Category: Venture Capital

Venture Capital

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Twitter, Revenue Models and Venture Capital

I love it when Michael Arrington takes off the here’s the tech of the day hat, takes the gloves off and talks about the real issues (more, more!), like he did that today with his post Twitter and The Revenue Dilemma. I wrote about potential business models for Twitter about a year ago, it generated a nice phone call from a venture capitalist, but not Twitter itself. Perhaps that will change now that Dick Costolo is COO of Twitter? Time will tell.

Michael clearly lays out the valuation issues with a situation like this.  My issue is that startups need to discover and map their potential data and revenue models before launching much more than they currently do so that it is incorporated into the user value proposition so that users don’t get rubbed the wrong way when large, seemingly random terms of service and/or privacy changes take place (and I’m not picking on Twitter, I’m pointing out an issue to the startup community at large). I’m not saying they should necessarily implement them on day one – Michael’s post points out why based on the way the world  currently does business cases.

If greater thinking through of revenue and data models is to occur, it can only happen if sites like TechCrunch and folks in venture capital demand that as the price of entering the game. I’m not going to name names, but there is evidence that some types of investors work off of the 1999 model, this guy has been successful in a startup before or he was a strong player in one and all too often emotional investments take place rather than ones based on the merits of the idea. There are regional variances to this of course and this is not the case in certain locations. I get exposed to some great ideas and business plans.  I’m currently in touch with a few very well thought out ideas with serious revenue models and they aren’t getting the investment checks written because they are serious non-sexy B2B businesses or they are well thought out B2C plays and they get push back on things like adoption. The behavior Michael described will not change until investors and to a lesser extent technology press put people’s feet to the fire on these issues prior to A rounds being granted. Bill Hartzer said it in his comment on Michael’s post:

“Sure, Twitter costs plenty (lots of money) to run. It’s a money pit, actually. And it appears that they don’t have a revenue stream (yet).

When are the VCs going to realize that they need to dump money into startups that are actually profitable?”

I think Bill meant “workable revenue model” instead of profitable as if they are profitable they rarely need growth capital, but his direction aligns with my views – have a well thought out business and data model. I’m not against freemium, but you need to be able to add features that people are willing to pay for and have a clear plan to succeed. To do this you need a management team that is customer focused and has the right balance of business and tech folks – too much of either and you’ve got a real problem.

So what are your views on how this should evolve? The dot com boom was focused too much on valuations, the web 2.0 boom was focused too much on tech and not enough on business models. Are we close to finally getting the balance right in the next few years? The net is still young, it’s not mature, new rules and breakthroughs will come but only if we move past legacy dogma…

Make sure you go back and read the comments on that post, it contains some really interesting ideas for you to ponder, I’m not  going to point out which ones are the best right now though as I have to run to a client meeting.

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TECH cocktail CONFERENCE Chicago – Creating Change For The Future

Wow! That was tiring, I stepped on the L at 7:30AM and didn’t get home until 1:30AM the next morning! 18 hours of pure madness! Most people noticed the great speeches by Gary Vee from Wine Library TV and Dick Costolo (aka ask the wizard) and others. But what I really appreciated was the other things that the day brought to me. When Frank Gruber and Eric started TECH cocktail, one of the goals was to enable the interaction of people and removing barriers between entrepreneurs, funding sources and removing the boundaries between Chicago and the rest of the world.

When I sit at the first TECH cocktail CONFERENCE Chicago watching great speeches and meeting people from startups from both the east and west coasts while talking, playfully joking about Internet concepts and trading ideas with a local Chicago angel investor in the back of the room for hours on end – it’s at that moment one can clearly perceive a vision is starting to become reality…

For a first conference, it was very well run. There were those little things with a venue that didn’t go quite right with the elevators and not having enough power outlets (but you could say that about any conference) but those were out of their direct control. You could see that Eric and Frank went out of their way to challenge the audience about topics that too often go ignored at startups, like how to set up a corporate entity properly, partnerships and most of these challenges and experiments went well.

