Seeing Both Sides

Steve Blank vs. Steve Jobs

 

I am co-teaching a class at Harvard Business School on entrepreneurship called "Launching Technology Ventures" along with my friend and colleague, Professor Tom Eisenmann.  The class kicked off this week with two cases:  Dropbox and Aardvark.

As I reflect on the class discussions, one of the interesting tension points that arose is the challenge an entrepreneur faces in selecting their primary product design approach.  Should they follow the Steve Blank, Customer Development Process school of product development or the Steve Jobs "vision" school?  In other words, should they pursue a user-centric design paradigm -- setting priorities based on rigorous tests and listening excercises that determine what users want -- or should they pursue a more top-down approach akin to Steve Jobs, who famously said: "It is hard to design by focus groups because most of the time people don't know what they want until you show it to them. "

Steve Blank's book, Four Steps to the Epiphany, has become an instant classic in Start-Up Land for good reason.  Along with the complimentary book by Eric Ries, The Lean StartUp, it provides an incredibly useful guide for starting companies, testing hypotheses and creating products that users love.  Dropbox and Aardvark were terrific first case studies for the HBS students -- both adhered to user-centric design principles quite religiously, but sprinkled a little founder vision in for good measure.

In the case of Dropbox, founder Drew Houston was brilliant in developing an MVP (minimum viable product) that was no more than a simple prototype and then used a rudimentary online video to test user reactions to the prototype.  Houston kept focusing on a test and learn approach to product development, event creating a "Votebox" feature that allowed users to vote for the product changes they wanted most.  But Houston did not strictly follow the Blank/Ries paradigm religously.  For example, after launch, he ignored the most requested feature that users asked for:  enabling the service to synchronize files outside outside the Dropbox folder.  In ignoring his customers' top request, Houston was exerting a Steve Jobs-like, top-down vision in order to stick with the focus on simplicity.

In the case of Aardvark, a social search start-up that was later acquired by Google, co-founder Max Ventilla, was obsessed with following user-centric design principles.  At one point in the case, Ventilla notes:  "We were wary of relying too much on vision and intuition in developing a product."  Yet at the same time, the company refused to provide an archiving capability in the early days of the product, focusing the service on a conversation paradigm rather than Quora's reference paradigm.  Again, the insertion of a Jobs-like product vision.

So in both cases, founders adhered to the Steve Blank school of product design, yet allowed their vision and instincts to overrule user feedback.  What's going on?  When should you choose between the two?  

First, I would observe that the dichotomy may not be as stark as it seems.  Blank is careful to point out in his book that when a company first begins, "there is very limited customer input to a product specification."  Therefore, "start development based on your initial vision."  Yet, in both the Dropbox and Aardvark cases, the founders ignored their customers well into the development cycle.  

I would submit that there are two guiding principles that founders should use when considering overriding their users.  First, when the feedback is in violation of a coherent set of product principles.  In the case of Dropbox, this was an unwavering focus on simplicity.  In the case of Aardvardk, a focus on social search being a conversation.  Second, founders should only have the confidence to develop these principles and  override their users when they possess very strong domain knowledge.  When product-centric founders deeply understand their customer's viewpoint and have tremendous customer empathy, they have the right to make hunch-based product decisions rather than data-driven.

That said, founders should never let themselves off the hook to applying the test and learn principles of Steve Blank to monitor their decisions and continuously validate them.  And the bar should be very high for such overrides.  As the 19th century German philosopher Arthur Schopenhauer observed:  “Talent hits a target no else can hit.  Genius hits a target no one else can see.”

Founders who override their users are betting on genius.  Steve Jobs and Drew Houston have proven that genius pays off.

A Democrat's Defense of Romney

I am a card-carrying Democrat and supporter of President Obama.  I will vote for him again in November.

But the attacks against Mitt Romney's record at Bain Capital - by both his Republican brethren and Democrats - and the demonization of the private equity industry are really starting to annoy me.  I won't vote for him for president based on his policies and the policies of the party he represents, but I believe Mitt Romney's business track record at Bain Capital, and the private equity industry as a whole, is deserving of a full-throated defense.

First, Bain Capital is a great firm.  I have co-invested with them and some of my closest friends are managing directors there and you will not find a smarter, higher integrity, harder working group of professionals.  They have also been incredibly generous with their success and become philanthropic leaders, both in the Boston community and beyond.  If you are going to pick on a private equity firm for bad behavior and hubris (of which there is plenty), they are the last ones to select.

Second, the work of private equity is a healthy part of our capitalist system.  Damning private equity as a maket force is absurd in a free market economy.  Should bad, poorly managed companies be allowed to destroy value?  Should fast-growing, innovative businesses receive capital and support to accelerate their growth?  And should hard-working pensioners and retirees be allowed to invest their svaings in an asset class that outperforms nearly every other one available?  Private equity has an important role and should be lauded, not lambasted.  The WSJ does a nice job of making this case here.  

I'm not saying Romney, Bain Capital or private equity are perfect.  I'm sure there were bad bets made or cases or situations where Bain Capital was overly aggressive in pulling out fees and, as a result, bankrupted the businesses they invested in, such as GS Industries.  And Romney, as much good as Bain Capital does for investors, entrepreneurs and businesses, is a bit fast and loose with his soundbite claim of creating 100,000 net jobs at Bain Capital.  Dan Primack of Fortune does a nice job of running through the fact and fiction behind the various claims here.

But the fact that Bain Capital has amassed over $60 billion in investor capital, and the fact that there are over 2,300 private equity firms managing $2.4 trillion, suggests that this is a massive force in our global economy that attracts the best talent, capital and companies for a good reason. 

I am tired of seeing politicians from both sides of the aisle talk out of both sides of their mouth.  Capitalism is a force for good and we are counting on the capitalism system to enable us to grow our way out of this economic malaise by creating wealth and jobs, expanding free trade and innovation.  So let's stop this name-calling nonsense (is Warren Buffet a corporate raider?) and instead focus on the important policy issues surrounding the economy, health care, foreign policy and social policies.

That's why I'll vote for Obama for President again in 2012.  Not because Mitt Romney is anything but a spectacular entrepreneur and business executive. 

Scaling is Hard

At the onset of 2012, many start-up executives around the world are sticking their copy of Lean Start-Up on the shelf, leaning back, and bemoaning the fact that they have a new set of challenges ahead of them.  Although there is a plethora of advice now being given about how to find product-market fit for your fledging start-up, there's a dirty little secret out there:  once you've achieved product-market fit, the hard work really begins.  Scaling is hard.

After three or four years of jamming on your start-up, you've finally crossed a few million in revenue, gotten north of 10-20 employees, and it's all starting to click.  Now the pressure really begins.  Your employees start doing what I call "phantom equity math" (if this company were worth a billion dollars, I'd become a multimillionare!), your VCs shift you in their mental models from "too early to tell" to "high return potential" and your spouse starts asking about when all that hard work is going to really pay off.

Yet, the hard scaling challenges and decisions that will enable true value creation, not just interim progress, are all ahead of you.  Here are a few of the top ones that I see start-ups wrestle with once they start seeing their initial revenue projections finally come to fruition:

1. Product Strategy:  Stay Focused vs. Broaden the Footprint.  The initial product is working well and now the question is how broad a product strategy should you pursue?  If you think the total available market (TAM) for the existing product is large enough to satisfy yours and your investor's ambitions, stay focused.  But, typically, the allure of pursuing the bigger win draws founders into ambitious efforts to broaden their product footprint through organic development efforts or even M&A.  My partner, Chip Hazard, likes to refer to the broadening efforts as the "lilly pad strategy":  focus on jumping on to a lillypad next to you rather than across the entire pond.  By pursuing natural adjacencies, a company can increase its TAM - ideally by leveraging existing customers (meet their needs more broadly), channels (given them more things to sell) or products (extend the current prodcut footprint with natural adjacent add-ons).  I'm often surprised that companies don't think through the basics of competitive strategy when evaluating these adjacent opportunities.  At the risk of getting some eye rolls for evoking Michael Porter, I encourage start-up CEOs to think carefully about the new lilly pad's competitive intensity, entrance threats, threats of substitute products as well as the power of suppliers and customers when evaluating the adjacent opportunities. 
2. Financial Strategy:  Exit vs. Raise Additional Capital.  Once things are working well, there is a magnetic power that demands pouring more fuel onto the fire.  If the customer acquisition costs (CAC) are proving out to be $1 and the customer's lifetime value (LTV) are $2, why not raise millions of dollars to acquire more customers?  Obviously, it's not that easy a decision.  Raising capital can be a hugely distracting, draining process and the dilution implications, as well as the choice of investors, has deep repercussions on your future options.  On the other hand, pursuing an early exit can be appealing, particularly if the entrepreneur has never had a win before, but there are many difficult considerations here as well, which I touch on in a blog post (Walking Away From Liquidity) as does Roger Ehrenberg (To Sell or Not To Sell).  
3. Human Capital Strategy:  Hire Grownups vs. Stay Young.  There is a certain charm and many benefits to the founding team sticking together and scaling with the start-up.  The culture remains true to the founding core, the young talented employees get growth opportunities, and there's an appeal to minimizing the disruption that outsiders bring.  Yet, frequently, the talented founding team that gets you to the point of scaling is not the right team to lead the scaling process.  I refer to the three stages of a start-up's life as "the jungle", "the dirt road" and "the highway".  The team that is skilled at hacking its way through the jungle is often not as well-suited to accelerate rapidly once a dirt road has been discovered.  Yet when more senior, experienced executives arrive, preserving the founding culture and maintaining alignment is critical.  The best companies build teams for scale early on (e.g., hiring great VPs who can be both effective players and coaches as their department grows) and work hard to select for cultural fit (Google's top recruiter, Mike Junge, had a great interview on hiring best practices in PE Hub, "Why It Pays To Be Nice").
4. Founder's Dilemma:  Bring in a Professional CEO?  Ultimately, one of the biggest decisions a scaling young company makes is - who should be the CEO?  The founder may be one of the uniquely talented individuals who can scale from the jungle all the way through the highway, but more often than not a senior, professional CEO is hired to help take the company to the next level.  This decision is truly make or break.  It rests on the founder's desires as well as the board's confidence in their ability to transition from a product-centric, pre product-market fit world to a sales and marketing execution-centric, post product-market-fit world.  Investors would always prefer to see the founder make that transition, but if the skillset isn't there, having an orderly transition with open communication is key.  HBS Professor Noam Wasserman has written a series of cases on this topic that show some of the do's and don'ts of navigating this transition.  It's never an easy one to embark on.

Each of these decisions can be gut-wrenching, bet the company moves.  There's a nasty image I hear used in the board room about snatching defeat from the jaws of victory.  If things are going well, you want to let them evolve naturally and achieve some measure of victory, albeit a small one.  This may mean sticking with a founding leadership team, a niche product strategy and selling early.  

Why should each of these decisions sound limiting?  Because great entrepreneurs are competitive, ambitious types who attract ambitious management teams, advisors and investors.  There's a natural allure to moving aggressively to scale once the initial product-market fit assumptions become validated.  Just scale wisely.  Going from $1-10 million in revenue is no easier than achieving that initial $1 million.  And getting to $100 million and beyond, well now you're really in the rarified air that gets the people around you excited - and sets expectations soaring higher.

Go Vertical

Start ups are great barometers for the future.  Those of us who spend our time immersed in the world of young companies are priviledged to get a glimpse of what's coming around the corner by meeting with entrepreneurs who are trying to bring the future forward.

In that context, I enjoyed USV's Christina Cacioppo's blog post, What Comes Next, where she summarized a few trends that are coming out of some of the start up incubators.  I have also seen the componentization of software and the shift to independent work agents, the latter of which has interesting policy implications for a jobs-obsessed policymakers.

Yet, in my own work with various incubators, I am often struck by the lack of vertical focus.  Perhaps it is because incubators are full of young entreprenurs who have less domain knowledge and therefore are not as well-positioned to transform existing industries.  But if you believe software is eating the world, vertical industry by vertical industry, business process by business process, then we should start seeing more entrepreneurs pursuing vertically-centric strategies.  When I heard about this weekend's $3.4 billion acquisition by SAP of HR software company SuccessFactors (which barely got any coverage from the tech press), I was further struck by the opportunity.

Many mature, massive industries are ripe for innovation.  Here are a few obvious ones where we at Flybridge have been spending time:

• Education.  The education industry is a massive one, growing quickly and full of outdated models.  Online learning, peer-to-peer learning and the redirection of student expenditures are all areas that we find interesting.  Companies like Open English, SimpleTuition and Skillshare are all gaining significant traction in this vertical and taking novel approaches that get around traditional gate-keepers.
• Health care.  If the multi-trillion dollar health care industry isn't the perfect area for innovation, I don't know what is.  Whether it's in areas like cost containment, process automation or point of care diagnostics, there appear to be plenty of openings for entrepreneurs.  We see companies like Patient Keeper, T2 Biosystems and Athena Health leading the way in this vertical - avoiding FDA risk by simply delivering software or diagnostic devices that makes the entire system more efficient.
• Financial Services.  With the financial markets upheavel, there are massive dislocations going on in the financial services industry.  Subprime lending has disappeared.  Payments are going digital and mobile.  And banks are under increasing pressure to stay focused on their core businesses.  As a result, companies that either focus on providing services where banks used to tred (ZestCash, GreenDot) or are working with banks to help enhance their revenue opportunities or efficiencies (Cartera Commerce, Convoke Systems) are finding significant growth. 

I could name others - advertising, manufacturing, insurance and human services - where we are seeing old hands coming to the "transformation table" as well as the young bucks, who are also asking "why not?"

The impact of horizontal technological advancements - such as cloud computing, big data, broadband penetration, smart phone penetration - takes time to be felt broadly in business.  Hopefully some of these start ups will make a dent in core business processes and therefore the all important metrics around productivity, which we need desperately as a country.  And hopefully we'll see more start-ups realizing that going vertical can be very rewarding.

Europe’s Autumn (or, Why You Can’t Outrun Big Debt Forever)

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

--James Carville

The news out of Europe just goes from bad to worse.  With debt levels so high and confidence in government so low, the bond market has come a knocking and is intimidating the heck out of European governments.  Interest rates on sovereign debt soar (see chart below) when the trust in the sanctity of that debt, and the country’s ability to tighten their belt while growing out of it, plummet.  First, the bond market knocks on Iceland’s door (see Michael Lewis' Vanity Fair article and his book Boomerang), then Ireland's, then Greece's and now Italy's.  And when the bond market comes to collect on the debt, leaders are overthrown – Papandreou in Greece, Berlusconi in Italy.  Who’s next?  Spain?  France?  If the bipartisan “Super Committee” of 12 senators and congressman can’t get their act together and come to a compromise that raises taxes while cutting spending in time for next week's deadline, the US of A?

What does all of this mean for entrepreneurs, other than a queasy feeling in your stomach when you read glance at the Wall Street Journal?  I have three pieces of advice:

1. Plan for Anything.  My father used to always tell me, “don't assume anything”.  The range of possible macroeconomic scenarios has exploded in the last few months.  We are entering a time of such uncertainty that one needs to be prepared for a far broader range of scenarios than ever before.  Will the economy muddle through?  Will we avoid a double dip?  Are we entering a massive, 5-year EndGame of de-leveraging and no growth?  Will high tech entrepreneurs be unaffected when they play in such massive secular growth areas, such as cloud, e-commerce, online advertising, mobile and others?  No one knows, so develop a range of plans for 2012 with objective external triggers that would steer you towards one plan or the other – see The Art of the Long View for a guide on how to do this – and have them on the shelf ready to execute when the time is right.
2. You Can’t Fund a Big Debt Forever.  Startups don’t typically take on financial debt (and certainly not at the level of a sovereign government), but there are many other kinds of debt in a startup in particular and in life in general that one can find oneself in the midst of.  For example:
   • One of my portfolio companies often talks about their “Technical Debt” – the notion that they paying the price for historically putting off building a robust platform in order to meet short-term customer needs.
   • I love the movie, Pay it Forward.  It beautifully depicts  the benefit of being nice to someone for no personal gain and then encouraging them to “pay it forward” to another party.  If that kindness becomes too one-way between two parties, “Relationship Debt” can form.  I often find myself reflecting on how luck I have been in my life to have had such great mentors and hope that I provide enough reciprocal relationship value to them so as to not be too deeply in debt to them.
   • My wife and I talk to our kids a lot about “Behavior Debt” – the notion that you have to deposit some kindness and good behavior “in the bank” if you want to get something in return from someone down the road (you can imagine how annoying a parent I must be…).
   • If you miss a number over and over again or a deadline, you build up “Commitment Debt”.  One of my portfolio companies gives the same caveat when reporting on the status of a promising partnership developing with a Fortune 50 company:  “Remember, though, this is a company that has never hit a single deadline they’ve given us.”  At the start of the 2012 planning process, one of my fellow board members commented ruefully in the private session:  “The plan sounds good.  Remember, though, this is a company that has never hit a single plan number they’ve given us.“ (note to self:  when someone starts a sentence with “Remember, though...”, it’s not likely to be a positive comment).
3. Paying Off Debts Is Painful and Demands Sacrifice.  It’s never easy to step back and pay off your debts, but it is often the right course.  Unfortunately, when you’re an entrepreneur, you don’t always find yourself in a position of strength when it comes to paying off debts.  Going into “technical debt” is often required to survive and drive cash flow.  Commitment debt can be out of your hands if you’re never able to secure the necessary resources required to deliver on your commitments.  You get the picture. 

