nice product and received a lot of great press about it.  Now, with this new partnership, they can reach many more users and provide them an even better service.

If you are considering getting started with Quicken or are looking for a free online personal finance service, you should really check out Geezeo. 

Posted by Mike Feinstein at 11:52 AM | Permalink | Comments (0) | TrackBacks (0)

When I was a kid, I never envisioned that I would enjoy sales.  I was pretty shy and not willing to approach strangers or speak up.  I did have a newspaper route, but that didn't require any selling skills.  If you lived in my neighborhood and wanted the morning paper delivered, you had to get it from me.  Nothing quite like monopoly power to diminish the need for good sales skills.

Early on in my career, I got bored with engineering and volunteered to move into sales when the start-up I was at had an abrupt change of business strategy.  I wasn't shy at this stage, and I really enjoyed working with customers.  I liked consultative sales -- finding the right solution for the customer's problem.  I have hired people who can sell anyone anyting, but that's not me.  If I can solve your problem (or if I think I can), I can be pretty aggressive in getting you to agree.  Persuasion, not arm twisting.

Sales skills are useful throughout life.  You have to be really subtle if you use them on your spouse.  But, they are helpful in negotiating and navigating your way through almost any situation.  Can you position what you have so it solves the problem that your boss/customer/partner/vendor has?  I have always recommended that marketing people go into sales for a time.  Most marketing people don't have an appreciation for how hard it is to get a customer to actually agree to buy something.  It's so much easier to generate some level of interest (marketing) than to get a customer to part with their money (sales).

As we are raising money for our new fund, I am in sales mode all the time.  Also, for our investment style, I have to sell my way into deals.  I love the challenge of trying to understand what your potential investor/portfolio company is looking for and positioning our skills and capabilities as the solution.  You have to build trust, think on your feet, listen well, and follow through.  Nothing is as challenging as overcoming objections (or indifference).  But, when you make progress and 'get the order', nothing is as satisfying.

There is a purity to sales that is unlike any other role.  You are measured only on results.  Trying hard and taking direction is nice, but doesn't matter.  If you succeed, you are the biggest hero.  If not, you're outta there.

One of my favorite movies is Glengarry Glen Ross.  This is an absolute must-see for anyone in sales (and that's more of you than you think -- every entrepreneur, CEO, and consultant is in sales in my book).  There is a scene when Alec Baldwin announces a sales contest for these hard luck sales guys.  It's part of a 'motivational speech' (language is not safe for work).  The contest goes something like this:

1st prize -- a new Cadillac

2nd prize -- a set of steak knives

3rd prize -- you're fired!

Posted by Mike Feinstein at 10:30 AM | Permalink | Comments (0) | TrackBacks (0)

Since I am still getting over the last vestiges of my (now) six day flu, I couldn't be there.  But, I am happy to say that Boston-Power has been named #1 on the New England AlwaysOn private company list.  There was an event tonight to recognize the winners, and they will also be celebrated at the AlwaysOn Venture Summit East to be held on April 7-9, 2008 at the Four Seasons Hotel Boston.

Boston-Power has a great team that has worked very hard trying to crack a very tough market -- laptop batteries.  They've had their share of challenges, but continue to make great progress.  They've been able to raise sufficient capital to make their plans come to fruition.  They have the potential to be a very large and interesting company.  I'm happy that I have been able to contribute to the company on their Board.

Christina and team:  Congratulations!

Posted by Mike Feinstein at 09:19 PM | Permalink | Comments (0) | TrackBacks (0)

I really enjoyed Jeff Bussgang's post about American Idol in the Boardroom.  I think that he cleverly captured the personality types you need on a Board -- domain expert, cheerleader, and truth teller.  The truth teller is usually the person who the entrepreneur gets mad at the most.  But, they are the most valuable -- you need people on your Board who will bring objective input to the company from the outside and who will challenge assumptions.  You have to remember that investors and Board members are not your friends.  You want to have a good, open relationship with them, but you don't want them pulling any punches or worrying about your feelings.

I've often thought that investors tend to bring three types of skills to a company, each person with their own combination.  Note that this is different than the personality types that Jeff described.  In general, when you finalize outside investment and put your Board together, you want to get representation from all three personality types and all three types of skills below.

