The Art of the Start

Ironically, I drafted the following post at the same time my friend, Jim Stamos, sent me Marc Andreessen’s recent post about the current writer’s strike in Hollywood Rebuilding Hollywood in Silicon Valley’s Image.

"Last week I posted a rather pointed polemic titled "Suicide by strike"
in which I argued that the big entertainment companies were acting
suicidally in picking a fight with the writers at precisely the wrong
time.

In this post, I more dispassionately outline my theory of why that’s the case, and what I think may happen next.

The writers’ strike, and the studios’ response to the strike,
may radically accelerate a structural shift in the media industry — a
shift of power from studios and conglomerates towards creators and
talent."

I would argue that the two businesses are eerily similar today and do hinge on the creative art, execution that "pierces the veil of disbelief" and branding/share of attention. I would also comment that the current B2C phase we are in has dropped the cost for start-ups and has shifted more of the power to the "creators". That said, most large successes require significant resources (e.g. more than a Digital Video camera or more than bootstrapping a start-up) and so, the "producers" have leverage vis-a-vis their capital and their connections (to talent, financial markets, strategic information, etc). However, venture requires much more of a cooperative approach while Hollywood has tended to use the buyout "iron fist approach". Here is my original post…

ART OF THE START

Many a time, I have heard entrepreneurs bemoan the fact that their company is just like a successful competitors and yet they are not getting the traction or attention.  I have often thought that the movie and venture businesses had a great deal in common. Both are “hit” driven with high failure rates and success is driven by detailed execution and the stars involved.  Venture capitalists act much like producers whose job it is to make certain that all of the key resources are tied in and the venture has sufficient capital.  Directors are like CEO’s and the key actors are like top managers. While certain talent helps improve the odds for success, the core fundamentals of the story (business or movie) can make or break.

Rishad Tobaccowala, the interactive marketing guru at Denu/Starcom, often says that memorable, impactful campaigns have a compelling story at their heart. In the movie business, it is how the plot holds and flows. In the venture business, it depends on the impression the elevator pitch makes on the investors, customers or strategic partners. Some resonate quickly and others get thrown into the generic bucket.

I wish I could layout what the formula is for success, but it is more art than science. That said, look at the persistence of certain producers (Bruckenheimer, Bay, etc), directors (Spielberg) and stars (Ford, Cruise, Smith, etc) in cranking out wins. Successful producers and VC’s have developed certain pattern recognition advantages and have built out an array of supporting resources (camera men & editors or board members & domain experts) that they can bring in at different phases of the effort.  Success, as in venture, begets success as the most promising scripts (or business plans) will often work their way to the star producers.

A successful company starts with a quality "script". Business model, market size and economics set the foundation for everything coming together. However, few businesses think enough about how the pieces hold together, what makes them compelling and where the “drama” is. Why do people “have to see” the movie and tell their friends. It’s only after this comes together that meticulous execution can drive it to the promised land. This is what the rapid, exponential success stories have in common. The story attracts talent, the talent leads to execution (initial talent obviously comes with the story) and execution leads to success. Without the heart of the story, companies can still be very successful, but it makes it more difficult to break out of the crowd (“aren’t you just like…”).

This may all sound superficial but I do believe that success in entrepreneurship and success in movies have a lot in common. Founders should look to script writers on the art of story, CEO’s to directors for how to motivate and direct people and VC’s to producers for how to pull it all together. The same goes in reverse.  Art is art and hit businesses are hit businesses for better or worse. That said, Hollywood does need to figure out a more cooperative model that aligns the interests of the various players as Marc states above.

Wisdoms of Sequoia’s Don Valentine

Over the years, Don Valentine (founder of Sequoia Capital) has had quite a few memorable quotes. He was the original investor behind successes like Apple, Cisco, EA and Oracle and is known to never mince words.  After coming across one of his quotes the other day, I used Google to chase down an array of others as listed below:


"The trouble with the first time entrepreneur is that he doesn’t know
what he doesn’t know. After a failure he does know what he doesn’t know
and can beat the hell out of people who still have to learn."

"That’s easy. I just follow Moore’s Law and make a few guesses about its consequences." (on his success investing in semiconductor plays)

"I got to Silicon Valley in 1959. Nothing is revolutionary; it’s
evolutionary. Look the sequence of Intel microprocessors. It’s all
predictable. The nature of silicon and software and storage go hand in
hand. In the case of software, you just have to be more clever about
the nature of the application. So all these things kind of tick along,
feeding off each other"

“All companies that go out of business do so for the same reason – they run out of money.”

"Why did you
send me this renegade from the human race?" (comment after meeting Steve Jobs)

"Great markets make great companies."

"I like opportunities that are addressing markets so big that even the management team can’t get in its way." 

“In
30 years we haven’t convinced ourselves to set up a presence in Boston.
It’s a very difficult business to be good at consistently over a long
period of time, and it requires a lot of thoughtful and integrated
decision-making….”We make enough mistakes on investments we make here
(in Silicon Valley), that we’re not comfortable we can (be successful)
3,000 miles away, never mind 8,000 miles away.”

"I am 100% behind my CEOs right up till the day I fire them."