I suggest you make these debt trade-off decisions consciously, not unconsciously, and keep an eye on those debts as they  accumulate.  The last thing you want is to find that debt roughly knocking on your door some night when you least expect it, or are in a position to handle it.  Isn’t that right, Washington DC?

 

 

 

 

Top 5 Scaling Lessons From Superhero CEOs

Scott Kirsner of The Boston Globe called them the startup equivalent of the Justice League of America. Seven superhero CEOs gathered on Friday afternoon at the Mass TLC Unconference to discuss the challenges of scaling their young companies. The CEOs on the panel were (from left to right):

• Michael Simon, CEO/founder of LogMeIn (2009 IPO) 
• Scott Griffith, CEO ZipCar (2010 IPO)
• Gail Goodman, CEO Constant Contact (2007 IPO)
• Niraj Shah, CEO/cofounder of Wayfair ($500m revenue)
• Colin Angle, CEO/cofounder of iRobot (2005 IPO)
• Paul English, CTO/cofounder of Kayak ($200m revenue, S-1 filed)
• Matt Lauzon, CEO/cofounder of Gemvara (reportedly $10m revenue) 

The panel was particularly fun because the environment was very relaxed - the Unconference uniquely creates a dynamic free-for-all where different topics are created spontaneously and teams are formed throughout the day to address big issues.  This panel on scaling was touted by Scott over the course of the week via numererous tweets and so attracted a large audience.

Here were some of the key takeaway lessons from this august group:

1) What Got You Here Won't Get You There. Each of the executives talked about tough decisions that they had to make with early team members that helped build the company to the point of scaling, yet held them back because they didn't have the right skills to lead the organization to the next level.  An "A" executive during the scrappy start-up days has a very different profile than an "A" executive at scale.  To drive this point home, I often use a metaphor called The Jungle - there are three stages to the life of a company: The Jungle (where you are hacking away to find a path), The Dirt Road (where the path is established but still bumpy) and The Highway (where the path is smooth and it's all about achieving maximum speed in a well-defined direction).  It is a rare executive that is skilled at two of these stages and nearly unheard of to be great at all three stages.

2) Outside Catalysts Force (Healthy) Change.  Sometimes you need an outside force to act as a catalyst to change the way you do things from scrappy start-up to more process-oriented, scalable business.  The CEOs pointed to this frequently, whether it was an acquisition (cited by Paul English when they acquired SideStep), global expansion (cited by Scott Griffith when they entered the UK) or filing for an IPO - these event jolted the organization into changing the way things were done in a very positive fashion, forcing discipline and processes that didn't exist previously.

3) Create a Culture Based on Integrity.  Paul English pointed out that the word integrity has an important definition beyond truth, and that is consistency.  His point being the consistency of the culture that emanates from the leadership is critical to help companies as they scale.  The implication, which resonated with the others on the panel, was to avoid creating a culture that is inconsistent with your identity and your authentic core as a founder.  Pursue the priorities that get you personally fired up.  Niraj Shah cited the fact that he avoided taking outside money for over 10 years and ignored much of the outside advice that urged Wayfair (fka CSN Stores) to over-expand as an example of staying true to your authentic self  and what strategy feels the best reflection of your mission.

4) Nothing Comes Easy.  When young entrepreneurs read about the success stories of founders like the ones on this panel, they sometimes forget that there were many ups and downs along the way - and there still are!  Many of these companies were "10 year old, overnight success stories" and each of them had their struggles.  Michael Simon talked about taking years to discover the business model that led LogMeIn to be so successful.  Niraj Shah joked wryly that the Wayfair rebranding resulted in his company going from low brand awareness to no brand awareness and each of the public company CEOs clearly struggle quarter by quarter to drive results and demonstrate success.  Michael Simon told me before the panel, with a smile, that when his stock goes up, it's because of LogMeIn's strong business momentum and when it goes down, it's because the market is having a bad day.  None of these CEOs are resting on their laurels.  Gail Goodman once told me she felt Constant Contact was in the second or third inning of a nine inning game.  And she's been CEO for 12 years!

5) Alignment, Alignment, Alignment.  Gail Goodman hammered the importance of alignment.  Some of her investors were ready to sell the company when it hit $30 million of revenue and over $100 million of market value.  She wanted to build a billion dollar company, and had to find investors that were aligned with this bigger vision.  

I could have listened to this panel of CEOs all day.  The hour went by way to fast and I hope there is a sequel coming soon - we need the Justice League to point the way to acehiving entrepreneurial success and scaling!

Ironically, the panel was conducted a day before an interview with Mark Zuckerberg, where he indicated that if he were starting Facebook now, he would have stayed in Boston.  I guess others are noticing that you can scale great companies in Boston nowadays! 

Why Groupon (and other high-flying start-ups) Should Take a Page From Ayn Rand

Fountainhead is one of my all time top ten favorite books. The lead character, Howard Roark is an independent-minded architect who bucks conventional wisdom and delivers buildings with vision and verve in the face of criticism and doubt – in short, a true entrepreneur.

One of my favorite scenes is when his antagonist, Ellsworthy Toohey, an obsequious newspaper columnist, captures a private one-on-one moment with Roark and asks him: "Mr. Roark, we’re alone here. Why don’t you tell me what you think of me? In any words you wish. No one will hear us." Roark replies, “But I don’t think of you." The sentiment is simply delivered; no antagonism or emotion – Roark truly doesn’t even consider Toohey or other critics like him when embarking on his work.

As he embarks on his long-anticipated IPO road show, Groupon’s founder and CEO Andrew Mason will need to channel a bit of Howard Roark. Critics love to throw stones at the company, as they do for other high-flying start-ups. I admit, even I have my doubts about the daily deal model and how sustainable Groupon’s approach will be in the face of merchant and customer attrition over time. This week’s news that smaller daily deal rival, BuyWithMe, is retrenching and laying off half its staff is not a good omen.

Yet I really respect what Mason and the Groupon leadership have built and, in truth, I wish them well. I want more young companies to succeed, break through the IPO glass ceiling, and continue to prove out the venture capital-backed company-creation process can work. I want Groupon to settle in at a strong valuation that generates wealth and further fuels the Chicago entrepreneurial ecosystem while returning capital to liquidity-starved investors. And as a Boston-based venture capitalist and start-up cheerleader, I like that Groupon is proving that not all the good companies have to come out of Silicon Valley.

So why is it that so many people are so eager to tear the company down? I guess schadenfreude, that odd feeling of happiness humans feel when they see other people suffering, is not simply a German phenomenon. For whatever reason (too many type A competitive folks in one small Petri dish?), the start-up community is a very snarky one. VCs are famous for bragging about their portfolio companies and snidely putting down their rivals. I remember when I was an entrepreneur and my company, Upromise, was raising money, one VC heard I was talking to a famous partner at a rival firm and sniggered, “Really? Is he still in the business?”

Yet the best entrepreneurs (and VCs, I suppose) know to ignore the critics and naysayers. In fact, like Howard Roark, they don’t even think of them. They keep their head down and focus on building a great service that their customers love and creating a great culture that engenders loyalty and passion amongst their employees.

Good luck, Andrew.

Peace Through Entrepreneurship?

I had an out of body experience last week.  A few days before Yom Kippur, the holiest day of the year in the Jewish calendar and a spiritual day of remembrance, I found myself in front of ten Palestinian high tech CEOs talking about entrepreneurship.  At the end of the session, they invited me to meet with Palestinian President Abbas to advise him on how to build a thriving IT sector (which now employs 3,500 across 300 companies).  How did this juxtaposition come about?

It all began a few months ago, when Massachusetts Governor Deval Patrick visited Israel on a trade mission.  He met with numerous Israeli entrepreneurs to foster greater business partnerships and opportunities with Massachusetts businesses.  While there, he met with a few Palestinian entrepreneurs as well and invited them to come to Boston to establish closer relationships with local businesses.  Last week, they took him up on this offer - coming to both Boston and Silicon Valley to meet with business leaders from the IT industry.  The Boston visit was coordinated by the Progressive Business Leaders Network, a business organization I co-founded, and Governor Patrick came to meet with the group to welcome them to Boston.

Honestly, when I was invited to speak to the Palestinian delegation, I paused.  You see, my father is a Holocaust survivor and finished high school in Tel Aviv.  My kids attend a Jewish day school, study Hebrew, and are being raised, like I was, as ardent Zionists.  I donate money to AIPAC as well as our local Jewish federation (CJP).  Although I strongly support a two-state solution, I worry that anti-Semitism remains rampant in the Middle East and that the demonization of Israel and Jews is at an alarming high.  And so the question I asked myself before accepting the invitation was:  would a strong Palestinian IT sector be a good thing for peace in the Middle East?  What if the next Skype or LogMeIn was started by a Ramallah-based entrepreneur instead of a Swede or Hungarian, respectively - would that be a good thing?

My conclusion:  100% yes.  And after meeting with the Palestinian CEO delegation, I would say 200% yes.

Thomas Friedman said recently that the surest cure to poverty was entrepreneurship.  I would say the same regarding peace.  If the Israelis and Palestinians are busy cooperating commercially, creating jobs and wealth for both sides, it will meaningfully reduce the tension that unemployment and a lack of opportunity for young and old represent.

I was blown away by the group of Palestinian entrepreneurs – they had more in common with entrepreneurs in Boston, Silicon Valley and NYC than probably many of their own people.  They could have stepped right out of Techstars central casting – smart, scrappy, ambitious, hungry.  I enjoyed hearing their stories of their entrepreneurial journeys to create their companies.  (I joked with some chagrin with the one female in the delegation – pictured above – that their male : female entrepreneurial ratio matched our own).

Traveling with the delegation was a USAID executive who is assigned to the region to foster more business development with entrepreneurial companies.  I was able to enlist a Palestinian Harvard Business School student (we hosted the event at Harvard’s new Innovation Lab, which is spectacular), to join us.  He was raised in Bethlehem and worked at a Palestinian venture capital firm last summer, called Padico, scouting opportunities for investment.

Who knows what will happen with the peace talks, but if these ten entrepreneurs are any indication, there’s hope yet for peace in the Middle East through posterity and entrepreneurship.  At least that’s what I was praying for in synagogue on Saturday!  With the recent bombshell announcement that Israeli Prime Minister Netanyahu has secured the release of Israeli soldier Gilad Shalit, perhaps we are a step closer.

 

Entrepreneur-Friendly Policies (Finally) Showing Promise - But Leadership Required

The policy conversation regarding jobs and economic development is starting to show some promising signs, particularly in helping young companies flourish.  The fact that the entrepreneurial ecosystem is critical to job creation should be obvious, but there remains a misperception that small businesses create jobs.  In truth, it’s not small business that represents the country’s job engine.  It’s new businesses.  The Kauffman Foundation’s research on this matter is clear:  from 1997 to 2005, job growth in the US was driven entirely by start-ups.  What this means is that any economic development effort must be framed in the context of the following central question:  how can the government help more young companies be formed, grow faster and achieve long-term success?

Fortunately, there is a constructive policy conversation in this area on both sides of the political spectrum.  Unfortunately, it's going to take leadership and bi-partisan cooperation to push them through, and it's not clear where that leadership is going to come from.  Here are some recent policy developments worth tracking, as well as my own two cents on the policies I think should be getting more attention to support company formation, growth and ultimate success:

Policies:  Company Formation

One of the most valuable resource for American start-ups are immigrants who come to the US to pursue entrepreneurial careers.  Such household names as Google, Intel and eBay were started by at least one immigrant founder.  Yet, we make it very difficult for immigrant entrepreneurs to pursue their dreams and build their companies in America.  To address this, Senators Kerry and Lugar proposed a Start Up Visa in March 2011, providing “Entrepreneur’s visas” for immigrant entrepreneurs.  This bill needs to be passed immediately (it is in the midst of hearings and keeps getting caught up in partisan bickering over broader immigration reform) and should be expanded to provide green cards for those with degrees in science, technology, engineering and math.  For more on this important bill, read here and here.  The administration has proposed additional changes to process immigrants in a more streamlined fashion, including a recent set of policies that the US Citizens and Immigration Services department has advocated which can be found here.

The other major lever to improve company formation is facilitating the flow of ideas out of our university system.  Flybridge Capital recently created an organization called URES (University Research and Entrepreneurship Symposium) in partnership with the National Council of Entrepreneurial Tech Transfer (NCET2), to bring together researchers, investors and entrepreneurs to act as catalysts for company-building.  Greater attention and support for these efforts will help accelerate the process for research to be commercialized.  The recently passed Patent Reform Act is a good step forward in this area as well, simplifying red tape and reducing the backlog (despite last-minute, dysfunctional nods to special interests). 

But to really jumpstart company formation, the government should consider meaningfully increasing NIH funding – perhaps 2-3x its current level.  Most medical research labs around the company are dependent on NIH funding and it is one of the highest leverage investment we can make – supporting 325,000 researchers at over 3,000 universities around the country.  Yet, NIH funding is at a ridiculously low $31 billion per year, roughly the same in constant dollars as it was ten years ago.  We spend $21 billion on tax breaks to the oil and gas industry and tens of billions of dollars on farm subsidies.  This anemic NIH funding level remains despite the well-known fact that the impact on health care costs and job creation is enormous.  In diabetes alone, the total government support for research is a mere $1 billion in contrast to the $200 billion per year that diabetes costs the economy.  In addition to the clinical impact, each dollar of NIH funding generates more than twice as much in state economic output, not including the jobs generated by the companies who are spun out of NIH funding.  I'm shocked that there isn't more discussion about channeling more dollars towards this inmportant institution.

Policies:  Grow Faster

Once new companies are created, they need access to both financial and human capital to grow faster.  Just to prove that good ideas can come from unusual sources, Republican majority whip Kevin McCarthy proposed in September the Access to Capital for Job Creations Act, a piece of legislation that would widen the universe of potential investors for small businesses around the Securities Act of 1933.  Packaged with other proposals around expanding the number of shareholders private companies can have, this act would be an accelerant for small companies seeking access to capital from a broad range of sources. 

Access to human capital is another critical component to allowing young companies to grow faster.  The dearth of trained computer science and engineering is crippling the growth of many Innovation Economy companies.  Worker training efforts in combination with educational efforts, such as the emphasis on STEM (Science Technology, Engineering and Mathematics) is a start, but are woefully underfunded and under-supported.  For example, Congress nearly cut the $181m Department of Education’s Math and Science Partnership Program and the NSF’s programs in this area also do not get enough attention.  In thinking through our investment choices, we should keep asking ourselves, if they had a massive shortage of software engineers, What Would China Do?  The President’s Jobs Bill contains some good ideas in this area, such as a “Bridge to Work” program, which could have a big impact when the details are fully worked through.

Free trade is another critical component to support small business expansion.  Coming out of the recent economic crisis, there has been protectionist pressure that threatens to choke off the opportunity for small businesses to expand via global exports.  The free flow of capital across borders is one of the most critical ways to expand opportunities for US companies.  In September, the Council on Foreign Relations issued a new report that concludes that America is at risk of being left a bystander in the global trade arena as our share of exports and direct investment has plummeted.  Huge emerging economies in India and Brazil need to be opened up more aggressively with the help of the Congress and White House.  A more aggressive free trade policy, coupled with stricter punishment for unfair trade practices, must be embarked on.

Policies:  Achieve Long-Term Success

For young companies to truly have a shot at achieving long-term success, they need to be able to access the public markets through an IPO.  Unfortunately, the IPO market was the victim of excessive regulation in the wake of the Enron scandal, leading to the passage of the very restrictive Sarbanes Oxley, among other things.  Policy makers have finally been listening to the start-up and entrepreneurial community to adjust the policies to prevent the choking off of growth.  In September, Congressman Ben Quayle introduced the Startup Expansion and Investment Act, which seeks to make it easier for new companies with a market capitalization of less than $1 billion to go public by opting out of some of the more onerous regulations imposed by Sarbanes-Oxley.  This is a good start.  The National Venture Capital Association (NVCA) has put forward a comprehensive list of policies that need to be followed to make an event larger impact here.  Hearings on this have started.  Action needs to be taken.

Conclusion

Despite the partisan rhetoric and bickering, the last few months have seen substantial progress amongst policy makers in the areas of helping the startup economy thrive.  The link between startups and jobs is becoming more broadly understand, as are the policies required to help business form, grow and ultimately succeed.  It will require extraordinary leadership to step forward and advocate these policies in a comprehensive way that transcends the classic “left” vs. “right” debates.  I sure hope that leadership is on its way.

Mastering the VC Game - in Paperback

I'm pleased to announce that my book, Mastering the VC Game, is now available in paperback, complete with a new introduction and a few updates.  Amazon has priced it at $10.88 for Prime customers.  Frankly, I'd prefer to give it away for free as making money off the book isn't really my goal.  The folks at Penguin have a business to run, though, so books still cost money.  That said, I was able to convince them to let me give away the first 40 pages for free - so download it here or at the book website at www.jeffbussgang.com to get a taste.

