More Measurements Says Dr. Brad Feld
Topic: 3) Ventures

Brad Feld, venture capitalist at Mobius Venture Capital and perhaps well-known locally here in Dallas because of the EDS acquisition of the The Feld Group, has a great perspective on measurements. I'm blue in the face from my recent, numerous discussions on the subject. My immediately prior two posts (here and here) are very closely related to the same core subject on reporting and measurements.

A couple of key things in Brad's post that I resonate with are focusing on synthesis, reacting, and not getting lost in the numbers. Sometimes I get nauseous when I recommend to clients that there be more measurements as part of core business foundation, yet I can see that their faces read, "you want me to provide more numbers????".

Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

Two Stage Venture Financing Model Emerging?
Topic: 3) Ventures
In a prior blog entry, I listed some of my favorite CEO and VC posts. Tim Oren has a follow-up post that builds on one of his prior posts that I cited. Tim's new post addresses "Two Stage Ventures". This post is interesting because it looks at the entrepreneurial financing path from the other direction, and it breaks the mold of what I would call "traditional" (and perhaps passe) venture financing. I also find this post interesting because it is something that I have sensed emerging over the past few years (e.g., by articles or blog entries connected to Accel Partners, Matrix, Dawntreader Ventures), but it is the first time I have seen something explicitly written down without talking around the subject.

Some Things to Consider When Negotiating Against Those Venture Capital Barbarians At The Gate
Topic: 3) Ventures

A little tongue in cheek I guess. A post by Brad Feld (VC at Mobius) followed by a post by Jeff Nolan (VC at SAP Ventures) triggered me to write this post about term sheets. Having worked mostly on the operating company (seller) side of things, I thought it would be interesting to note a few perspectives on terms and negotiating from a side other than the VC side of the table. Here are a few thoughts:

1) Valuing an "investment" depends somewhat on the other things in your "portfolio". An investment (whether taking money or giving money) cannot be looked at in isolation of what else you hold. As an example, home owner's insurance is worthless to someone who does not also have a home. The insurance is a hedge investment that goes up when you lose the home though. Now for the entrepreneur, the value a VC brings (e.g., complementary connections, partners, or expertise) to the table should also be factored in beyond price they value your company at. Look at what assets you have (e.g., current people on your team pre-funding). I recall (hopefully correctly) that Mena Trott (at Six Apart) blogged about how Sequoia Capital's money was the "best" even though it was not necessarily best from a pre-money valuation perspective. Now some will say there is an age old saying that "Money talks, _____ walks" (ask mom or dad about this one if you don't know what I'm referring to). Nevertheless, go through the thought process of not just looking at price.

2) Consider using lawyers as a part of good cop/bad cop tactics during negotiations. I've worked with counsel from firms like Piper Rudnick, Greenberg Traurig, Jenkins & Gilchrist, and others - lawyers are smart. Though they can be expensive and extent of use should be weighed by stage of investment and company specifics (vs. using a company godfather, experienced friends, or management's own experience, say), lawyers can help you effectively wade through mechanics of term sheets, stock purchase agreements, amendments to articles, investors rights, etc. Sometimes you can get the lawyers to draft bad cop memos (or play bad cop roles) for you to respond to VCs on legal docs while you stategize, value the terms from your perspective, and play good cop.

3) Be able to "name the game". A key to negotiating is being able to understand the game being played. Playing some games require greater understanding of mechanics. The term sheet and the subsequent legal docs (if a term sheet is executed) are areas where mechanics can be hairy than the "average bear". Unfortunately, entrepreneurs tend not to negotiate legal docs every day. Lawyers and VCs, on the other hand, do. Plus, market terms change over time (even within a period of a few months). In any case, utilize the Internet, books, and informal networks to gather as much baseline info as you can. Brad Feld looks like he has some good upcoming posts on the subject of term sheets.

As a closing thought, to start to get familiar with the general idea of term sheets, the AllBusiness website has a vanilla short form agreement and long form agreement on the web (not the only source and not necessarily the best source but instantly accessible and another data point for you).

Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

Interesting Post by Paul Allen (Managing Partner, Infobase Ventures) On Entrepreneurship Mentoring
Topic: 3) Ventures
Interesting post by Paul Allen (Managing Partner, Infobase Ventures) for getting on top of things as an entrepreneur. Although the intent of the post, as Paul writes, is to raise the bar for entrpreneurs contacting Paul for advice, his post seems like a good reference for entrepreneurs in general because it contains some very, very specific things one can do to address the broader considerations that affect an entrepreneur's viability.


Paul Allen mentions using things like LinkedIn (a networking tool) and getting endorsements. He cites using QuickBooks online to be able to discuss financials. He also mentions using free, publically available SEC info for competitive information. He mentions all of this in a nice list format. Find out the list of ten steps to getting to Paul Allen for mentoring (here). His list of specifics is great because entrepreneurs need to establish as much leverage as they can with low $$ at times. Paul's list is pretty state-of-the-art too. Services like LinkedIn and QuickBooks Onlne Edition are probably not more than 1-2 years old but are great resources for bootstrappers and early-stage companies.