Skills from VCs:

1. Raw intellectual horsepower.  There are many VCs who are just super smart.  They can connect the dots faster than anyone else and think through the outcomes of various courses of action.  They often may be linked to the truth teller as you want the smartest person to not pull any punches.
2. Deep contact network.  Most VCs have deep rolodexes and close contacts with people in the industry -- potential partners, acquirers, other entrepreneurs, other investors, etc.  You should certanily expect to leverage these networks from your VC.  Make sure that the individual you bring on the Board has these connections directly, rather than representing connections that their firm has.  Most entrepreneurs will tell you that VCs are generally poor at leveraging relationships that their partners have.
3. Attention to detail.  You want to have an investor or Board member who will read everything and try to understand everything.  A lot of VCs are so busy that they don't have time for the details.  But, the management team needs to focus on the details, and, hopefully, one investor or Board member will be digging into these details to make sure that management stays on track.

As you put your Board together, make sure you have a good mixture of these skills and the personalities that Jeff Bussgang described.  Think about each prospective Board member along these dimensions and make sure you know how you score them on these scales.

These days, many entrepreneurs are raising angel money rather than VC money.  That's a good thing, but it doesn't mean you shouldn't think about your Board.  You can still put a Board together with some angel investors or industry people to give you an independent, outside perspective.  Too many times I see very early stage companies that don't put a real Board together.  These companies tend to 'breathe their own exhaust' for too long and lose site of where the real market opportunity really is.

Are there other styles or skills that you would like to see from Board members and VCs?

Posted by Mike Feinstein at 09:20 AM | Permalink | Comments (0) | TrackBacks (0)

Don't get upset.  I'm not advocating some level of undress for business meetings.  Instead, I'm glad to see that some businesses are declaring that meetings should be free of laptops (or 'top'-less), PDAs, etc.  This was written up in today's Boston Globe.

Now, sometimes a laptop is necessary in a meeting.  That's the case where the presenter or meeting leader needs the laptop to display a presentation or as a focus point of collaboration.  I could imagine some types of meetings where you are brainstorming and want people to be able to do their own searches while you come up with ideas.  All very good.

But, the cases where people bring their laptops and PDAs in order to sneak a peek at their email or otherwise be distracted are very damaging.  If some people aren't paying attention, then others won't either.  This makes the meeting even more of a waste of time.

I don't like meetings.  I think that they can be very inefficient.  I remember having a meeting-hating boss who used to count up the annual salaries of all the people involved in a meeting and announcing every once in a while how much money the meeting had cost.  In a big company where everyone feels that they have to be part of every meeting, the cost skyrockets.

Meetings work when there is a clear leader, a defined agenda, crisp discussion and decision making, and well documented action items.  A well run meeting can take less than half the time of a poorly run one.  And, it can get better results.

If people aren't paying attention, it sends a message that the meeting isn't important and that one person's time is more valuable than the rest.  This is very divisive.  I'd rather make sure that the meeting is run efficiently, and then let people get back to their office, and the laptops, in order to plug back in to their email, IM, and social networks.  You could argue that for some jobs these activities don't add value anyway.  So, why would you let people do them in a group setting, dragging down everyone else's productivity?

Posted by Mike Feinstein at 07:19 AM | Permalink | Comments (0) | TrackBacks (0)

Today's Wall Street Journal had an article about how businesses can weather and even succeed during a downturn.  If you are blocked from reading the article due to the lack of a subscription, here are the highlights:

First, don't panic.  You can't predict how long or deep a downturn will be.  So, plan for the long term.  Hopefully, your business is not so highly leveraged that you have some economic cushion.  Debt-ridden companies or those that are thinly capitalized are a the most risk.

Seize opportunities while you can.  JP Morgan's purchase of Bear Stearns is a great example.  It looks today that they will have to pay more than they first thought in order to satisfy existing shareholders, but the price will still be pretty cheap.  JP Morgan moved fast to take advantage of a very unique situation.

Look overseas for growth.  If you export, then your US-dollar denominated products should look cheap these days.  And, many international markets will continue to grow even if the US is slow.  Lastly, there are different technology requirements in different markets.  Your product may very well be a better fit in some international markets than it is in the US today.

Keep debt low.  I have always been a believer in this.  I think that businesses that keep their debt level low and manageable have the most flexibility.  Similarly, they will have the cash around to take advantage situations which arise from weaker companies in distress (see Bear Stearns).  These cash-strong businesses can also invest more in new product areas while their weaker competitors can not.

Get your resume on the street.  If you haven't been an active networker, now is the time.  I