Since the publication of Mastering the VC Game in 2010, I have received wonderful feedback from the entrepreneurial community. In fact, I have been blown away by the response from such a diverse population of entrepreneurs and would-be entrepreneurs around the world. One twenty-something entrepreneur working at a non-profit in Australia wrote me:

 “Thank you for writing this book. It was a captivating read that gave me the basics of how the industry looks. I loved it. My only problem was feeling inspired to action, which made me put the book down to send emails to friends, and look up companies, which was a great problem to have.”

Inspiring entrepreneurs into action was my original goal for the book. The need for entrepreneurship is greater than ever. Policy makers and business leaders have both come to recognize that the capacity of human beings to innovate is our best hope for addressing and ultimately solving society’s thorniest problems. It has never been more critical that we brew up that magic elixir that comes of mixing entrepreneurs, who are the source of innovation, with investors, who are the source of capital to fuel that innovation.

I wrote Mastering the VC Game to contribute in some small way to this phenomenon and inspire entrepreneurs around the world to arm themselves with the knowledge, skills, and tools they need to take action and to succeed in their endeavors.  When entrepreneurs and investors align and work in harmony, the long odds for start-up success are greatly improved and real magic can happen - creating that next Google, Facebook, or Twitter.  Let me know what you think!

Techstars on TV – Hit or Miss?

Like many members of the start-up ecosystem, I was excited to watch the Bloomberg TV show on Techstars NY last night.  The opportunity to see our little subculture of whacky characters and idiosyncrasies playing out on television was so alluring that it was worth foregoing my usual nightly email binge.

Yet, when the show was over, I was strangely disappointed.  I had that same feeling you get when you eat a bag of potato chips, which taste good going down, but then feels unfulfilling and unappealing after the last chip is gone.  In short, I think the show was a huge wasted opportunity.

First, I should say that I’m a huge fan and supporter of Techstars.  My partners and I are personal financial investors in Techstars Boston and we funded one of the first Techstars companies (oneforty) and have served as advisors to countless others in NYC and Boston.  Finally, I am a huge fan of David Tisch, Katie Rae and the other Techstars managing directors.  What they have created from nothing a few years ago, with the backing and support of Brad Feld and David Cohen, is nothing short of remarkable.

OK, caveats aside, here’s what I didn’t like about the show:  the tone was all wrong.  The edgy graphics, music and camera shots tried to bring a crass, reality TV feel to a serious and sophisticated business.  The producers apparently wanted to create something akin to “the Bachelor metes The Apprentice” and, in doing, cheapened the whole endeavor.  Get rich quick, kids, was the message, complete with hip sound track, sound bites and quirky camera angles.

I would submit that’s not the point of entrepreneurship or, for that matter, Techstars.  I would have much preferred to see a more sophisticated show that brought out the “change the world” passions of the founders and provided a more nuanced view of the ups and downs of start-up life.  I wanted to see more big picture thinking, for example an explanation about the game-changing (and, in many cases, life changing) impact start-ups are having in our society, transforming industries and households up and down the economic stack.  

I’m not suggesting Bloomberg should try to emulate their own Charlie Rose, and risk putting the audience to sleep, but at least channel a bit of Jon Stewart (who, Bill Moyers recently put, is brilliant at taking “a critical view of the news and marinating it in humor”).  I would have much preferred to see the producers treat the audience like adults, able to digest serious issues and trade off decisions that the founders were struggling with, rather than target hipsters that are looking for dramatic founder break-ups because they’re too busy to watch mid-day soaps. 

Perhaps the start-up community needs a Jon Stewart-like figure to act as our guide through the Techstars process – more of an shrewd yet entertaining narrator than an MTV host.  Some of the quick-hit interviewees on the pilot show would be great candidates for this (e.g., Fred Wilson, Roger Ehrenberg, Brad Feld).  Start-up life has plenty of drama that doesn’t need fabrication or exaggeration.  Hard problems are being faced by each team professionally and personally.  The characters in most start-up dramas are fascinating people, with compelling stories – I know many of the folks depicted in the show and they are deserving of more than surface treatment, but rather real character development and dimensionality.

Sure, I enjoyed seeing so many friends and familiar faces on screen and seeing “my world” exposed to a broader audience.  But, objectively, I thought the actual show kind of stunk.  That said, I’ll be tuning in to the second episode.  And hoping for the best.

Why Venture Capitalists Invest In Pigs, Not Chickens

There is an old parable about the concept of commitment when it comes to breakfast. The story goes that when looking at a plate of the traditional fare of ham and eggs, it's obvious that the chicken is an interested party, but the pig is truly committed.

When I tell this story to entrepreneurs, my point is usually to contrast the approach VCs have to start-ups as compared to entrepreneurs. The VC is an interested party, but at the end of the day, if their start-ups live or die, they typically still have their job, their office and their portfolio of other investments. The entrepreneur, on the other hand, is the pig - truly committed to the outcome, with no fallback.

But lately I've been thinking about the parable of the pig and the chicken in the context of the characteristics that make a great entrepreneur - and the kind of entrepreneur that we VCs in general, and my firm Flybridge Capital in particular, like to back. In short, we like to back pigs - entrepreneurs who are truly and completely committed to the outcome of their venture, have a lot of stake, and no fallback.

How do we discern the difference between the two entrepreneurial archetypes? It's usually relatively easy, but sometimes subtle. Here are a few of the top characteristics we see in entrepreneurs who appear to be exhibiting behavior that suggests they're more like "chickens" when it comes to their start-up:

1) Prefer to wait to start their venture only after they receive funding ("We are ready to go, as soon as you give us your money." ...um, does that mean you won't start the company if I don't give you my money?).

2) Don't quit their day jobs before receiving funding. ("This has been a side project for a year, and I can't wait to focus on it full-time" ... um, if you can't wait - why are you waiting?)

3) Don't physically move themselves or their teammates to be in the same geography when starting their venture (think Eduardo Severin in the Social Network spending his summer in NYC).

4) Prefer to play a hands-off chairman role or look to quickly hire a COO/president in the early days rather than operate as the hands-on CEO/president. (I'll leave out the numerous examples to protect the innocent, but as a rule of thumb, companies with fewer than 40 employees don't typically need a COO).

5) Are unwilling to fully leverage their own personal and professional networks to drive recruiting, fundraising and business development.

On the other hand, the top five characteristics we see in "pig" entrepreneurs include:

1) Commit to the new company everything they have - even if that means moving their families, quitting their jobs, or even dropping our of their schools (as much as I don't want to condone or encourage this!).

2) Put themselves "out there" publicly and visibly with the industry, their relationships, family and friends. If the company is a failure, it will not be a quiet one.

3) Have not yet achieved a mega-success already and/or yet achieved wealth beyond the point of needing to work again. (I remember my mentor and boss at Open Market, CEO Gary Eichhorn, congratulating me when I became a first-time homeowner in the mid-1990s and observed: "I hope you got a large mortgage so that you are locked in and highly motivated to create wealth!").

4) Participate in a minimal set of outside interests and hobbies that aren't directly related to their business. Starting a company is a consuming, obsessive, 7x24 endeavor. Raising a family and remaining healthy is enough of a battle. When we see entrepreneurs with long lists of hobbies and outside interests, it's a red flag. One of my partners went so far as to look up the number of times an entrepreneur played golf one summer (which apparently is public information somehow, although I'm not a golfer so still don't know how he figured this out) as a barometer for how hard they were applying themselves to their new venture.

5) There exists a rare breed of entrepreneurs that have already had mega-success are so special and driven that they remain obviously hungry and scrappy. For these entrepreneurs, the key is to watch and see if they're still as hands on as they ever were (e.g., obsessed with the product, knee-deep in the financial model, out in front of the organization in selling). Again, these entrepreneurs are very special.

So what are you - the chicken or the pig? Investors clearly prefer one model over the other, not just in the founder, but in the entire team. As a result, as you are assembling your start-up team, be careful not to hire chickens. In the eyes of prospective investors, you may find it's even less kosher than hiring pigs.

Summer Reading

One of my favorite parts of summer is having the opportunity to catch up on pleasure reading.  Like many, I read so much work-related material that it is refreshing to have the luxury to broaden my thinking and information intake by reading non-work related books.

Inspired in part by the Wall Street Journal's recent piece on VC Summer Reading, here are a few of the books that have been capturing my imagination lately, organized by topic.

Life Management/Happiness/Health

Despite being a computer scientist/technology wonk/business type, I am fascinated with books on the philosophy of life and seeking happiness.

• A New Earth:  Awakening to Your Life's Purposes by Eckhart Tolle.  My former business partner Michael Bronner recommended this excellent book to me.  I found the lessons regarding managing your ego and maintaining personal equilibrium to be so compelling that I wrote down a dozen or so excerpts and put them up in my office.  
• Happier:  Learn the Secrets to Daily Joy and Lasting Fulfillment by Tal Ben-Shahar.  This book is a thoughtful exploration into what makes you happy, encouraging self-awareness and wise choices.  My friend Dan Allen recommended it to me.  An insightful study covered by the Atlantic Monthly on this important topic of happiness is also worth a read.
• Younger Next Year: A Guide to Living Like 50 Until You're 80 and Beyond by Chris Crowley and Henry Lodge.  One of my softball teammates pushed this one on me and I adored it.  I've given it to a dozen friends as a gift - encouraging them to maintain the philosophy that health, fitness and well-being does not have to degrade as you get older.

Family/Kids

My three kids remain one of my most passionate obsessions, so I'm a sucker for any recommended books about child-rearing and family management.  A few of my recent favorites:

• Nurture Shock: New Thinking About Children by Po Bronson and Ashley Merryman.  David Kidder of Clickale suggested this one to me and I have enjoyed it as a book that cuts against conventional wisdom in many areas of raising children.
• The Talent Code:  Greatness Isn't Born, It's Grown. Here's How by Daniel Coyle.  My partner Jon Karlen recommended this one to me.  Jon was an all-American squash player and his wife was a 12-letter athlete (!) at Harvard, so I take his recommendations about raising talented kids seriously!
• The Three Big Questions For a Frantic Family by Patrick Lencioni.  Lencioni is one of my favorite business book writers (see my recent blog post on his work on team dysfunction) and so this book was a refreshing way to apply some of his core business lessons to family management.

Fiction/Fun

When you don't feel like serious non-fiction, a little light fiction hits the spot.  For example:

•  The Strangler by William Landay.  Full disclosure:  Billy is my brother-in-law, but as a former prosecutor in the DA's office, he's got a great angle on crime mysteries.  His third book, Defending Jacob, comes out next winter and is also outstanding.
• Delirious by Daniel Palmer.  This is a very fun and a bit freaky fictional work about a start-up CEO who goes insane.  Murder, drama and software all play heavily.  Palmer used to be a start-up executive and gives a great view into this world. 
• The Finkler Question by Howard Jacobson.  A hedge fund buddy of mine recommended this to me.  Wry and somewhat bizarre depiction of a philo-Semitic (as opposed to anti-Semitic) world view. 
• Cityboys:  Beer and Loathing in the Square Mile by Geraint Anderson.  A buyside equity analyst buddy of mine recommended this one to me.  Anderson is a London-based trader who provides a laugh out loud fictional (but based on fact) inside look at the hypocrisy and idiocy on the trading floor. 

So those are a few of my top suggestions - many are a bit off the beaten track but very enjoyable.  Happy reading!

Catch the Wave 8.0 - Live From Kennebunkport

Every summer we invite our portfolio company executives and their families along with friends of the firm to Kennebunkport, Maine for some fun and sun.  The event is all about having fun and community building - no conferences or panels allowed.  On Saturday night, we have a costume bash and in past years, people get really into it.  

This year's theme was Saturday Night Live and my (very creative) partner David Aronoff produces a video each year to show at the party.  You can see this year's video here, with numerous guest stars and a brilliant "Mr. Bill raises VC money" skit:

David promises me this is the last year he'll make fun of me for writing a book.  I'm not holding my breath.  Here's a picture of the Flybridge team in full regala:



Arranged Marriages

My wife and I have picked out the perfect spouse for my son.  They have developed a wonderful relationship together over the years, with great chemistry and warmth.  She comes from a family that has identical values and priorities to ours and would make wonderful in-laws.

They are both 9 years old.

This example - admittedly absurd (although we still do talk about it!) - got me thinking about the challenge of arranged marriages in the world of entrepreneurship.

Many entrepreneurs come to us and say "I have this great idea, all I need is a technical co-founder" or "I have a killer technology that I'm developing, all I need is a business co-founder."  They look to us to help make the match in the hopes that they will complete their team and live happily ever after.  

Unfortunately, arranged marriages are hard to execute.  You can't force a partnership.  It has to come naturally and evolve organically.  When two partners have worked together already and come to us, we know that "team risk" has been meaningfully mitigated.  But even when a founding team has a long personal history, if they don't have a professional history together it can be hard to predict whether things will work out harmoniously.

We have had a few examples in the Flybridge portfolio where we have been able to make matches between business builders and technical founders that have really worked.  In particular:

• Virtual Computer, where we were able to match the late Alex Vasilevsky (RIP) with CEO Dan McCall to build a successful desktop virtualization company.
• Cartera Commerce, where we were able to match technical founder Dave Andre with CEO Tom Beecher to build a successful e-commerce and performance marketing company.
• Digital Lumens, where we paired a data communications veteran, CEO Tom Pincine, with a lighting guru, Brian Chemel, to start the leading LED-based solid-state lighting company.

But we have also seen plenty of examples where it has not worked - where putting two strong personalities together to build a venture leads to disaster.  Here are a few tips based on lessons learned in trying to make arranged marriages work:

1. Sign a pre-nup.  Two founding team members may think they have a clear agreement as to how they are going to divide up responsibilities, but unfortunately humans have a tendency to listen to what they want to hear.  To avoid misunderstanding, write it down.  Write down the roles and responsibilities, the mechanisms by which you will resolve disputes, and what the financial deal is (equity split, deferred compensation, etc.)  between the two of you.  HBS Professor Noam Wasserman wrote a good blog post on how to think through the initial equity split that I highly recommend.
2. Celebrate diversity.  I have found that it's best to have two founders who are really different - different skills, backgrounds, different perspectives on the world.  Otherwise, there is a risk that they step on each other's toes by inserting themselves into the same set of issues.  Which founder will be Ms. Outside vs. Ms. Inside?  Which founder will handle fundraising vs. product development?  These questions should have obvious answers based on skill set and experience, rather than coin-flipping.
3. Don't rush it.  Having a year long engagement period is a good practice in marriages - it allows the newlweds to "try on" the whole marriage concept over a long period of time.  Similarly, allowing a founding team to have some hang time together and not rush into a relationship is an important practice.  With a fast-moving industry, a year is typically not practical, but take a few months to "try it on" before you jump in to a founding partnership.
4. Talk it out - in private.  I believe it was President Bill Clinton who began the practice of weekly lunches with his Vice President, Al Gore (cute joke on that here).  That cadence of private 1 on 1 sessions is a valuable mechanism to set up between two founders to make sure they remain in synch.  If employees sense even slight disagreements between founders, it can lead to confusion and misalignment.
5. Seek a counselor.  I am a big fan of busines coaches and would advise founding teams to consider hiring a professional coach or nominating an advisor to help them resolve disputes - before any disputes arise.  There's a good reason complex business contacts have a built in agreement on the dispute resolution process.  In the heat of the moment, that's the last thing you want to negotiate.  Similarly, founders should setup a neutral party and process to assist them in resolving issues so that when they inevitably arise, it's an orderly, rational process.

My wife and I will keep a close eye on my son's evolving relationship with his nine year old girlfriend.  In the meantime, I'll keep looking to make more great entrepreneurial matches.

The Start-Up Law of Comparative Advantage

I can type faster than my assistant.  If she is reading this blog, she may dispute this (and we may have to have a show down with the help of an online typing test), but I'm a pretty darn fast typer.

But, if my assistant were to sit in on my board meetings for me while I stayed back in the office and typed, I'm not sure my entrepreneurs would be very happy (at least, I hope not!).

Thus, despite the fact that I may be a faster typer than she on an absolute basis, it's way more important for my job as a VC that I maximize my time working with entrepreneurs, something I am comparatively better at than she is.

This simple example is derived from an economic law discovered by David Ricardo that has always fascinated me, called the Law of Comparative Advantage.  This law says that it does not matter  whether a nation is better at producing a particular good on an absolute basis as compared to another nation.  What matters is whether a nation is comparatively better at producing a particular good as compared to other goods it can devote its resources to producing relative to another country.

Unfortunately, I see too many founders ignoring the entrepreneurial corollary to this law, the Start-Up Law of Comparative Advantage.  I'm no David Ricardo, but it seems to me that if entrepreneurs followed this "law", the gains to their start-ups would be akin to the gains attributed to free trade.  Here's why:  founders are typically gifted, multi-talented, versatile professionals.  As such, they get sucked into spending time doing things that they may be better at than the others in their organization on an absolute basis, but that, comparatively speaking, they are worse at in relation to the handful of things that they are uniquely suited for.