(And I will publically admit for the record that I have never heard of Paul's 8th step regarding Alexa rankings. I will have to check Paul's recommendation out.)


Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

3rd Friday, MTBC Session on Early Stage Funding
Topic: 3) Ventures
This past Friday I attended the Metroplex Technology Business Council's (MTBC) 3rd Friday Technical Luncheon Series in Richardson, Texas.

The lunch session began with a hot-off-the-press video from NTT DoCoMo, which depicted a vision of the future in 2010. I have to say that the form factors depicted by the Japanese stir a pleasant feeling. As one of the people eating lunch with me mentioned, the video has an Disney Epcot kind of feel to it. (Source: http://www.nttdocomo.com/vision2010/media300.html)

The main presentation of the day covered "Early Stage Funding and the Future of Wireless Communications". Guest speaker was Roman Kikta, industry veteran and managing partner of Genesis Campus, a seed- and first-round financing venture capital and incubator fund. Genesis Campus is closing a new $100M fund in January (Genesis' second fund). I was struck by the fact that the example liquidity event highlighted by Roman for Genesis Campus (Fund I) was Spatial Wireless (Alcatel to acquire for approx. $250M USD) and that the CEO was also the founder. I mentioned to Roman that having the founder as CEO up to the point of a large liquidity event was very atypical and asked whether he expected to see similar patterns in his other portfolio companies.

Roman had a very good response. He mentioned that while each situation must be treated on a case-by-case basis that founders get swapped out too early in many cases. Founders provide the vision for a venture, and the vision can get killed off too early if a new CEO is brought in.

Maybe a good topic of research for the academics reading along. That'll be $0.05 please.


Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

New Private Equity and Venture Capital Research
Topic: 3) Ventures
There is some new research by the University of Chicago GSB's Neubauer Family Professor of Entrepreneurship and Finance Steven N. Kaplan. Although so far I've only had the chance to skim the presentation and cross-ref some of the paper details, some interesting aspects to note are:

- the fact that some new data not accessible before through Venture Economics is utilized
- the sad story on returns (slide 12) since 1999 ... all average returns across all quartiles of performers is negative ...
- the Public Market Equivalent (PME) measure (slide 19) used to gauge partnership returns against the S&P 500 is kind of a novel measure which I've not seen before (the measurement is useful in terms of making the measurement of returns more invariant to sequencing)
- one finding (promising story) is that some GPs *do* persist superior returns over time ... factors and explanations probably include the access to proprietary deal flow and evidence of better negotiated deal terms against early-stage company owners, founders, etc. (gee whiz, the story is getting sad again since I have mostly represented operating companies in the past ...)

Here's the presentation and paper (the latter for the benefit of the academics!).
(presentation)
(paper)

Although Business Week magazine and others have always ranked Professor Kaplan as one of the premier professors in Entrepreneurial Finance using traditional means, from my perspective Professor Kaplan has always done a great job at making academic research and papers accessible by the general business community. I'm sure as I dig further I will find more of the same caliber work.


Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

Some Favorite CEO and VC Blog Posts
Topic: 3) Ventures
A lot of folks have been asking me about CEO and venture capital blogging as of late. Thought that I would point out a few of my favorite posts. Note that there are not that many VC bloggers out there (last number I saw was around 12). That said, there is growing interest by VCs in blogging investments. August Capital recently put in Series B money to Six Apart (see webblog Mena Trott, co-founder and President of Six Apart). Additionally, Sequoia Capital's LinkedIn investment (which some might argue is not quite a blog) recently drew Series B monies from Greylock (LinkedIn release).

But I digress. Here are some recent VC and CEO blog posts that I like quite a bit (some of these blogs I read semi-regularly):

- on Running an Efficient Board Meeting see http://www.beyondvc.com/2004/09/running_an_effi.html by Ed Sim, Managing Director of Dawntreader Ventures

- on the Sales Learning Curve (SLC) see http://ross.typepad.com/blog/2004/10/the_sales_learn.html by Ross Mayfield, CEO of Socialtext

- thoughts on the Feature, Product, or Company thing that VCs need to tease apart as they analyze prospective investments, see http://due-diligence.typepad.com/blog/2004/01/vc_feature_prod.html by Tim Oren, partner at the VC firm Pacifica Fund

- "It's the Feed Stupid" (this is a bit of a technical subject but an important one related to blogging), see http://avc.blogs.com/a_vc/2004/05/its_the_feed_st.html by Fred Wilson, managing partner at the VC firm Flatiron Partners


Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

Entrepreneurs and Finding the Right Balance of Marketing and Sales Operations
Topic: 3) Ventures
Two recent articles and a couple of sales and marketing meetings related to eCommerce and software businesses led me to write this blog entry. In the first article I read, comments were made that even companies like McDonald's are having trouble getting their marketing dollars to rise above the nit. In the second article, Phillip Kotler (marketing academic and guru) characterized the world as still using old marketing concepts. He went on to mention that companies haven't yet figured out how to combine technology with high-touch marketing. Kotler's core point was that businesses don't spend enough time 1) getting a map of the customer's mind and 2) mapping back how a company's processes and operations should be optimized about customer awareness, preference, and choice. In any case, both articles touch on getting through noise and the relationship of customer prospects with business operations.