So what’s next? I’d like to challenge each and every person in TECH cocktail community to take things to the next level by taking the following actions:

1. Follow Up – People need to work to get to know each other better and learn to leverage each person’s special gifts and talents and realize that 1 + 1 > 2 when we behave in this manner. For me, I know that creating new business partners while listening to help iterate the product, data model or service is my area of strength.

2. Change TECH cocktail from an event to an everyday process on your own – a three month cycle time is not sufficient to build relationships to the next level – it’s everyone’s responsibility to make an hour here and there to sit down with someone, learn about what they are doing, give them a fresh perspective and potential assistance. Don’t wait for the next TECH cocktail event. If this means you need to organize your contact info, make that important time investment.

3. Listen to what Dick Costolo had to say about Internet company NDAs and then change your behavior accordingly (where is the video of that speech anyway?) – Stop sending people NDAs that serve no purpose other than to destroy your access to people who are the most qualified to help you. Ideas are a dime a dozen, assembling the right people with the current knowledge and future potential to create that reality is what matters.

4. Go beyond lurking, participate!!! During the conference, I had at least 10 people talk to me about a blog post of mine in detail, yet they’ve never left a comment on my blog. That’s sad. Leaving a comment leaves you a hyperlink back to your business or blog and allows distribution of one’s business network organically removing them as the bottleneck, please use this viral tool.

5. Learn to hire people for their current knowledge, network, blogs and future potential – not legacy job titles and brands – this takes work, research and being involved in the community, but it is how you’ll find the breakthrough thought leaders and future superstars.

6. Become an ambassador to expanding the understanding of the tools we all use and expand our base of understanding to new people outside our core – If you have a client or operate a service do they understand what Internet advertising, blogs, rss, social media, twitter, etc do? If they do is their organizational culture and structure set up to handle it to serve a customer’s needs? Many people know there is a problem but do not know where to start to fix it – I want to help those people as it will ease the adoption and enhance demand for disruptive new Internet services. I’m planning a series of future posts on this important, yet highly untouched topic. If you have examples of success stories or learnings in this area, I’d love to hear from you.

What else would you add to this list? I look forward to your contributions.

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TC08 Chicago – Ask The Wizard Live – Dick Costolo Talks Entrepreneurship

Dick Costolo gave a really raw, heartfelt talk about Feedburner, venture capital fund raising and venture capital. I won’t dwell on it here, but even though I’ve never worked directly on anything with Dick, we’ve had an amazing exchange of ideas and conversation over the years. Someday I hope I can take that relationship to an even higher level – mostly for the personal growth that I know it would cause rather than the monetization events it would likely bring. He gets it. Dick never stops learning and interacting every day. That restlessness is critical to his perpetual personal growth. Sorry, I think I did dwell on it a bit….anyway, here are my raw notes or his passionate speech that bordered on a rant at times…in the most positive way:

4 startups including Feedburner

Feedburner all founders had same equity percentage – very important to teamwork dynamic and success

Entrepreneurs worry too much about valuation

Market Opportunity – sizing, does the market need it, team, product, market

Location – No Black Swans

Funding
Cash – Don’t kid yourself

CCs, your misunderstood friends – finding the right one

Options/Equity – options, pool, common stock, dilution

Board Meetings – Should be strategic discussions, not operations, board package, timing and who should attend…

Hiring – Best Available Athlete, Roles and Flat Organizations, Hierarchy begets bureaucracy, replace with tools (eg SFA)…Don’t hire for position…hire people that can do almost anything…a jack of all trades…this reminds me of a lot of what BlackRock was like…I sat at 23 desks in 4 years, I don’t know how many projects I worked on during my time there, I understood every process in the company.

No offices. Open culture and communication are critical…

Experience or Enthusiasm?