I work with one founder/CEO who is so talented, I think he literally could perform the job function of each of his direct reports better than they could.  But if he spent all his time doing operational project management or tactical sales activities, he wouldn't be able to spend time on the things that only he uniquely can do relative to his teammates.  

In a fast-growing start-up, a founder needs to be very protective and strategic with how they spend their time.  Founders are always complaining that they are spread too thin, are overwhelmed with the job at hand, and struggle to figure out how they should be prioritizing their efforts.

I would submit that, above else, there are two areas a founder should not delegate:  product and people.  Product-related activities include developing customer intimacy (studying the "voice of the customer"), designing features, thinking through product strategy and setting priorities.  People-related activities include hiring, setting the culture, coaching and mentoring.

If a founder finds themselves spending the bulk of their time on issues not related to product or people issues, they are violating the Law of Comparative Advantage.  They need to rethink whether they're delegating in the wrong areas, and not being (appropriately) obsessively hands-on in the right areas.

I remember reading once that in the early days at Microsoft, Bill Gates and Steve Ballmer would review each other's calendars on a monthly basis and give feedback to each other on where they should be spending their time.  That concept has always stuck with me, and my partners and I endeavor to do the same periodically. 

Try the following exercise:  at the end of the week, write down the top 6-8 categories of time spent on your start-up (e.g., product, people, project management, operations, marketing, sales, investor relations, miscellaneous).  Just as a lawyer would, track your hours at the end of the week by "billing" each of these buckets.  When you step back and analyze how much time you are actually spending (as opposed to how much time you think you are spending), you may find you can make appropriate adjustments to better deploy your time. 

Adhering to the Start-Up Law of Comparative Advantage may not earn you the Nobel Prize in Economics, but it will help you direct your time more productively when starting your company.

Why You Should Eliminate Titles at Start-ups

There has been a recent dialog around a theme I'll call "hacking the corporation" - creating novel approaches to building young companies, particularly when they are in their formative start-up stage and pre-product market fit.  One of them, reinventing board meetings (or, "Why Board Meetings Suck"), has gotten some attention from leading thinkers like Steve Blank and Brad Feld.

I'd like to submit another item to add to the "hacking the corporation" punchlist:  elimnating titles.

At business school, I learned all about titles and hierarchies and the importance of organizational structure.  When I joined my first start-up after graduation, e-commerce leader Open Market, I found the operating philosophy of the founder jarring - he declared no one would have titles in the first few years.  If you needed a title for external reasons, our founder told us, we should feel free to make one up.  But we would avoid using labels internally.  In other words, there would be no "vice president" or "director" or other such hierarchical denominations.

Why?  Because a start-up is so fluid, roles changes, responsibilities evolve, and reporting structures move around fluidly. Titles represent friction, pure and simple, and the one thing you want to reduce in a start-up is friction.  By avoiding titles, you avoid early employees getting fixated on their role, who they report to, and what their scope of responsibility is - all things that rapidly change in a company's first year or two.

For example, one of my first bosses in the company later became a peer, and then later still reported to me.  Our headcount went from 0 to 200 in two years.  Our revenue grew from 0 to $60m in 3 years.  We went public only two years after the company was founded.  We were moving way too fast to get slowed down by titles and rigid hierarchies.  Over the course of my five year tenure, I ran a range of departments - product management, marketing, business development, professional services - all amidst a very fluid environment.  Around the time that we went public, we matured in such a way that we began to settle into a more stable organizational structure and, yes, had formal titles.  But during those formative first few years, avoiding titles provided a more nimble organization.

So when I co-founded Upromise, I instituted a similar policy:  no titles.  We had an open office structure and functional teams, but a fluid organizational environment and rapid growth.  One of our young team members changed jobs four times in her first year.  Only after the first year, as we settled into a more stable organizational structure and I recruited senior executives who were more obviously going to serve as my direct reports on the executive team did I begin to give out titles (CTO, CMO, CFO, etc.).  With the title policy, there was some early tension and discomfort (one young MBA kept referring to himself as a VP externally, although he was clearly playing an individual contributor role and was soon layered).  Often, when you are running your start-up experiments, you are not even sure of the right profile for employees or organization structure for optimal execution.  But you can establish role and process clarity without having to depend on titles.

I haven't been able to institute this systematically in our portfolio, but whenever young start-ups are formed, it's one of the first things I counsel the founder.  Don't let your founding team and early hires get too attached to titles and hieararchy.  In fact, in that formative first year, see if you can avoid them altogether.

A New, Intellectual Fertile Crescent - Allston and Cambridge

In ancient history, the Fertile Crescent extended from lower Egypt, through modern-day Israel and into Assyria and Mesopotamia.  Thanks to the waterways, population density, and diversity of peoples, it was characterized by an unparalleled flow of goods and services and intellectual foment.  The region's nickname, "The Cradle of Civilization" is well-deserved.

Today, Harvard University is announcing that the school is finally progressing with its stalled expansion in Allston to create 700,000 square feet of new lab space and a 36-acre enterprise research campus with a dozen building to house start-ups, biotechs and VCs.

If this project can be completed as planned (something Larry Summers tried to complete during his term as president, but it was stalled due to the economic crisis), it will form a modern-day, intellectual fertile crescent between Harvard and MIT's Kendall Square, linking academia, industry and capital along the Charles River.

To be clear, this is not just a Boston phenomenon.  The scientific progress being made in Kendall Square and throughout the region in the areas of human genomics, bioengineering and personalized medicine at the Whitehead Institute, the Broad Institute and the Wyss Institute are having international impact.  If the Harvard Stem Cell Institute were to move to the new campus and sit alongside the newly created Harvard Division of Engineering and Applied Sciences, nestled next to Harvard Business School and the newly created Innovation Lab, the amount of collaboration and innovation would simply explode.  Notably, each of the institutions mentioned above are 5-10 years old and thus are still extremely early in their progress in bringing to market all the implications of the intersection of the human genome project, big data, cloud computing, Moore's Law and advancements in nanotechnology.

There is a big idea nestled in here.  Let's hope local, state and national leaders recognize the opportunity...and seize it.

Groupon S-1: Mind The Ratios

When evaluating company documents and filings, a hedge fund manager friend of mine has a simple mantra: "read the footnotes".  So when the Groupon S-1 was posted last night, I was eager to pour over it and find a few hidden nuggets that might explain the company's success and provide some indication of what the future might hold.

I think I found it on pages 74 (not the footnotes, I grant you, but buried quite deeply in the 110 page document).  The company presents two case studies for its two oldest cities, Chicago and Boston, and provides a few datapoints that allows one to infer two of the most important metrics for the business - customer churn and customers per merchant.

Let's look at the longest-tenure city - their hometown of Chicago.  Here's the chart they provide in the S-1 for performance over time:



All the numbers are growing, which is terrific.  But what matters in these situations is the ratios of growth, not just the absolute growth.  So let's do some simple calculations.  First, subscriber (defined as someone who receives an email from them) growth per quarter and percentage growth:

As you can see, quarter over quarter subscriber growth is slowing considerably in Chicago.  In Q1'10 it was 81%.  In Q1'11 subscriber growth was only 37%.  This is incredibly important because there are going to be inactive subscribers - also known as attrition or churn - and that number will likely grow over time.  Groupon needs to fill this leaky bucket with new subscribers every quarter.  If not, growth will slow, flatten or decline.

Now, let's look at customer growth.  Typically, I would expect the definition of a customer to be someone who purchases a Groupon in that period.  But a footnote on page 8 provides a different definition.  A customer is defined as anyone who has purchased a Groupon since January 1, 2009.  That is, it is a cumulative figure representing anyone who has purchased in Groupon's history.  Thus, the change in customers is far more important than the absolute number.  Here's what that looks like:

As with the subscriber numbers, this figure is slowing in quarter-over-quarter growth.  In Q1'10, the change in cumulative customers (that is, new customers) was 69%. In Q1'11, it was 35%.

Now let's look at things from the merchant's view.  The number of Groupons sold per merchant and the number of Groupons sold per customer per merchant are two important ratios of merchant success and customer activity.  Here's what that looks like:

As you can see, these ratios are also in decline, with Groupons per merchant per 1000 customers dropping 10x from Q3'09 (21.3) to Q1'11 (2.3).  This ratio is a good proxy for how active the cumulative customer base is.  The lower the ratio, the more likely there are large pools of inactive customers.  Again, if customer engagement attrits over time, then there is a leaky bucket that can only be filled with new customer acquisition. In saturated markets, it is typical for new customer acquisition to slow down and become more expensive over time.

To be clear, I'm incredibly impressed with this company and what it has achieved.  But a careful read of the rations is instructive when thinking about persistence and durability of the model.  Groupon has so many assets at their disposal and is so early in their innovation cycle, that I'm sure we haven't seen anything yet in terms of targeting, loyalty and other techniques to provide sticky customer relationships.  But the ratio data above suggests that the basic model they're executing on right now has some weaknesses that will become more acute over time.

5 Lessons Entrepreneurs Can Learn From the Navy SEALs

There has been a surge in interest with the world of the Navy SEALs since the Osama bin Laden action (this piece in the WSJ was a particularly good profile) and I confess to being caught up in it myself.  One of my portfolio company CEOs, Will Tumulty of Ready Financial, is a former Navy SEAL (1990-1995).  Will was kind enough to introduce me to a SEAL classmate of his, Brendan Rogers (SEAL 1990-2000), who joined me and 20 NYC CEOs/founders from the tech scene last night to talk about the SEALs - the training, the planning and the operations behind their combat operations - as well as draw out some relevant lessons for entrepreneurs.  Brendan went on to HBS and McKinsey after the SEALs and then started his own hedge fund with a partner, so he had an interesting, multi-faceted perspective.

The discussion was wide-ranging and entertaining.  The five key lessons Brendan highlighted were as follows:

• What's hard is good.  SEALs go through an intensive 6 month training program called Basic Underwater Demolition/SEAL training (BUD/S).  That training program is designed to test a candidate's physical and mental limits.  Traditionally, by the time of SEAL graduation, the attrition rate is as high as 70%.  SEALs quickly learn that the punishment and pain of training hardens their minds and bodies and adapt to embrace the tough environs.  Brendan pointed out that start-up executives who go through hard times should learn to relish them, recognizing that the hard times will toughen the team and train them properly for "battle".
• 80% training, 20% execution.  SEALs are incredibly well-trained and when they are not on acutal combat deployments, they are spending the vast majority of their time training for a number of different types of missions.  In contrast, at start-ups, executives typically spend 100% of their time executing and 0% of their time training.  Brendan emphasized the importance of training and practice in all areas - employee onboarding, management practices, etc.  He commented on the importance of training for unexpected situations.  The simultaneous shooting of three Somali pirates at sea as part of a hostage rescue two years ago was an example of the kind of outcome possible when  SEALs train under all possible conditions.  The CEOs in the room had wide eyes and were certainly thinking hard about their training regimens and scenario planning after that example.
• Every seat counts.  Brendan pointed out the price of settling for mediocrity, even in a big organization.  Every SEAL needs to know with 100% confidence that the man behind them will be able to save their life and get them out of a bad situation.  The CEOs in the room were asked if they could say the same about their management teams and if those management teams, in turn, could say that about their lieutenants.  One CEO objected that he had 1000 employees in his company and couldn't possibly hire all "A's".  Brendan replied by citing the example of DDay.  Eisenhower planned DDay with a small number of subordinates who he turned to and said, select 12 men underneath you who can trust with your life to execute this mission.  Each of those men did the same.  And so on and so on.  That cascading effect resulted in the successful employment and combat engagement of over a 2 million troops throughout Europe.  The lesson?  Don't let a large organization be an excuse for mediocrity.
• Everyone is expendable.  The SEALs are trained in a nearly identical manner and no one SEAL is indispensible to the unit or the mission. The nature of combat is that anyone can be lost at any time.  Entrepreneurial companies have a harder time executing on this philosophy since there are specialists and superstars, but Brendan's message was to make sure contingency plans were thought through for any set of personnel circumstances.
• You never know the measure of a person until they are tested.  As mentioned earlier, the SEALs training program weeds out 70% of participants.  Brendan conveyed that the people he thought would never drop out did while others proved to be more resilient and tougher than imagined.  Until your people are really tested (see "what is hard is good"), you can never be sure who will step up and who will falter.  One sure sign, based on pattern recognition, is that those that talk tough and are full of bluster are predictably those that are the first to blanche in the face of adversity.  Quiet strength and determination in a start-up are invaluable.  When you see it in your people, bottle it.

Everyone left with a great appreciate for those brave men who serve our country so ably, and the system behind it that produces such a consistent, excellent "product".  Brendan is also the co-founder of the Navy SEALs Foundation, a non-profit that helps take care of the families of SEALs when things don't go as smoothly as they did in Pakistan a few weeks ago.  I was inspired to make a donation to the organization immediately after the dinner.  You can read more about them here.

One final humorous note - Brendan observed that the spouses of Navy SEALs are as tough as nails themselves and impossible to impress.  They still make their spouses take out the garbage, do the dishes and change diapers - no matter how impressive their accomplishments in the field of battle.  I suspect many start-up executives have similar, appropriately humbling marital arrangements!

Washington Report

In addition to my day job as an early-stage venture capitalist, I spend some time on civic activities - I think I must have gotten the social justice gene from my Dad.  One of my passions is my work as co-chair of the Progressive Business Leaders Network (PBLN), a nonpartisan group of business leaders that are committed to pro-business, pro-competitiveness policies that are also sustainable and socially responsible.

Last Thursday, I helped lead a delegation of over one hundred CEOs to Washington DC - our most impressive turnout ever - to advocate for policies consistent with our values.  We met with over a dozen senators, a handful of Members of Congress and a number of executive branch leaders.

There were many highlights, but here were a few:

• Start-Up Visa. Rep Jared Polis (D-CO), a former entrepreneur, reports that the Start-Up Visa initiative is languishing because there isn't a single Republican in the House that will co-sponsor it.   Sen Kerry (D-MA) and Sen Lugar (R-IN) put forward a bill in the Senate (Start-Up Visa Act of 2011) but it's not moving because of the House.  Rep Polis also shared that he is starting a Congressional Caucus on "Innovation and Entrepreneurship" along with Rep Vern Buchanan (R-FL) - clearly an important movement to focus and coordinate policy efforts.
• Internet Privacy. Kerry and his staff told us about the recent Internet Privacy Bill he and Sen John McCain (R-AZ) have proposed.  They believe a business-friendly, consumer-friendly version will get passed into law eventually after some negotiations with Sen Jay Rockefeller (D-WV), who is pushing for a more liberal bill that includes a Do Not Track provision.
• Deficit Reduction. Sen Mark Warner (D-VA) briefed us on his work as part of the "Gang of Six" - the six senators who are trying to develop a bipartisan, deficit-reduction plan.  As everyone knows, the deficit data is scary (I recently read analyst John Maudlin's book Endgame, which is about as scary a book about the global economy as one can imagine).  To take $4 trillion out of the deficit over the next 10 years (the common number focused on by the Ryan Plan, the Obama Plan and the Simpson-Bowles Plan), it is clear that entitlements, taxes and draconian spending cuts are all on the table.  Many insiders believe a proposal will be put forward this week.
• Investment and Growth Policies. Austan Goolesbee, Chairman of the Council of Economic Advisors and a frequent guest on The Daily Show, provided his views on the economy and the policies required to drive growth.  He seemed less focused on the deficit (scarily, frankly) and more focused on "growing our way out of this".  He highlighted the President's focus on innovation policies and job growth, although when pushed he was squishy on details.  He did observe that the fixing the IPO market malaise needs attention (an issue that is dampening growth - as analyzed extensively by these two Grant Thornton Reports, one titled "A Dysfunctional IPO Market Fuels Unemployment"). 
• Deregulation.  Will Marshall and Mike Mandel from the Progressive Policy Institute (PPI) briefed us on the need for deregulation.  There is a growing awareness in Washington on the importance  of reducing regulatory burdens on business.  What a pleasure to hear a Democratic group advocate for this!  In fact, Mandel shared a good insight:  governments should apply regulatory policy during business cycles much like they do monetary and fiscal policy - loosen during times of economic weakness, tighten during boom times.  He highlighted Sarbanes Oxley as a huge mistake, just when the economy needed less regulation in the IPO market, not more.  He also railed against regulatory overreach on the part of the FCC.

These were just a few of the many highlights.  The call to action given to us by the elected leaders still resonates.  "We need you.  Keep caring.  Stay engaged." pleaded Senator Warner.  We have only a few months left to achieve a long-term deficit reduction plan and making progress on pro-innovaton policies over the next few months before election fever strikes.  Everyone needs to stay engaged in what happens next.

Hire a Recruiter...Now

The unemployment rate in America is hovering around 9%. But if you are a competent engineer, sales executive, online marketer or general manager in Silicon Valley, NYC, Boston or other start-up hotspots, the unemployment rate is 0%. 