Now entrepreneurs are generally very concerned about marketing and sales so this is not new news. However, I often find that entrepreneurs are often stretched and need to make choices quickly. Based on a typical psyche of entrepreneurs where they are more inclined to try to maximize all resources at their disposal as opposed to taking a trustee's primary orientation of protecting assets, well this just fuels the need to make quick, and sometimes improper, decisions.


Where things can go awry is in the implementation of marketing and sales operations, and I'll only address two activities for brevity: cold calling and networking. A popular saying is that networking is the most effective way to generate sales. While I think this is true, I think that such thinking ignores some underlying core concepts. Better understanding the core concepts is helpful because a spectrum of marketing and sales techniques may be used in an organization.


On one end of the spectrum, cold calling operations are generally better for those types of offerings that are more commoditized, common, and well-defined. Cold calling operations are also better for those cases where the customer's problems are not that confidential. Thus, as you can imagine, since customer prospects can be contacted at any moment by telemarketers (aside from do not call regulations), if the prospect has a common and well-defined problem, there is very little risk to having an unknown, telemarketer give the sales pitch to them.


On the other end of the spectrum, problems of an infrequent nature and with a confidential slant to them (e.g., merger integration, company turnaround, new business launch) - these types of problems are better matched to sales and marketing processes involving networks. Use of networks and trusted people are the people that get invited to the party. Since problems faced by customer prospects are more confidential and infrequent, networks serve as feelers into the marketplace for suppliers.


So this is just another way of thinking about sales and marketing. At which end of the spectrum do your products and services sit? Do you have multiple products that require different operations? Does a blend apply? What should the balance be?


Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

Overestimating Equity
Topic: 3) Ventures
In a number of different discussions I have been having regarding bringing technologies to market, hiring new executives in early-stage ventures, and determining the proper capital structure for a business, I run into situations that remind me of a classical finding in the organizational behavior field of study that I learned while attending the University of Chicago business school. For example, when a husband and wife are asked individually "what percentage of the housework do you perform in your family?" a general finding is that the two numbers significantly sum to more than 100% (e.g., husband says he does 70%, wife says she does 80%).


I find the same type of overestimation tendencies occur in start-ups and with new inventions, where quantifiable value in dollars may be very hard to pin down to a single number or even a narrow range. This value discrepancy can occur throughout all assets in the business between insiders, outsiders, classes of investors, functional roles, etc. People tend to overestimate themselves and underestimate others. While there are external ways to mitigate the counterproductive aspects of overestimating oneself (e.g., use of Board processes, benchmarking), one should be cognizant of complex costs imposed on early-stage ventures to resolve these differences. Sometimes external controls may not be the only thing to look at.


Steve Shu
Managing Director
S4 Management Group
Email: sshu@s4management.com
Web: http://www.s4management.com

Applying Operations Theory to Early-Stage Ventures (Part I)
Topic: 3) Ventures
Early-stage ventures frequently have dynamic and demanding environments. Aside from the technical aspects of corporate governance and executive management, a key question for operating managers in a venture is who is going to do what by when (the 3Ws).

While this goal-driven perspective is important, I also find it useful to draw analogies and apply operations concepts such as those illustrated in the popular business novel by Eliyahu M. Goldratt and Jeff Cox, "The Goal". In that book, the reader is essentially introduced to having to increase the output of a manufacturing plant, a foreign environment to most readers. One concept introduced in the book to solve the problem is to try to figure out where the bottleneck is and to alleviate the bottleneck, e.g., by increasing processing capacity at the point of the bottleneck, to increase throughput.

I find the bottleneck concept to very important for early-stage ventures, especially since there may be little margin for error in the venture and since response times are so critical. Sometimes the bottleneck is sales prospecting or lead generation. Other times, it has to do with insufficient marketing collateral or capital. Managers in early-stage companies need to look at problems using multiple frameworks and methods so that they can not only remove bottlenecks but also recognize them. I suggest that using principles of operations can also help as even experienced managers in early-stage ventures will find themselves in new, foreign environments like the main character in "The Goal".

Unfortunately, removing a bottleneck can create a bottleneck in another area (shifting bottlenecks). If companies didn't have enough things to worry about! Well, we'll save that for Part II.


Steve Shu, Managing Director, S4 Management Group
sshu@s4management.com