Performance – performance reviews and subjectivity

KPIs

Growing the team
– Sales and Marketing – don’t hire until you are ready to sell
– Interview process – long

Product Development and Business Strategy
Serendipity and Adjustment – visit to the eye doctor

Launch Late to Launch Often – data models and programs architected for extensibility can beat point solutions every time (I agree this is critical)

Focus and Speed of Execution are a competitive advantage
– Internationalization
– Early biz dev can hurt you, so can any biz dev

Competitive advantage
– Be first to market, not most sophisticated, not the best product, be itirative and fast

Let people you don’t know help you win (open/api) and provide your products/service with the best opportunity to evolve in the market

Startups who ask people to sign NDAs are stupid! Gave a great (and way too fast!) discussion on this…I wish he’d write a detailed blog post of his rant. ?

Quantum barriers to entry and market share – Get market share, market share is the only thing you should focus on.

Revenue plan: Don’t kid yourself. Revenue ALWAYS ramps slower than you think it will.

Don’t do unnecessary things because you think you’re supposed to

Try to let the business model come to you
– Easy to say, not easy to do
– It’s easier to lower the price than to raise the price?
– Look for always on opportunities

Don’t worry about an exit strategy, worry about everything else

Be a big small company
– Public face of the company
– Have a specific voice, have a culture

Be competitive on your merits

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Tom Churchwell Venture Capital Speech at University of Chicago GSB

The following are high level notes of Tom Churchwell’s speech discussing venture capital at The University of Chicago Graduate School of Business (Chicago GSB). This talk took place in Chicago on January 22, 2008. I’m posting it today in celebration of this week’s Midwest Venture Summit.

Typical Fund Structure
– Management Fee 2.5% of committed capital
– Carried Interest – after losses offset by profits
– 80% Net Profit – Investors
– 20% Net Profit – General Partner
– 50-70% desired return…
– Vesting occurs over 5 years

– Experienced, successful entrepreneurs abound throughout the country
– Start-up companies have access to abundant early-stage venture capital
– Skilled attorneys, accountants, consultants are readily available
– The majority of start-ups can result in successful IPO’s within 2-3 years
– Increasingly hedge funds are an alternative financing source
– Angel capital is more available in Chicago than it used to be

– The space a VC plays in is extremely important – industry sector, growth

– Tom has changed management 3 times on average in the 60 companies he’s invested in

– Buckets of entrepreneurship seed entrepreneurs, beta stage, scaling skills

– Discipline = Success

Criteria:
– Proprietary product or service
– Sustainable competitive advantage
– Viable business model
– Large markets
– Experienced management team
– Appropriate use of funds
– Target 10-15x growth 5-7 years
– Objective: Sale of IPO in 5-7 years

Management:
– The most critical resource
– More important than all other elements
– Stage appropriate, later stages may require different management
– Must have a significant stake in success
– Tom says “Management experience is management experience, big company experience is just as good as small company experience in his view.” (Note: I actually find a *mixture* of both sizes in your experience to be of high value)
“We don’t make money on IPO’s, we make money selling to the Baxter’s, Motorola’s etc.”

“Nothing succeeds like revenue, it’s the cheapest form of capital.”

In 60+ company investments, I can only say that once it was the technology that made the company fail. It’s about getting the product in the marketplace.

What makes you say yes?
Passion. A product I have to get on the marketplace that solves a real problem. Management discipline which means they can step back and say realistically this is how long it will take, this is the team you will need, etc.

Revenue is an outcome, it’s not a driver. What is going to cause the business to scale? It’s business model testing. I don’t care about year 5, I care about what will get us more proof of concept and closer to a success.

The first screening process is where did this plan come from, if another VC sent it to us, we pay attention more. I ask, “Do I want to have a beer with this guy? You shouldn’t be there if you can’t say yes. ”

60% of the time we at least get our money back.