The talent market has gotten as competitive and aggressive as I have ever seen in the last 20 years. CNN recently reported that 40% of the 130,000 job openings in Silicon Valley are for software engineers.  Senior executives have never been harder to secure.  That's why, even though it flies in the face of conventional wisdom, I'm advocating that all my portfolio companies hire recruiters when they are trying to fill senior or key positions.  Immediately.

Typically, when a young company gets financing and begins to hire, they seek to leverage the network of the founding team and their investors. This network provides some valuable leads and perhaps a few hires. Leveraging existing networks has greater benefits than simply cost savings and convenience.  Teams that have worked together in the past simpy are well-positioned to out-execute those that haven't due to their common history, language and relationships.  I have read studies that show that one of the factors that correlates highly for success in a startup is if the team has worked together and made money together in a previous startup. 

But tapping those informal networks alone doesn't scale. And reacting to inbound people flow generates an adverse selection bias - the best people are not looking, so they will never contact you and respond to your job posting. 

As an entrepreneur, I was initially very skeptical of fast-talking, expensive recruiters. I thought hiring them represented a personal failure on my part as an entrepreneur.  After all, it was my job to secure the best and brightest talent through my own efforts and my own network. But my years of recruiting have taught me that startup CEOs are at a distinct competitive disadvantage if they don't get outside help for recruiting. Here are the top five reasons why:

1) You Never Have Enough Proactive Time. As an entrepreneur, you are always battling dividing your efforts into proactive time (where you direct the activities through your own energy) versus reactive time (where you are reacting to people and forces around you).  With the inflow of real-time information and people coming at you from all sides and demanding your attention (employees, investors, customers, etc), it's hard to find enough proactive time in the day.  Recruiting is a proactive exercise.  It requires effort and energy from the entrepreneur to generate candidate flow, meet candidates, vet them, check references.  It is therefore important to have an outside force push you to react to candidates and help you prioritize the recruiting effort, just as your VP Sales is pushing you to prioritize sales and your VP Marketing is pushing you to prioritize marketing.

2) Hiring Inexperience.  Most entrepreneurs are first time CEOs or even second time CEOs who simply do not have a lot of experience hiring, particularly hiring the particular executives they're hiring for (Try this exercise - ask your favorite CEO/entrepreneur how many times they've hired a CFO. Most never have but even if they've done it once or twice in the past, are they really now an expert at it?).  Like anything else, hiring is a science.  A recruiting friend of mine likes to say, "interviews are inquisitions, not discussions".  Too many entrepreneurs don't actually know how to interview well.  Further, they're not experienced at assessing their current human capital needs, analyzing the gaps of management team members, and then understanding the market and how to fill the gaps.  Good recruiters are invaluable in this regard.

3) Shallow reference checking.  Busy entrepreneurs and busy VCs typically do cursory reference checking when making even senior hires.  They allow themselves to be swayed by their own conviction, let the candidates spoon feed them their top fans from past jobs and ignore the opportunity to push for a deep understanding of candidates' histories and claims.  When I make an investment in a company, I typically do 8-10 reference checks and get a wide variety of perspectives from people who have worked with the entrepreneur in the past and seen them in a range of different situations.  It's hard to have the discipline to replicate this thoroughness when making a senior hire, particularly when trying to move quickly in a competitive hiring market (see "You Never Have Enough Proactive Time" above).

4) Quarterbacking the Selling Process.  Many hiring managers don't realize that the due diligence process for a candidate is as thorough, if not more so, than your due diligence on them.  The best candidates have choices and are sought after.  Even though you are deciding whether to "buy" over the course of a series of interviews, you need to be in a position to sell every step of the way.  "Everyone's trying to be the coolest place to work," observed one Stanford junior who is being barraged with job opportunities.  Recruiters can be very helpful in quarterbacking the selling process - proactively surfacing objections and handling them with data and follow-up conversations, linking candidates to the right people at the right time in the process.

5) Focus on closing.  Closing candidates in this competitive a market is very hard.  Counter-offers, compressed timeframes and personal considerations all get in the way of smooth closes.  Again, if you don't have alot of proactive time available to you (and who does?!), there's great benefit to having a focused closer.  Further, I have found having an intermediary helps tremendously with the negotiations.  A candidate will be unafraid to tell a recruiter what it takes to get the deal done, and a tough back and forth with the help of an intermediary can avoid bad feelings aftewards between two principals that will need to work together as a team when the dust settles.

Too often I hear entrepreneurs say, "I'll work my network for a few weeks and then we'll hire a recruiter."  Many VCs are over-confident about their own recruiting prowress and will tell entrepreneurs to wait until they talk to their partners and surface a few great candidates from their network.  The problem, of course, is that everyone gets busy and distracted. A few weeks turns into a few months, a few candidates get turned up and interviewed but then discarded, and finally when the network comes up dry, the group reconvenes and decides to hire a recruiter.  Now the recruiters need to be selected, interviewed, reference checked, negotitated with and ramped up - causing more delay.  By the time you get around to getting the recruiter ramped up, the board and CEO feel frustrated that they are already behind.  To be clear, not all recruiters are created equal and some are a waste of time and money. But if you can find a good one, don't let them go. 

Paul English, cofounder of Kayak, is a truly gifted recruiter and there has been alot written about his approach to hiring.  If you can be that exceptional, perhaps you don't need a recruiter.  And, believe me, the price you pay for these folks feels exorbitant, particularly if you are in the scrappy, lean start-up phase of development.

My bottom line advice is to just bite the bullet and hire a recruiter now. The difference will cost you an incremental $50-100k, but everyone knows hiring an "A" has a massive positive impact as compared to a "B" - and that impact is compounded if it can be achieved 3-6 months sooner.

What if it’s 1996, not 1999?

In May 1996, Open Market completed a successful IPO and more than doubled on the first day of trading, ending with a $1.2 billion market capitalization.  We had recorded $1.8 million in revenue the year before. 

If investors observing this extraordinary phenomenon in 1996 were to have concluded that the technology market was in the midst of an unsustainable bubble, they would not have been wrong.  But if that observation led them to refrain from investing in the Internet sector, they would have missed one of the most stunning legal creations of wealth in history.

In 1997, a Charles River Ventures fund yielded a stunning 15x return, backing such superstars as Ciena, Vignette and Flycast.  Matrix had a fund in 1998 that yielded an eye-popping 514+% IRR.  The Internet bull market continued to run for four more years after the Open Market IPO, finally ending in the spring of 2000.  The average venture capital fund raised between 1995 and 1997 returned more than 50% per year.

Amidst all the recent talk of boom vs. bubble, there is a hue and cry that the current environment may smack of 1999.  But what if it’s actually more akin to 1996?  What if the fundamentals are good enough to support four more years of insane behavior before the music stops and the natural business cycle correction settles in?

The chart below from this week’s Economist on unemployment made me pause and consider this question.  As evidenced from the unemployment curve in the last economic cycle, these business cycles can often last 4-5 years.  2009 was the trough year of the most recent business cycle – and a deep trough at that.  2010 was a year of firming and climbing out of a hole, but the tepid IPO market and general macroeconomic malaise seemed to linger until late in the year (similar to how 1995 felt).  2011 is the first year where it feels like a real boom – much like 1996.  Employment lags economic output and is an admittedly imperfect indicator, but if you continue the analogy, it may be that the next 4-5 year boom cycle lasts until 2015!

Consider the following:

• When bellwether players go public (such as Netscape in 1995), there is a massive rush of capital and companies that follow.  Facebook will likely go public in 2012 and be valued in the $50-75 billion range.  This IPO and others like it (e.g., Groupon, Zynga) will create tremendous liquid wealth for a number of people and institutions who will likely pour that wealth back into the start-up ecosystem.  That liquidity flowing back into the start-up ecosystem will arguably fuel the boom.

• Macroeconomic choppiness is holding back more dramatic market euphoria.  Tsunamis, Middle East crises, government shutdown threats and a looming budget deficit are all dampers on the market.  But if some of these dampers clear out – if there is a period of reasonable international stability,  if a divided US government can strike another fiscally responsible deal for the upcoming budget year and begin to deal with some of the long-term, fundamental drags on growth, then the markets will become even more euphoric.  Remember, it wasn’t a straight line between 1995 and 2000 – there were a series of macroeconomic crises on the domestic front, such as a near government shutdown (sound familiar?) as well as international crises, including the Mexican debt default, Russian currency defaults and the Asian market crisis.  Let’s not forget that Time Magazine featured Alan Greenspan, Rob Rubin and Larry Summers on the cover in February 1999 with the headline:  “The Committee to Save the World.”  At times, this period saw pretty grim macroeconomic trends, while the Internet continued to boom in the trenches.

• Thanks to recent decades of strong growth, the combination of China, India and Brazil have GDPs that are 4x the size and impact on the global economy as compared to the 1990s (see chart below).  Demand from these, now larger, economies are having a very positive effect on the US tech market. They are gobbling up mobile devices, PCs, routers and other technology gear at a rapid rate.  This powerful source of economic demand didn't exist 15 years ago. 

 

• All the existing technology players are awash in liquidity and all the numbers are bigger this time.  There are eight US-based global technology companies with market capitalizations of greater than $100 billion (Apple, Google, Oracle, IBM, Microsoft, Intel, HP, Cisco).  There are a handful of companies that are very well-positioned, growing fast and could be the next $100 billion players (Amazon, Dell, Netflix, EMC, VMWare, Salesforce.com and Baidu come to mind). These companies either didn’t exist in the mid-90s or are in infinitely stronger positions than they were 15 years ago.  Internet usage, mobile phone usage, advertising dollar spend – all have grown enormously over the last 15 years to provide a stronger foundation underneath the latest boom.  See the chart below, which will only explode further when updated for more recent figures that will take into account Internet access via mobile phones.

The point here isn’t to be Pollyannaish.  I recognize that we have major structural issues in the global economy and they are perhaps more daunting than they have ever been.  And the recent run up in the stock market has many arguing that the bull market won't last much longer.  If oil soars to $150 per barrel, a few more soverign nations default on their debt obligations and gridlock persists in Washington, we could be looking at another recession as soon as 2012.

Yet, with entrepreneurship on the rise, with this generation of young people (“the Entrepreneur generation”) surging in their use and interest in technology and digital content, with some of the positive fundamental forces in innovation, it may just be that the music may not stop for another 4-5 years.  Wouldn’t that be something?

Board Meetings vs. Bored Meetings

I have been thinking alot about start-up best practices.  There has been a great deal written about how to pitch VCs and how to drive towards product-market fit, but there is relatively little out there about managing your board.  I spent a very modest amount of time on it in my book and there have been very few good blog posts on the topic.

Yet a well-functioning, well-managed board of directors is incredibly critical to a start-up's success.  Whether your board is full of VCs, angels, outside directors or a blend of all three, learning how to effectively manage your board is critical to your start-up's success and your personal success as an entrepreneur.

One of the best books on the topic is the somewhat obscure Board Room Excellence by a wise old start-up lawyer I worked with many years ago, Paul Brountas.  I send a copy of the book to every CEO I invest in and it gets rave reviews.  With a dozen years of of board work under my belt, here is the play book I try to encourage my CEOs to follow in running the board meetings.

First, the preamble - what happens before the board meeting:

• Materials get sent out in advance, typically 2 days.  The materials contain:  CEO's overview, a briefing on the one or two key strategic issues that will be the focus of the meeting, financial and functional updates from each of the executive team members and the overall key operating metrics for the business.
• The CEO sends a cover email along with the materials summarizing the one or two key strategic issues and soliciting board feedback for additional issues, observations or reactions to the material in advance of the meeting. 

Then, during the meeting, the agenda flows as follows:

• The CEO begins alone with the board for 30 minutes where the CEO provides a one-page summary of the business and the key issues from their standpoint.  I often suggest presenting this in a "Red/Yellow/Green" format - what's going well, what's making you nervous, and what's not going well.  The best one-page summaries are very brief - hence the one page rule - and help focus the board's energies as well as provide a window into the CEO's priorities, thinking and "stay awake" issues.
• The CEO then invites the CFO in and perhaps members of the management team to provide summary functional and financial updates.  Because the materials were distributed in advance and each board member has read the materials, it's more of an interactive Q&A than presentation.  This portion of the meeting lasts 30 minutes.
• The CEO then invites members of the management team to join in a discussion on the one or two key strategic issues that will be the focus of the meeting.  The board has read the preparation materials in advance and so not every bullet on every slide needs to be read.  Often this is an opportunity for the management team members to present materials and get some board exposure.  The CEOs frame the  issue, present a recommendation as to how to proceed alongside their team, and then ask the board for help and guidance.   Ideally, a board decision is made at that point or in the private session that follows.  This portion of the meeting lasts 60 minutes.  The key issues may be approving the annual financial plan, the product roadmap, a briefing on a major partnership, the new product launch, an acquisition, an international launch or a new marketing initiative. 
• Then, the CEO remains with the board for 30 minutes for an executive session.  This provides an opportunity for the board to reflect on the content of the meeting with the CEO and have additional dialog around the strategic issues.  In this session, for all of 5 minutes, resolutions are voted on, options grants are reviewed and previous board minutes are approved.
• Finally, the CEO steps out and allows the board to have a non-management session.  When I was an entrepreneur, I was initially uncomfortable with this idea of stepping out of the room so that the board could talk about me and "my company".  But I came to appreciate the value of the private session for both the board and the company.  It's an opportunity for the board to gain alignment on the key takeaways, direction to give the management team, and also a forum to make decisions around compensation and bonuses, CEO performance feedback, financing, and generally build a functional decision-making unit.  This session typically lasts for 30 minutes.

After the board meeting, ideally the following would occur:

• The lead director will summarize the points of board feedback to the CEO verbally or in writing in a follow-up call or email.  If the topic is a sensitive one, this may be done face to face.
• The CEO would in turn summarize their takeaways in a follow-up email to the entire board.  This ensures alignment and clear communication so that nobody is confused about what the CEO decided to do with the advice received - particularly if there were conflicting opinions around the room and a single direction needed to be selected.

The best board meetings are working sessions, not reporting sessions.   A key role of the board, among other things, is to contribute to the company and work hard to increase shareholder value.  If the CEO isn't making the board work and creating a meeting framework that gets the most out of the board, then shame on everyone involved.

Boards should evaluate their CEOs once a year in a formal, 360-degree review process.  One of my new year's resolutions this year was to do this across my entire portfolio and, although its been somewhat burdensome, it's been a very valuable exercise.

In turn, boards should evaluate themselves every year.  The board should ask itself a few simple questions, like:  How effective is the board?  Does it work as a decision-making body?  Is the CEO getting the most out of the board?  Only through a rigorous focus on self-improvement and honest assessment will progress get made on any of these dimensions.

So that's my download on board best practices.  Would love to hear your tips and add them to my arsenal.

A Call to Arms on the IPO Malaise and Inaction

I almost never agree with a single thing written on the Wall Street Journal editorial pages.  Yet, I found myself muttering "amen" to myself a few times as I read this morning's editorial on "Whatever Happened to IPOs?".  It is just stunning to me how little interest there seems to be on the part of a supposedly pro-business Congress and (more recently) Executive Branch on this one simple thing that would unleash innovation and jobs - watering down Sarbanes Oxley.

The IPO market has improved somewhat in 2011 and so perhaps that has taken some pressure off, but the fact is that the regulations and costs associated with an IPO are so overwhelmingly daunting for our young venture-backed companies that they simply avoid them altogether.  I used to hear from investment bankers that a company north of $100 million in revenue and consistently profitable can find a welcome public audience.   But recent conversations that I have had with bankers has carried a different, even more depressing message.

I am now being told by investment bankers that if a company's revenue is less than $200 million and the projected market capitalization less than $1 billion, they are at risk of being relegated into the "public company ghetto" - a sad corner of the public markets where you have no analyst coverage, no float and so no liquidity.  Your stock simply drifts down and down without any institutional support.  And so even $50-100 million companies in our portfolio and others - growing profitably and creating real value - look at the IPO as an unattainable goal.  I profiled a number of companies in New York and Massachusetts that fit this criteria in response to Bill Gurley's excellent piece (IPO Anxiety) from a Sillicon Valley perspective a few months ago.  But when I talk to CEOs and board members at these companies, they roll their eyes at the IPO prospect - it feels simply too unattainable.

Some complain that the source of the problem is the lack of mid-tier investment banks.  Others complain that the lack of analyst coverage is the issue.  In both cases, it's a cause and effect problem.  The cause is Sarbanes Oxley and the lack of volume.  The effect is that bankers and analysts follow the money.  If the rules were more relaxed, there would be more bankers and analysts, for sure.  This is the Information Age - analysis and bankers will follow opportunities.  They may not be as well known, but banks like Jeffries & Co, Needham & Co, GCA Savvian and now BMO are aggressively courting companies to help them go public and would be all over a more robust market for companies in the $300-600 million market capitalization range. 

In 2009, the National Venture Capital Association (NVCA) made this topic their policy focus.  They released a series of spot-on recommendations to help bring back the IPO market.  But then everyone got distracted with the financial crisis and (yet) more regulation related to SEC registration and battles over the tax treatment of carried interest.  I don't know if there have been any hearings or serious consideration on policy options to provide more liquidity for the IPO market since the NVCA's recommendations.  But clearly there's been no action.

It's time to beat the drum on this.  Surely we can find a group of members of Congress who are willing to match their rhetoric on fostering innovation will doing the hard work of loosening up Sarbanes Oxley.  The StartUp Visa movement has made terrific progress thanks to online, grassroots support.  Let's use that as a model for the IPO market.  John McCain's on Twitter (@SenJohnMcCain).  Send him a tweet and see if he's listening.

Mastering The VC Game - Paperback Edition

My book, Mastering the VC Game, is going to be coming out in paperback.  My publisher, Penguin's business imprint Portfoilo, has asked me to make some edits and updates for the new edition, which I have been dutifully working on.

For fun, I experimented with getting some community input on this task.  I posed a question on the popular Q&A site Quora:  "What should I tweak in my book, Mastering the VC Game, for the upcoming paperback edition?" and got some great responses.  It is yet another example of how rich the discouse now is in the blogosphere  on the start-up ecosystem.  I am working on each of them, as well as other feedback I've gotten from reviewers.  By the way, if you want to read some of the book for free, I have made the first 40 pages available here.

One thing I was struck by was that the start-ups I chose to profile in 2009 have absolutely exploded in popularity and value.  Baidu was worth $12 billion at the time of the writing.  It is now $41 billion.  Constant Contact, LinkedIn, Twitter and Zynga were other companies I profiled.  Each of them has grown in value from 2-10x since the time of the writing a short eighteen months ago.  I don't know if it makes the lessons from these founders captured in the book that much more valuable.  I think we sometimes need to spend more time studying the lessons learned from start-up failures and perhaps this is something I will devote more energy to in the months ahead.

So, stay tuned for news about when the new release will be coming out.  In the meantime, I'm sharing this funny cartoon that Andy Cook of Rentabilities was kind enough to have drawn up and sent to me.  It brings to life the concept of "putting money to work" that I tweak VCs for in the book.  The only thing I don't like about the cartoon is that the VC is wearing a tie - very unrealistic nowadays...

Ten Predictions for 2030

I spent this weekend with my two sons in Ft Myers, Florida as part of our annual pilgrimmage to the Red Sox spring training camp.  While not chasing after foul balls (thanks, Youk!) and autographs, we spent some time talking about what the future might look like.  We ended up making a provocative list of what we called “10, 2030” – ten predictions for the year 2030.

For context, my sons are 8 and 11.  Looking back 19 years ago (1992), I realize that I had my first cell phone, dial up access to bulletin boards, a love affair with email, and was doing consulting for AT&T on Apple’s first mobile computing device, the Newton.  In short, nearly 20 years ago, the fingerprints of the future were evident in the present.  Similarly, my sons are seeing fingerprints of the future in what they see, read and hear about today.  Trying to focus on the right things to extrapolate off, and having some fun with it, provided us with great entertainment.

 So here are their top ten predictions for the year 2030:

1. Two out of three of my children, as a reflection of the entire US car market, will own an electric car (they are convinced oil will be a thing of the past, although according to the International Energy Association and The Economist, oil demand in the US will shrink only modestly in the next 20 years)
2. School classrooms will be converted into all digital environments where Individual student desks will be converted into desk/tablet computers with a touch screen per child linked to SmartBoards and the Internet with a host of applications available.
3. Advanced techniques in genomics will results in a cure for both cancer and ALS (others I’m sure, but those are the diseases my sons were most focused on due to our family history)
4. Super-fast, high speed trains will finally be installed on the Northeast Corridor, allowing Boston to NY travel to take 2 hours and NY-DC a mere 1.5 hours.  My sons seem to think magnetic technology is the state of the art.  I'm not sure where they got this factoid, but it sounded good to me.
5. Commercial travel to the moon will be possible and relatively common for super-rich thrill-seekers.  Sort of like private jet travel today.
6. Voice-controlled, self-driving cars will be prevalent.  Perhaps not even brought to you by Google.
7. No one will carry wallets any more – all functionality of a wallet (payment, coupons, identity) will be embedded in your mobile device
8. No wires anywhere – wireless power/electricity, wireless Internet, high bandwidth data will result in the taking down of telephone polls in large parts of the country.  A corollary to this one is that my sons don't think hardly any homes will have landline, wire telephones any more.
9. Hover boards will be sold commercially – still high-end devices, but useful for urban transportation as an alternative to bicycles.  This one struck me as a stretch, but they're quite convinced of it, and they haven't even seen this hilarious AliG clip.
10. A woman will be elected president of the United States.  I pointed out to them that there would only be four elections (not counting 2012 - sorry Sarah Palin) between now and 2030 for an American female head of state to be elected but they were bullish on this one as well.

Here were a few that we discussed but were ultimately rejected as plausible, but not likely by 2030:

1. Humans landing on Mars
2. Hover cars (i.e., cars that floated above roads at high speeds)
3. Cars that converted into airplanes
4. Home robots that do household chores – dishes, laundry, changing diapers
5. Life discovered on another planet
6. Electronic ink on flexible, paper-thin screens that mimic a book – but, like a Kindle, download wirelessly and electronic

At one point, I mentioned to my sons that I might blog about their predictions because I thought they represented an interesting window into the future.  My oldest got concerned and objected, "But Dad, what if we want to invent some of this stuff and people steal our ideas?".  And that's when the lecture on execution began...

Figuring Out FourSquare

I had the pleasure of teaching a new case at HBS yesterday on foursquare that I co-authored with Professors Tom Eisenmann and Mikolaj Piskorski as part of Tom's new course "Launching Technology Ventures".  Foursquare executives Dennis Crowley, Naveen Selvadurai and Evan Cohen were kind enough to allow us to interview them in preparation for the case, which framed some of their current key strategic issues and looked back on the choices they made in the early days to draw pedagogical lessons of lean start-up best practices, building a platform business, network effects and running monetization experiments.

The foursquare team was consumed this week with SXSW preparations, but we were fortunate to have as class guests Charlie O'Donnell, who wrote the original blog post on foursquare that got many in the community excited about the company, and Andrew Parker, who was an associate at Union Square Ventures at the time of their Series A investment. 

As I did with the class a few weeks ago when Fred Wilson visited, I asked the students to pull out their phones and tweet throughout the class.  You can see the rich "dialog behind the dialog" here, using the Twitter hash tag #hbsltv.  Here were some of the takeaways I had from the class discussion framed around three major questions I posed to the students:

1) Why did foursquare succeed as compared to the same founder (Dennis) in a similar venture (Dodgeball) in a different era and as compared to other teams pursuing LBS services in the same era?  

The students concluded that the context around a venture matters tremendously - that smart phones, the explosion of apps and social networking all were important enablers that allowed foursquare to succeed at this particular moment in time.  At the same time, the foursquare team was incredibly skilled at applying lean start-up best practices, specifically:

• Product-obsessed founders:  both Dennis and Naveen were consumed with the product.  Always interacting with users in bars and over Twitter, thinking less about strategy, analytics and monetization and focusing more on a great user experience. 
• Hunch-driven:  they had deep domain knowledge and didn't need outside studies or market research to guide their prioritization.  One of the key takeaways that both Charlie and Andrew emphasized to the students was to be power users in whatever area of focus they choose to develop those instincts.
• Minimum viable product:  they didn't wait years and years to perfect the product but instead got it out there to solicit user feedback.
• Modest burn:  the company only raised $1.35 million in its series A financing and kept the burn rate at less than $100k per month to make he money last.  Dennis wrote a great post at the time of the financing that showed just how product obsessed he was, even after taking the seed money.  There's no bravado or BS - just a list of the great features they're going to roll out as a result of having the extra capital.

2) What was the magic of the foursquare system that drove rapid adoption that so many other consumer Internet companies fail to achieve?

• Game mechanic - students really honed in on the playfulness of the service, both the entertainment value and the addictive nature of competing for badges and mayorships.
• NYC launch - the fact that the service started in such a perfect venue gave it great advantage - a highly concentrated, very social community.
• VC validation - having Fred Wilson invest and promote the company helped provide it credibility with an insider crowd that may have provided some strong tailwinds.
• Win-win for all constituents - unlike many services, the students understood a key insight about foursquare:  the local merchants make the service.  The fact that merchants are so incented to promote, discuss and reward consumers creates a positive feedback  loop that transcends the power of a consumer-only service.
• Online - offline combination.  Another aspect of the magic of foursquare is that it is not an online only service.  In fact, the ability to drive consumers to actually walk into local venues is a special dimension of the service.  As one student pointed out:  "Facebook tells me what my friends are doing.  foursquare tells me where they are and where I can meet them."  This is a unique and powerful aspect of the service.

3) Once a company achieves product-market fit and starts to scale, how do their priorities, and burdens, shift?

• Raising money, scaling the team.  A rich discussion ensued about what it means to raise big money.  When foursquare took $20 million in venture capital at a reported valuation of $100 million, suddently they had transformed the company from a lean, product-obsessed start-up to a company that would need to generate tens if not hundreds of millions of dollars in cash flow to justify a billion dollar valuation.  A product-obsessed management team suddenly had to transition to become an operational scale management team.
• Monetization.  Consumer Internet companies have to decide when they begin to monetize - as part of the lean start-up experimentation or only after they achieve enough scale to attract partners and advertisers.  But it's not a binary decision.  Foursquare has run monetization experiments from the beginning, but to justify the big valuation they will have more pressure to show real financing results, perhaps at the expense of the user experience.  It takes a strong founder to resist that temptation (think Jesse Eisenberg playing Mark Zuckerburg in "The Social Network", sneering:  "No advertising.  Advertising isn't cool.")
• Vision/Becoming a platform.  What does the company want to be when it "grows up"?  To be a generation-defining company and enter the ranks of Facebook and, arguably, Twitter, foursquare needs to evolve from a great application into a platform.  But becoming a platform company requires a whole different approach and set of priorities.  Do you build out your own features or expand your APIs and invest in supporting third party developers to build applications to your platform. One of the students had coincidentally tried to work with the foursquare API to develop an application and complained that it was very rudimentary and limiting relative to the Facebook and Twitter API.  

The verdict?  I ended the class by polling the students - who would buy foursquare stock at a $200-250 million valuation (my very rough estimate of the current trading on the secondary market) and who would sell?  One third of the students were buyers at that price at the end of the class.  Two thirds were sellers.  One student pointed out in a tweet that the voters were unfairly negatively biased because only 10% of their classmates had even tried the application and, besides another tweeted, 3/4 of HBS students apparently wanted to sell Amazon short in 1998!  Another student tweeted that if there was even a 3% chance that the company could be a $10 billion company, it was worth buying at $200 million.  Now there's a future venture capitalist in the making!

Thanks again to the foursquare team for letting us write the case and adding to the HBS community's intellectual capital.

Fred Wilson comes to Harvard Business School

It was a treat to host Fred Wilson of Union Square Ventures at Harvard Business School today - his first time attending a class at the school.  Fred, as most readers of this blog know, is a venture capital legend in the making and the investor in some of today's leading consumer Web properties, including Twitter, Zynga and Four Square [Fred's post on his visit can be found here].

Fred and I had a discussion about lean start-ups and pattern recognition with the HBS students in Professor Tom Eisenmann's class "Launching Technology Ventures".  If you want to see some of the Tweets that came out of the class (imagine a professor encouraging students to grab their smart phones and live Tweet in class!) you can check them out here (#hbsltv was the hashtag).

A few takeaways from our session that I thought were particularly insightful:

• Early on in a start-up, entrepreneurs should be hunch-driven more than data-driven.  If you are only data-driven, the risk is that you will move too slowly.  It's more important to have a hypothesis about what might work and what might not work and then see what happens in the marketplace to prove or disprove that hypothesis.
• Lean start-up as a methodology or approach is very useful, but isn't a guarantee for success by any stretch.  Think of the methodology as a machine.  If you have garbage inputs, you will still have garbage outputs.  There's no substitute for good strategy, great entrepreneurs and a very large market opportunity.
• When considering when to monetize your new product/service, think carefully about whether the monetization strategy actually improves the service or is a distraction.  Banner ads on Facebook are a distraction (as Zuckerburg supposedly said in the movie Social Network, "No ads. Ads aren't cool.")  But, for example, on Etsy if someone pays for a product, it inspires producers to create more products.  Thus, the monetization is harmonious with building the service.
• If you are going to fail, and certainly with more start-ups being created and seeded we will see more failure, be sure to fail gracefully.  How you handle yourself as you unwind / seek a soft landing will reflect heavily on you and will cement your reputation.
• Don't worry about whether you are building a feature, a product or a company.  Build something great, have huge passion for it, engender affection with a large customer base, and let the rest follow.
• If you get traction, transform your company into a platform.  The most valuable companies are those where third parties help you grow by plugging into your services like a utility.
• VCs don't make companies successful.  They can believe in and support a company, but ultimately the entrepreneurs make or break the company's success and don't let anyone (particularly an egotistical VC!) imply otherwise.

As we ended the class, we tried to inspire the students to "go for it" and become entrepreneurial.  I am always pushing students to consider if now is the right time for them (see my recent blog post:  "Should I become an entrepreneur?") and pointed out that this was a time in their lives where they could afford taking more risk.  Once they get married, have kids, buy a house and get a mortgage, it's a different ballgame.  Fred quoted a friend who once told him there were three addictions in life:  "calories, heroine and a paycheck".  If you can break the last addiction, you are well positioned to become a potent entrepreneur!

 

Inbound Marketing Comes To Health Care

The Wall Street Journal's article today about the existence of "alcoholism genes" and what the future might bring ("imagine you go to your doctor and say 'I'm drinking I need help.' and they do a blood test and, if you qualify [based on genetic markers], they give you medicine the next day.") is a part of a larger trend that will radically change the world's health care system.  With a nod to my friends at Hubspot, I'll refer to this future phenomenon as "inbound marketing comes to health care".

First, some background.  The cost of mapping your genes is falling rapidly.  Today, you can get your genes mapped and analyzed for $10k.  In 3-5 years, that price will fall to $1k.  Harvard Medical School Professor George Church, one of the great pioneers in this field, observed recently to one of my partners that, "people will spend $10k per year on insurance but over a 70+ year lifespan are not yet comfortable spending $10k for their genome to be sequenced." As the process gets cheaper and the data and analytics gets better, that will change.  I'd be shocked if you, dear reader, did not have an analytical report in your files somewhere in 5 years about your personal genome and insight into its health implications.

And that gets me to the concept of inbound marketing.  Inbound Marketing (as captured nicely in the book by Dharmesh Shah and Brian Halligan), is the notion that the new era of marketing is about pull, not push.  Rather than producers pushing their products onto consumers, consumers have the tools and means to show up at the producer's door "inbound" and identify their needs and interests.  

It's become very clear how this technique applies to products - consumers research their needs by searching this huge information database in the cloud called "Google" and find what products and services might serve their needs and proactively contact and, eventually, purchase those products.  This technique is why many companies invest so much money in search engine optimization (SEO) and search engine marketing (SEM) - a business that has grown to tens of billions of dollars and fueled Google's meteoric rise as one of the most successful companies and global brands in business history.  Businesses are redirecting their tens of billions of "push" marketing dollars  into other mechanisms that set themselves up to be found by intelligent, informed consumers.

Now, let's go back to health care.  Imagine that in 5-10 years that tens or even hundreds of millions of people have their genomic data stored in the cloud.  Imagine that this data can be indexed, analyzed, parsed, sliced and diced.  And imagine that it is very, very secure.

What might happen with that kind of large-scale genomic data available in that format?  Inbound marketing.  Rather than pharmaceutical companies pushing drugs through their large sales force, they can access this database and alert consumers as to what drugs might fit what genomic profile.  Rather than hunt for clinical trial candidates in hospitals throughout the world, drug companies can email the relevant 1000 patients that precisely fit the indication they would like to test. 

Let's make this very personal.  My father-in-law recently died of ALS.  His older brother also died of ALS a number of years ago.  Thus, there is a reasonable chance that my wife's family has some genetic predisposition to ALS.  In today's health care environment, where genomic information is expensive and sitting in silos, there is nothing much we can do about it but wait and worry.  But someday in the future, perhaps as soon as 10 years from now, we will have the opportunity to opt-in to a service that will alert us via email or text when ALS drugs that might address this particular issue enter clinical trials.  Or perhaps even approved by the FDA.  We might all register our genomic data into this service so that we can receive alerts and information about any range of insights or treatments that might be relevant to our personal make-up.  This is "personalized medicine" in the extreme.

One of our portfolio companies, Predictive BioSciences, is pioneering a urine biomarker technique - pee in a cup, and Predictive will tell you if you have cancer.  In the future, we might all be swabbing our cheeks, peeing in cups, and pricking our fingers to tell us much, much more.  And when that information is available to our trillion-dollar health care infrastructure, imagine the possibilities.

Should I Become An Entrepreneur?

When to become an entrepreneur is a common quandary for many.  For whatever reason, this issue has come up a great deal recently (recession-driven workforce dislocation?), so I thought I'd share a few thoughts that might help frame this critical decision.