Scientific Board of Directors (compensated with a point of equity +/- a bit)
– Should be at least equivalent in stature to the scientific founders
– Like the Board of Directors, should have complementary skills
– Used properly, play a vital strategic role
– Typically meet semi-annually

Tom never signs an NDA.

The Business Plan
– Executive Summary is most important
– Shorter is better
– Assume the full appreciation of the technology will come in the due diligence
– Avoid jargon
– Avoid the hockey stick
– Focus on the revenue model
– Have a realistic exit strategy
– IPO’s are rare – most VCs are quite happy with a nice M&A exit
– Nobody reads the full business plan – I care about the executive summary
– Cashflow is more important than revenue during this phase

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Venture Capital Speed Dating – Entrepreneurship Week at Stanford University

As part of Entrepreneurship Week at Stanford University, they are holding a Venture Capital Speed Dating event and mixer. This event looks like so much fun, I wish we had casual events like this here in Chicago, especially since Stanford encourages lifetime social interaction with the community and properly sees it’s role as larger than simply current students. They state “Events are open to all students, alumni, members of the greater Stanford community, and the general public.” Chicago university leaders, take note!

Venture Capital Speed Dating

Date:
Friday, February 29th

Time:
1:00-3:30 PM Student pitches
3:30-4:30 PM Mixer

Location:
Wallenberg Hall Learning Theater (Building 160)

For more detailed directions, please visit the Searchable Campus Map
Host:
Asia-Pacific Student Entrepreneurship Society (ASES)

Student Application/VC Registration:
http://ases.stanford.edu/vc3/
No registration required for mixer

Cost:
Free

Overview:
Students, pitch your business ideas to Silicon Valley venture capitalists (VCs). Apply in advance for 3-4 opportunities to give three-minute pitches to VC pairs and receive three minutes of feedback. This portion of the event is closed to pre-registered students and VCs (see above for registration information).

At 3:30, the event opens to the public for a networking mixer. Come join us to meet entrepreneurial students and VCs. Event will end promptly at 4:30; continue networking at Arrillaga as you wait for the Innovation Tournament Showcase to begin.

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Have We Entered The Era of The Functional Web?

The New York Times has an article on how the potential sale of Yahoo! to Microsoft could be bad for minnows, i.e. small Silicon Valley companies looking to be acquired. I think this is a short sighted viewpoint.

In the late 1990’s dot.com era, the web was slanted too much towards wall street involvement that led IPO’s that were questionable and in retrospect not advisable.

A force outside the web, namely Sarbanes-Oxley in the Enron aftermath, has made the IPO considerably more challenging to achieve and costly to navigate – even for highly legitimate ideas.

In the web 2.0 era, the slant often went way too far to the left in terms of engineering. Some ideas with little actual business purpose have received unwarranted acclaim and without artificial sources of acquisition, some might not even exist.

Before I go onto explain why that development might create an alignment that I’ll tentatively call the functional web, let me state that I think there are plenty of other companies out there that could emerge to pick up the slack such as Fox, Intuit, Apple or any of a number of traditional media companies who “get it”.

This web might emerge even if the Yahoo! acquisition does not take place. If the functional web emerges a place where engineering and business purpose mix in equally important parts instead of the excesses in one direction or another, who potentially gains and who potentially has something to lose?

Potential Gainers:

– Strong Internet business skill generalists with strong system architecture, product management and the ability to network with geeks and non-geeks alike and iterate from feedback will be in higher demand.

– Companies who would like to challenge the big three who would get an opening.

– People who understand how to create revenue models that could provide for great stand alone businesses.

– People pushing for Sarbanes-Oxley reform to reopen the IPO spiggot a tad. They will push even harder.

Potential Losers:

– Funding sources who either fund ideas in a me-too fashion or just because they’ve known the people since the dot.com era and/or those who can’t define and lead a path to monetization or bring strong execution partners to the table.

– Domain name squatters and sellers.

– Passive executive recruiters who will have to actually analyze comprehensive skill sets instead of simply poaching from a direct competitor.