I have concluded that being an entrepreneur is an irrational state of being.  If human beings were purely rational, evaluative, value maximizing individuals (see HBS Prof Michael Jensen's paper on self-interest and human behavior), they would not start companies.  If they sat down and did the expected value calculation by laying out the probability-weighted outcomes of being an entrepreneur as compared to taking a safe job, it would not pencil out.  

Yet, entrepreneurship is not simply a rational journey.  It is one that is defined by passion and personal satisfaction that transcends purely financial analysis.  And, of course, there is always the hope for the big payout, no matter how long the odds.

Despite popular wisdom to the contrary, age is not a major factor in the decision to start a company.  The Kauffman Foundation reports that the median age of founders is 39 - right at the midpoint of a typical professional career - and 69% are 35 or older.   Another study by Washington University professors of 86,000 science and engineering graduates showed that age was not a significant predictor of becoming an entrepreneur.

So when should you become an entrepreneur.  Here are the kinds of questions you should ask yourself:

1. Do you have an idea that no one can talk you out of?  When you bounce your start-up idea off your spouse, friends and trusted advisors, are they able to raise enough objections that you begin to doubt whether the idea has merit.  Getting honest, objective advice can be hard because the people you are likely to go to care about you and may be afraid to tell you what they really think for fear of offending you.  Thus, you need to get feedback from objective parties (e.g., advisors, experts, prospective angel or VC investors with whom you don't have a deep personal relationship).
2. Do you have a partner you trust with complimentary skills?  Starting a company is a lonely adventure.  Having a partner that you can trust and whose skillset and experience is complementary to yours can be a huge functional and emotional benefit.
3. Are you prepared to endure with modest or no salary for a few years?  Founding a company often means making personal sacrifices and below-market cash compensation.  All the talk about "lean start-ups" (which I'm a big fan of) sometimes obscures the practical reality of what it means to eat through your personal savings. 
4. Are you bored with your current work environment/life situation?  There is nothing boring about being an entrepreneur.  More apt adjectves might include stimulating, engrossing, obsessive, exhilarating, nerve-racking - but not boring.  If you are tired of viewing your work as a chore and if every day is a bit of a grind, then entrepreneurship is for you.  I find that the intrinsic motivation behind an aspiring entrepreneur is sometimes the simplest - because it's fun.  Seeking fun can transcend all other factors. 
5. Do you perform best in the absence of structure?  In my book, Mastering the VC Game, I describe a metaphor for the three stages of a start-up:  the jungle, the dirt road and the highway.  In the earliest stages of a venture - the jungle - there are no clear paths available and the skills required are to thrive in the midst of the chaos.  For those who possess that makeup, being a start-up executive is an excellent fit.  But for those that like clear paths with little uncertainty and a great deal of structure - the highway - an early-stage venture will feel like a very uncomfortable environment.

Reflecting on these questions, I find it intriguing to reflect on what kind of environment - either from the perspective of parents raising their children or policy makers thinking about encouraging entrepreneurial ecosystems - can be created to foster more entrepreneurship?  HBS Professor Noam Wasserman is writing a book called Founding Dilemmas which is coming out later this year (I've read early drafts and believe it will be a must-read for entrepreneurs).  In it, he quotes career guru Dr. Tim Butler who points out that signals from parents, mentors and local leaders have a large influence on whether people chose to become entrepreneurs.   “We receive very powerful messages [from those around us] about what’s important, what success is, what failure is, what counts for achievement and what doesn’t. "

Celebrating entrepreneurial success stories in our culture and putting folks like Steve Jobs, Bill Gates, Larry Page (the new Google CEO!) and even more accessible, local heroes on magazine covers and in front of audiences is obviously a huge factor.  Every college kid in America looks at Mark Zuckerburg and thinks, "Why not me?"  Why not, indeed?

follow me on Twitter:  www.twitter.com/bussgang

Walking Away From Liquidity

With big tech companies awash in cash, nearly every analyst out there is predicting that the M&A market will heat up in 2011.  At a (pre-blizzard) conference I attended today run by Gridley & Co, this theme was reinforced, with rosy predictions of an M&A boom.

If this boom comes to pass, everyone will cheer.  Yet a strong M&A market won't be a panacea for all.  It will cause good companies to face perhaps the singular hardest decision in their lives:  whether to walk away from an opportunity for positive liquidity. 

Two of my companies have just gone through this process.  In each case, a strong unsolicited offer came in that would have yielded "VC-like" returns (5-10x) and many millions for the founders and senior executives.  But in both cases, everyone around the table unanimously, courageously (and hopefully not foolishly) voted to turn down the offers and walk away.  Having just lived through two of these episodes in the last few weeks, and having lived through many others in the past, I thought I'd share a few observations on this classic conundrum.

When to sell a company is one of the hardest decisions a board and entrepreneur face, and it's a decision made even more difficult if there is a lack of alignment around the table.  If different investors have invested at very different prices, or if the entrepreneur has not made money before and this is their first shot, there can be greater tension inserted into a naturally tense situation.  For example, if the Series A investor has a blended average post-money valuation of $20 million across three rounds, they may be happy with a $100 million exit.  But the Series C investor who just invested at an $80 million post-money valuation would be bitterly disappointed.  Meanwhile, the founder who owns 10% is looking at a $10 million payday - a heady sum for someone who still has a mortgage and is worried about saving enough money to pay for her kids to go to college.

It's all very theoretical, of course, until an actual offer is put on the table and everyone starts to calculate their share of the proceeds.  There is no easy answer to help determine which path to pursue, but here are five considerations that can help an entrepreneur frame the decision:

1. Passion. Do you still love running the business? Does it feel like you can’t imagine doing anything else with your life? Do you still feel like you have something to prove or do you feel tired and worn out?  Do the problems in the business energize you or drain you?
2. Belief.  Do you still believe in the business’s potential? Does it appear that the major proof points are still ahead of the company?  Do you feel as if the value will be meaningful greater after you have achieved a few more milestones - and that those milestones are well within reach?
3. Economics.  How much is the offer as compared to what it might be a year or two from now if the company were to successfully execute on its plan and hit its numbers? What might the company’s value be in a year or two if it falls short of its plan by 30 percent? How would you assess the probability of either path and then calculate the expected value of holding on for a few more years as compared to taking the money off the table by selling now?
4. Dilution Risk.  Does the business require more capital and, if so, can that additional capital be raised easily at a reasonable (and therefore not too dilutive) price?  What must the business be valued at after the additional capital to be equivalent to your dilution-adjusted payout today?  In other words, let's say you own 10% today and can sell for $100 million.  If your post-financing ownership will be 5%, then you are betting that you can sell for more than $200 million down the road.  Risk adjust this number and take into account the time value of money, and then assess the trade-off.
5. Team.  Do the people around you (i.e., your management team, your VCs, your family) want you to sell out or are they encouraging you to keep going?  When you look your team in the eye and tell them they are walking away from $x million each, do they stiffen their spines and project bravado - or do they look at you longingly, with regret?

It can be hard for VCs and entrepreneurs to be aligned in these situations, because the VCs have the luxury of a portfolio approach to investing in start-ups - they are looking for home runs that can move the needle on their funds.  Entrepreneurs, on the other hand, have no such luxury.  This may be their one shot to change their lives and their family's lives.  

I have found that the entrepreneurs who have made good, not great, money in the past are more likely to be both hungry and risk tolerant enough to go for the big win.  Having saved enough money to pay down their mortgages and pay for the kids' colleges, these entrepreneurs are willing to take more risk to make the kind of money that can really change their lives.  That sweet spot tends to be $2-5 million in liquidity.  More and more, I have seen investors show a willingness to allow partial liquidity for founders who have built enough value to raise money at high prices to soften the sting of walking away from an outright sale.

So the next time you hear about how robust the M&A market is going to be, remember that the real trick is for founders and boards to find that right balance between taking advantage of the robust market, and putting their collective heads down and focus on trying to build a big company. 

Top 5 Great Apps in 2010 - Great Companies in 2011?

Thinking back on 2010, the smash hit of the iPad and the continued proliferation of great iPhone and Android apps was one of the most striking aspects of the year.  As a user, I have fallen in love with five apps and find myself using them almost daily.  Millions of others are discovering these apps - and others like them.

But the gap between product success and business success is a large one.  There's an old saying in the venture capital business:  "Fund great companies, not great products or great features." The key question for 2011, therefore, is whether these great apps will mature into great companies.  Will they cross the chasm and move beyond the early adopter market into the mainstream market?  Will they build sustainable business models?  Twitter and Facebook were in a similar position a few years ago - great utilities that initially felt niche, and are now on their way to becoming great companies (OK, some of you will argue that Twitter still has a ways to go, but you have to admit, turning down $1 billion from Google in April 2009 is looking like a good decision in retrospect given the latest round of financing, led by Kleiner Perkins, at a $3.7 billion valuation).

So, here are my picks for the Top 5 Apps of 2010 that will face the challenge of becoming great companies in 2011:

1. Flipboard.  If you aren't addicted to the Flipboard app on the iPad, you can't consider yourself an information junkie.  Beautiful graphics and layout characterize this app, but what makes it brilliant in my opinion is they way it turns Twitter and Facebook into curated content channels.  I am naturally interested in reading the articles the editors of the New York Times and the Economist think I should read.  But I am also interested in reading the articles my friends are linking to in their tweets and posts - they are also relevant editors and curators for my interests.  The Flipboard business model is obviously still evolving and the leadership and backing of this company suggest they need to be taken seriously as a next generation content curation cum general information browser.
2. FourSquare.  I have long admired FourSquare and as part of my part-time duties at Harvard Business School, I decided to co-write a case on the company, which I will be teaching in a few months.  As part of this effort, I had the opportunity to interview the management team and learn more about the company's history and future plans.  The vision for the company is compelling and what appears in the application today is a fraction of the possible (Dennis Crowley observed that he has only implemented something like 20% of his 2004 NYU thesis on location-based services).  2011 will be a pivotal year for the company to turn some of their business model experiments into something scalable. 
3. Instapaper.  The only one on my top 5 list that isn't venture-backed (as far as I know), I love this app.  It allows users to bookmark things to be read later and then turns those links into an attractive content layout - in effect, your own newspaper.  The benefit is immediate and obvious.  The long-term business model isn't  immediate and obvious to me yet, but perhaps it will emerge in 2011.
4. TweetDeck.  I am totally addicted to TweetDeck.  This leading Twitter desktop and mobile app claims to have millions of subscribers.  When I am visiting start-ups, I often notice employees have three apps open and running at all times - Google Chrome, Facebook and TweetDeck.  I use TweetDeck to pull in my Facebook updates so I can keep track of my friends and those I follow on Twitter in one app.  Again, 2011 will be a critical year for them to begin to scale their business model.  Twitter hasn't yet tipped mainstream but is well on their way.  TweetDeck is following close behind.
5. Disqus.  Another quirky pick, perhaps, but I think Disqus is awesome as a blog response tool.  I use it for my own blog and I love when I see it on others' blogs as it makes it so easy for me to respond via email off my mobile device and track feedback.  I don't know how they make money and I presume they're still in lean start-up mode given how little they've raised (only $500k according to Crunchbase), but as a user I'm finding myself as dependent on Disqus as I am on my blogging platform.

So those are my picks for great apps in 2010.  What are yours?  Will any of them  become great companies in 2011? 

Depressing Thoughts About Groupon’s Model

A great deal has been written about Groupon’s rejection of a supposed $6 billion offer from Google.  Most of the reports breathlessly describe the explosive revenue and customer growth the company has achieved in two short years and what a breakthrough the model represents (an example can be found in John Battelle's hagiographic blog post).  With over 40 million email subscribers, Groupon’s success is based on consumers responding to their daily deal emails, and sourcing high-quality offers that compel readers to respond. The story CEO and founder Andrew Mason told in his interview with Charlie Rose last week was that when they offered helicopter flying lessons in one of their daily email blasts, they sold 2,500 in one day. This compares to a business that had acquired only 5,000 customers in its 25 year history.

But haven’t we seen this movie before in the world of direct marketing? History has shown nearly every major new direct marketing paradigm sees impressive initial response rates, but depressing response rates over time. For example, when display advertising was innovative in the late-1990s (imagine websites without ads?), publishers saw click through rates in the 1-2% range, allowing advertisers to be charged a high cost per thousand impression (CPM) in the range of $35-40. Today, iMarketer and MediaMind report that display advertising click-through rates are 0.10 - 0.20% and CPMs of $2-3 – less than one tenth what they were ten years ago.  Email has shown a similar sharp decline over time. Average click through rates for the early years of email campaigns in the 1990s were as high as 30-40 percent. Today, they range from three to five percent, again, a 10x drop.

Groupon conversion rates, supposedly, are now in the three to four percent range. What will those same response rates to the same consumers look like in five years? Will daily deals follow a fundamentally different model than every other new direct marketing medium? The benefit of being only two years old is that you don’t have a lot of vintage data to analyze.

What has impressed me about e-commerce stalwarts like Amazon.com and Netflix is that they have stood the test of time and have grown ARPU (average revenue per user) over time.  Consumers continue to have an appetite for books and movies, year-in and year-out, and the volume of new content changes rapidly. In contrast, the merchants in my community and the ones I regularly do business with do not change all that rapidly.
 
That said, Groupon is building a huge consumer database, a massive set of merchant relationships and a super-talented management team. Just as Amazon and Netflix have innovated beyond their initial model, Groupon has the capacity to replicate these results. But if it the company is going to step into the multi-billion dollar winner’s circle, it will need to find a model that stands the test of time, and the reality of depressing response rates over time.

Frankly, I hope they figure it out. Now if you'll excuse me, I have to sneak in a trip to the local indoor skydiving place before the holidays...

Stop Avoiding Conflict

One of my favorite business books of all time is Patrick Lencioni’s “Five Dysfunctions of a Team”.  Like all books by Lencioni, it begins with a short fable in a corporate setting of a management team that is operating totally dysfunctionally.  Then, he provides a framework that analyzes the situation and draws out the general lessons as to why teams operate poorly together, and how to systematically combat it.  The pyramid below summarizes his advice.



Each of the layers of the pyramid resonate with me (which is probably why I have this pyramid printed and hung up in my office), but the one that I always come back to and reread is “Fear of Conflict”.  Again and again, I see management teams and boards of directors shy away from conflict.

It is quite natural for humans to avoid conflict.  In fact, our deeply programmed “fight or flight” instincts are designed to protect ourselves and run away when we sense danger.  Interpersonal conflict is a danger we all prefer to avoid as it makes us uncomfortable.  Your stomach gets a little queasy, your heart beats a little faster, and you think, “How do I get out of this situation?”.  So, you tell a joke.  You change the topic.  And you feel a sense of relief.

When I see this happening in management teams and in board rooms, it makes me uncomfortable because I know where it leads.  It leads to mistrust, simmering issues, politics and dysfunctional behavior.  Here are a few techniques I've found help address this issue, particularly in start-ups.

1. Building Trust.  The foundation for handling conflict productively begins with building trust amongst the management team.  It's easy to say, but particularly hard to do in a start-up when people have been slammed together quickly and are so crazy busy, that it's hard to stop and take the time to understand each other more deeply.  One technique I have found very helpful here is to conduct a facilitated, day-long offsite where each management team member takes the Myers-Briggs test to help surface how each party thinks,  processes information and makes decisions.  I did this with my management team at Upromise and again when we were starting of at Flybridge and in each case found it helped us understand each other at a far deeper level.
2. Annual Reviews.  It's easy to be running so hard and so fast that CEOs and boards forget to conduct systematic reviews where a broad range of feedback is collected and tough development issues are addressed head on.  I try to do this at each of my boards and at Flybridge, the general partners conduct 360 degree reviews of each other.  Done correctly, these can be emotionally draining, difficult but very productive exercises where a safe forum for brutal honesty and constructive dialog can be developed.
3. Systematic Post Mortems.  In my early product management days, I learned the value of the post-mortem - the process of gathering all the relevant team members into the room to talk about what happened after a product ships and why errors or schedule issues occurred.  Extending the post-mortem process into all business activities can be very valuable.  It allows a clinical, unemotional examination of what has happened, how everyone operated under pressure, and what process improvements can be made for next time.  Whether it is done post product release, when an executive team member departs because things didn't  work out, after a board meeting in an executive session, or after an investment goes bad, an analytical examination of what just happened is a useful exercise that forces all parties to address difficult issues.
4. Go Direct.  At Flybridge, we have developed a mantra for addressing issues amongst the partnership:  "Go Direct".  When one of us has a concern about how another partner is handling a portfolio company situation or evaluating a deal opportunity, we don't allow indirect conversations.  If two partners find themselves talking about a third partner, we stop the conversation and bring in the third partner so that the issue can be addressed directly, out in the open  rather than it festering behind closed doors.  I learned this lesson as an executive team member at a start-up that was not good at going direct.  The VP of sales would come into my office and complain that he wasn't getting good support from the VP of marketing.  Ten minutes later, the VP of marketing would storm in and complain that the salesforce wasn't properly executing on our strategy.  The entire executive team avoided going direct because it was uncomfortable, so we had false harmony in our Monday staff meetings and deep divisions the rest of the week.

Conflict can be stressful, draining and uncomfortable.  Yet, it is incredibly natural, healthy part of life, particularly in a start-up.  And creating a culture that can handle conflict effectively clearly has a positive impact on performance, as recent research has shown (see i4cp study: "Leaders With Low Emotional Intelligence May Be Depressing Bottom Line").

If you want to avoid your start-up feeling like a Soap Opera, try out some of these techniques, and let me know if there are others you've employed as well.

Time For "A Millionare's Pledge"?

There has been a great deal of attention paid to the efforts led by Warren Buffet and Bill Gates to their pledge to give awway at least half of their fotunres to philanthropy.  This so-called "Giving Pledge" has garnered the support of 58 billionares, each of whom has signed up publicly to the pledge.

I am no billionare and will never be one, but today's news that the Bush tax cuts for the wealthy will be approved by the Senate has got me thinking that perhaps it's time for a "Millionare's Pledge".  The form of this pledge might go as follows: 

I promise to give away to charity the incremental tax break I will receive from the extension of the Bush tax cuts.

Philanthropy is a central part of our family's life.  We try to be very supportive to a range of non-profits, including our synagogue, Facing History and Ourselves (teacher-training organization), Progressive Business Leaders Network (progressive policy), Endeavor (promoting global entrepreneurship) and many others.  I know of many other families like me who are philanthropically oriented and have very mixed feelings about the tax cut exension. 

The simple calculus, as I understand it, is to take 5% of your annual income (upper income tax rates would have gone back to 39.6%, up from 35%).  So if you make $200,000, that's $10,000 in incremental savings that you would direct to charity in 2011 and 2012 (and perhaps beyond!).  I know it's not nearly that simple with capital gains changes, estate changes, deductions, etc.  But let's keep it simple to make it easy for everyone. 

At this point, it doesn't matter whether you are for or against the extension of the tax cuts, the reality is that they will become law, so what should progressive, philanthropically-minded individuals do now that they have an unexpected windfall?

There are 371 billionares in the US, but 3 million millionares and 6 million taxpayers with income greater than $200,000.  Now that would be a movement.

Who's in?

A Tribute to Courage, Entrepreneurship, Grace

My father-in-law, Michael Doctoroff, passed away last week of ALS.  It's been a sad series of days in the Bussgang household and we are just beginning to recover and transition back into the real world.  I am finding that when you lose a loved one, it's hard to make the switch back into our frenetic, exciting, optimistic start-up world.  But, we are doing our best and I thought a memorial blog post would be somewhat cathartic.

My father-in-law was a remarkable man.  He was the middle child in a household with three boys, surrounded on both sides by over-achieving Harvard graduates (one became a judge, the other a successful doctor - the dream of every Jewish mother!).  Yet, he charted his own path.  Although on paper he had a marvelous career (corporate executive, professor, author of a management book - pictured above), in truth he never found his true professional calling until 16 years ago, at the age of 60, when he founded Trainers Warehouse out of his basement.

Don't let anyone ever tell you that you are too old to be an entrepreneur, too old to take the risk of starting your own venture.  My father-in-law worked alone and didn't take salary for years and years, eventually building the company into a multi-million dollar leader in the corporate training supplies market.   He raised no outside money, located the office 5 minutes from his house and employed his daughter - now president of the company - and wife as well as tens of others.  Even while battling ALS, he came to work every day to design creative products for trainers to bring fun and fulfillment into the workplace. 

Despite his entrepreneurial success, his career did not define him.  His relationships with his family and friends are what made him most remarkable.  He had an amazing relationship over the course of a 50-year marriage with his wife.  Their love for each other through his battle with the disease has been inspiring to observe.  He had three lovely daughters (my wife being one of them!) who have happy marriages and functional families as well (coincidentally, each of the three daughters married a college classmate).  And he was able to foster great relationships with each of his three son-in-laws - finding special ways to connect with each of us, despite our diverse interests (an entrepreneur-turned-VC, a scientist and an author).  I think it is the mark of a great man (in this case, in partnership with a great woman) who can create such a functional set of relationships across their entire family. Fostering close friendships was also paramount to his existence.  No less than five people came up to me at the funeral to tell me he was their best friend in the world.

In his final months, my father-in-law taught me a lot about grace and courage.  ALS is a horrible disease, slowly weakening your body while your mind remains sharp.  He was funny, irreverent and attentive to those around him to the end.  I don't think I'll ever forget the night he came over our house for dinner, a week before his death, when he drew a bone on his handheld white board (he could no longer speak) and motioned to my dog to see if he could get him to chase after it.  At Thanksgiving, he had his three year old grand-nephew chasing his wheelchair around trying to beat him in tic-tac-toe.

I feel blessed to have had him in my life.

IPO Anxiety - East Coast Version (part 2: NY)

Yesterday, I analyzed the Massachusetts IPO ecosystem.  Today, I look at NY. 

Unlike MA’s robust public company ecosystem, where I counted 33 companies with greater than $1 billion in market capitalization, I was shocked to discover how very few public companies in the Innovation Economy that exist in the Big Apple.  If you restrict the geography to 30-45 minutes driving distance and part of the “scene” (which encourages mingling and productive talent and idea sharing), you have to eliminate CA, IBM and Priceline.  I think that only leaves you with the following companies that have greater than $1 billion in market capitalization:

• AOL ($2B)
• Intralinks ($1B)
• TakeTwo Interactive ($1B)

I’m sure I must be missing a few, but my informal survey of NY VCs, bankers and entrepreneurs didn’t yield any others.  There are a few smaller public companies, like Travelzoo ($660M) and Medidata ($470M), but even the sub-$1 billion market cap list is uninspiring. Given the digital transformation of media and advertising, some may argue that the big media companies and advertising agencies should be included here and certainly they play a very important part of the NY ecosystem, but in terms of pure technology companies with entrepreneurial DNA and technology roots, it’s disappointing to see how few are in NY. 

That said, when you analyze the pipeline of IPO candidates, you begin to see a very different picture.  Not only is it quite robust – there are roughly 30 companies with estimated market values of greater than $100 million – but arguably full of companies that feel more promising and explosive than the MA companies.  The chart below is lifted from the Business Insider list, but I also cross-checked with AlwaysOn, Inc’s various lists and input from local members of the entrepreneurial community.

Rank	Company	Estimated Market Value (mn)	Estimated 2010 Revenue
1	TheLadders.com	$800	$100-120
2	Gilt Groupe	$750	$400-500
3	Everyday Health	$480	$120
4	FreshDirect	$300	$300
5	Etsy	$300	$30-50
6	Vibrant Media	$275	$125-150
7	Thumbplay	$260	$80-100
8	Yodle	$250	$70
9	SecondMarket	$250	$50
10	ideeli	$250	$150-175
11	Huffington Post	$200	$30
12	Tremor Media	$175	$60-70
13	Undertone Networks	$150	$65
14	Gawker Media	$150	$50
15	CafeMom	$150	$25-30
16	NextJump	$135	$20-30
17	Betaworks	$100	$0-5
18	Rent The Runway	$100	$20
19	Recycle Bank	$100	$10
20	Media6Degrees	$100	$20-22
21	Foursquare	$100	$0

As far as I know, none of these companies has yet registered to go public.  Everyday Health almost did, but then pulled out and raised a private round of financing instead.  Behind this list, there are tens of other strong NY-based start-ups with real revenue momentum (> $30m) and belong in the > $100 million market capitalization category.  Folks cite:

• 33Across
• Antenna Software
• BuddyMedia
• Clickable
• GLG
• LiquidNet
• MediaMath
• OLX
• Vostu
• Yext

The conclusion is that NY is missing, that robust public company ecosystem does not exist.  Unlike in MA, one doesn't see public company CEOs regularly mingling with their pre-IPO brethren at cocktail parties and industry gatherings.  If you fast forward two or three years, however, the NY-based IPO company pipeline appears quite promising – arguably more promising than MA’s – and bodes well if the investors and management teams have the courage to go all the way.  Then, the CEOs of these companies will need to heed the warning of many wise men and women before them who know that an IPO is not an exit, it’s a financing event.  The best is yet to come.

IPO Anxiety - East Coast Version (part 1: MA)

Bill Gurley’s excellent piece on Silicon Valley IPO Anxiety inspired me to take a companion look at the East Coast, particularly Massachusetts and New York, and evaluate the health of the local IPO economy and prospective pipeline.  Today, I'll cover Massachusetts; tomorrow, New York.

I first came across Bill when he was a Wall Street analyst and covered my company Open Market (IPO 1996).  I always admired his perspicacity, even if he didn’t like our stock all the time!  For purposes of this blog post, I am only focused on companies involving technology, whether software, Internet, health care or energy – which I’ll define as members of the Innovation Economy.  Note also that, for obvious reasons, I leave out any Flybridge Capital portfolio companies in my analysis.

Massachusetts

First, let’s look at my home state of Massachusetts.  By my count, there are 33 Innovation Economy companies with market capitalizations of greater than $1 billion (see chart below).  Some of these are important companies, leaders in their field, and full of great future prospects (EMC, Thermo, Genzyme, Akamai).  Others have seen slower growth, are a bit more tired, and may get gobbled up in the years ahead (Parametric, Novell, Progress).  A number of them are recent IPOs who are growing nicely and may become multi-billion dollar revenue companies in the years ahead (Acme Packet, VisaPrint, Athenahealth).  

Other recent IPOs, like Constant Contact ($720M), A123 ($960M), Insulet ($520M) and EnerNOC ($600M), are sub $1 billion in market cap, so not listed here, but are representative of a number of small market cap players in the community who have > $1 billion potential.  The headquarters of each company is within 30-45 minutes of each other, so the degree of talent concentration and social interaction is very high.  Further, acquisitions in the last 12 months such as Unica (IBM $480M), ATG (Oracle $1B), Netezza (IBM $1.7B), Phase Forward (IBM $685M) and Starent (Cisco $2.9B) show that there’s a vibrant M&A market for small cap technology companies in 2010 and will likely be a catalyst for talent to be recycled.

2010 Rank	Company	Market Value (mn)	2009 Revenue (mn)
1	EMC	$44,960	$14,026
2	American Tower Corp.	$20,730	$1,724
3	Thermo Fisher Scientific	$20,350	$10,110
4	Genzyme Corp.	$18,470	$4,495
5	Biogen Idec	$15,470	$4,377
6	Analog Devices	$10,490	$2,015
7	Boston Scientific Corp.	$10,290	$8,188
8	Akamai Technologies	$9,030	$860
9	Waters Corp.	$7,190	$1,499
10	Vertex Pharmaceuticals	$6,960	$102
11	Nuance Communications	$4,940	$950
12	Iron Mountain	$4,470	$3,014
13	Skyworks Solutions	$4,310	$1,072
14	Hologic	$4,190	$1,680
15	Monster Worldwide	$3,010	$905
16	Acme Packet	$2,800	$141
17	Bruker Corp	$2,540	$1,110
18	Parametric Technologies Corp.	$2,480	$1,010
19	Varian Semiconductor	$2,400	$832
20	Novell	$1,960	$862
21	Charles River Laboratories Int’l	$1,920	$1,203
22	VistaPrint Ltd.	$1,770	$670
23	Progress Software Corp.	$1,680	$494
24	Sapient Corp.	$1,660	$667
25	American Superconductor	$1,530	$316
26	Haemonetics Corp.	$1,450	$629
27	athenahealth	$1,400	$189
28	Cubist Pharmaceuticals	$1,370	$560
29	Parexel International Corp.	$1,170	$1,336
30	Pegasystems	$1,110	$264
31	GT Solar	$1,090	$733
32	Alkermes	$1,030	$178
33	LogMeIn	$1,050	$79

Yet, when you evaluate the pipeline of IPO candidates, the results in MA are less inspiring.  One interesting ranking comes from Business Insider’s list of the 100 most valuable private digital companies.  Although this is only one and skewed towards one industry sector, it contains only one company from MA in its ranks:  Brightcove.  In an informal survey of a number of Boston VCs and entrepreneurs, the same 10-15 names come up as IPO candidates in the next 2-3 years (the criteria I asked folks in my informal survey was to name companies growing fast, revenue runrate > $30m, profitable or converging on profitable and probably worth > $100M today).

They include (note – all estimates are my own judgment and highly disputable; for obvious reasons, I did not include any Flybridge Capital portfolio companies, so we are not investors in any of these):

• Brightcove ($50-60m)
• Carbonite ($60-70m)
• Communispace ($50-60m)
• CSN Stores ($300-400m)
• Endeca ($80-100m)
• Glasshouse ($90m) – registered for IPO  
• Globoforce ($80-100m)
• Hubspot ($25-30m)
• ITA ($150-200m) – Google acquiring for $700m
• Jumptap ($40-50m)
• Kayak ($150m) – registered for IPO
• Kiva Systems ($80-100m)
• Kronos ($700-800m)
• Litle & Co (>$100m)
• Name Media ($50-60m)
• Vertica ($25-30m)
• Zipcar ($130m) – registered for IPO

There are numerous divisions of public companies that historically resulted from acquisitions – like TripAdvisor/Expedia ($400-500m revenue), Shoebuy/IAC ($200-300m revenue) and Rue La La/GSI Commerce ($150-200m revenue) – but those are not included here as they’re not relevant to this analysis unless they get spun back out.

The conclusion?  There is a robust public company ecosystem in MA, which should serve as an inspiration and catalyst for other local private companies.  Strong public company talent is easily recycled at the most senior levels (see, for example, Akamai’s hiring of former Digitas CEO David Kenny as COO) and when you gather at networking events and see other CEOs who have taken their companies public, it is a wonderful inspiration.  

But, sadly, the private company ecosystem in MA is less inspiring, with only roughly a dozen private companies that could possibly be public companies in the next two to three years and only a half dozen with revenues of greater than $100m.

Tomorrow, I'll analyze the New York market, which yields a quite different picture by comparison.  

Tech-Business Divide - A Call To Arms

While Facebook founder Mark Zuckerberg’s decision to drop out of Harvard and move to Silicon Valley was a plot point in in the movie “The Social Network,” it looked like a watershed event to many in the local technology community. It was a call to arms for all who want Massachusetts to remain a competitive environment for entrepreneurs to build ventures that change the world.

Over the last five years since Zuckerberg’s emigration, there has been a transformation in the local start-up environment. The plethora of mentorship opportunities for entrepreneurs is mind-boggling — programs like TechStars and Mass Challenge, not to mention myriad business-plan contests. Despite these positive advances, though, the tech community is still less visible and engaged with the broader public in Massachusetts as compared with California, where tech executives Meg Whitman and Carly Fiorina recently made high-profile bids for statewide office.

In particular, there is a disconnect between the political system and the business environment, a disconnect that risks getting wider with time. It’s a natural outgrowth of the fact that the participants in the innovation economy — which includes biotech, Internet startups, and other tech-related firms — are often so consumed with building their businesses that they just don’t engage in our civic environment. And many of them view the local government as an irrelevant factor in their business.

This disconnect is also reflected on Beacon Hill, where so many movers and shakers walking the halls represent constituencies that have been active in state politics for generations. That’s not to say that these groups are not important, but it’s clear that the transformation in the local business environment has not produced much change in the local political system.

The transformation in the economy has been profound. Major technology companies like Microsoft, IBM, Oracle, and Google have acquired local companies and opened large offices here to tap into the local talent pool. Recently, Disney was seen scoping out space in Kendall Square to set up a research lab. Fourteen of the top 20 Massachusetts-based companies ranked by market capitalization and all of the top 10 growth companies are from the innovation economy — arguably a more concentrated industry sector than in any other state in the country. Interestingly, most of these companies did not even exist 30 years ago — they grew out of our start-up ecosystem that is so central to Massachusetts’ economy.

What can be done to bridge the civic divide between government and tech? Simply put, innovation economy leaders need to get more engaged in the local political scene. Business leaders who don’t think that the political system affects them are both naïve and missing the opportunity to affect real change. As one high-tech CEO observed to me the other day, “I realize now that if I’m not out there on the political playing field, someone else is playing my position!”

Groups like the Progressive Business Leaders Network (which I co-chair), New England Clean Energy Council, and Massachusetts Innovation and Technology Exchange are a good starting point, but need to elevate their impact on local policy. The need for better communication goes two ways: Mayors and state representatives need to get to know their innovation economy business leaders and learn how to help support their growth.

Right now, there is a mismatch between what our innovation economy start-ups need and what the employee base has to offer. Our unemployment rate is high, yet the job boards of local venture-capital firms show hundreds of job listings across their portfolios. Our companies desperately need more lab technicians, search engine marketers, online advertising salespeople, and software developers. How do we galvanize the public-university system to produce skilled workers that more closely match our innovation economy’s needs?  How do we tackle the mismatch between immigration reform, Washington-style, and immigration reform, business-friendly style - most glaringly evidenced by the lack of support still for the Start-Up Visa movement?

Facebook, Twitter, and other innovative forms of communication have had a profound impact on elections and public opinion. Now let’s find a way to engage the people behind those companies, as well as the next generation of emerging leaders closer to home, in transforming the local political system.

An edited version of this piece originally appeared in the Boston Sunday Globe