"The world of technology thrives best when individuals are left alone to be different, creative, and disobedient."

"One of my jobs as a board member has been to counsel management to avoid distraction and to execute with constructive paranoia."

“I’ve always been mystified by the
critically important disc drive industry, without which the PC is a
useless device. You have to be brilliant in electronics, you have to be
brilliant in magnetics and you have to be brilliant in mechanics to get
all that memory capacity in a very little place and do it for next to
nothing. That market has never been rewarded financially for its
brilliance."

How VC’s Determine % Ownership Thresholds

Jason and Brad at AsktheVC forwarded to me a question sent in by one of their readers. Their site is a great site for answering a broad array of questions regarding VC and entrepreneurship.

Question: What’s a completely generic range of equity a VC typically wants for a round 1 or round 2 investment?

Most VC’s will generally say they target 20-30% ownership in a company to “make it worth their time”. This means that if they invest $3m early on, they expect the post-money to be around $10-15m and if, in later rounds, they are investing $10m, they expect to have a $30-$50m post-$.

Often, however, VC’s will use the “percentage” threshold as a means by which to increase money into a round or to get the valuation down. I have seen a given VC say they need 25% ownership for deal (to get valuation down) and do a more competitively sought deal at 15% two weeks later. In the end, two things drive all of this. First, there are legitimate minimum investment amounts a firm needs to have per deal. A $500 million fund will never get its capital deployed by doing $2m and $3m deals. They need to put $7-10m to play early and $20m+ over the life of the investment. Second, the valuation (and hence % ownership) will be driven by attractiveness and competitiveness of the deal. In the end, it is really about valuation (assuming their investment appetite remains in a set range).   

Other People’s Money

"There’s only one thing I love more than money. You know what that is? OTHER PEOPLE’S MONEY.
"
— Danny Devito in Other People’s Money

I haven’t posted in a while as work has been absolutely chaotic as the pre-Thanksgiving rush has begun. Start-ups, acquirers, partners are all pushing to close transactions before our business begins to wind down in the Thanksgiving to New Years period. I am up in Wisconsin with my son who is getting one last golf tournament of the year in. The aptly named “Intimidator” tournament has a steamy 40 degree wind chill, 17 mph winds and light rain. I elected not to walk the course with the other parents in his group for some reason. So, I can catch up on some posts here…

A friend of mine sent me a question I thought warranted a post. He was wondering how VC’s viewed a) founders investing their own capital in the early rounds and b) founders raising money to pay themselves normal salaries. Pre-bubble, VC’s preferred to see the founders have a significant portion of their net worth tied up in the deal. This aligned interests and kept the entrepreneur focused. Nothing like a mortgage to encourage strong commitment to a deal.

However, as top deals became more competitive and successful entrepreneurs built up sizable nest eggs, entrepreneurs began to push back on the notion and embraced the OPM (other people’s money) philosophy. They were committing time and giving up opportunity cost to pursue the venture. What more could a VC demand?

Most VC’s, while preferring to see financial skin in the game, are focused more on the quality of the team, the market and the deal terms. Additionally, true entrepreneurs are driven by a core desire to make a difference (and notch a win) so monetary sticks add only incremental leverage (though more so in downside scenarios).

Most entrepreneurs will take the middle ground. They will choose to bootstrap the business through proof of concept (site launch, etc) and then push for funding. Often they will self-fund or use angels so as to increase valuation when the larger capital comes in.

On the salary front, VC’s are not fans of entrepreneurs who raise capital and then turn around and give themselves $200,000 salaries. Knowledgeable entrepreneurs also usually don’t do this since this is expensive, dilutive capital they have raised. They are taking significant dilution in order to gain incremental salary. If the deal is successful, every early dollar will turn into $15-25 worth of foregone equity at the exit…ouch! So, it is a bit of an IQ test from the VC’s perspective. Generally, the entrepreneur passes and takes a $60-100,000 salary early on and moves this up once the company is more mature.

Some entrepreneurs are forced to take in larger salaries to pay the bills at home. This is not a great situation from which to start a business. I counsel friends thinking of starting a company to make certain they have (preferably) cash equal to two years worth of personal expenses saved up. This way, they can focus on the business and not on the wolves at the door.

Today, VC’s aren’t as focused as in the past on how much cash the entrepreneur has sunk into the business. We would still view it as a strong positive, but the realities of the market have pushed this term down the list. However, I would highly recommend that they start with a nest egg, bootstrap their business and use new capital predominantly for infrastructure and new hires.

This Embodies Entrepreneurial Success…

Every once in a while, you come across something that takes you completely by surprise. I have never been one to watch American Idol or "Britain’s Got Talent" (it’s precursor). A friend of ours fired this up on YouTube tonight and it really took my breath away.

Paul Potts is an everyday, middle class guy from the masses in England who sells mobile phones and plans. He is not handsome nor athletic as are many Idol winners. He is unassuming and the last thing you expect from him is opera. But, what a performance he puts on (he eventually won this year’s contest and will perform for the Queen of England).

This is what entrepreneurship is all about. It’s about having a dream, even if you are the only one who believes in it. It is about surprising breakthroughs coming from the most unexpected places and it’s about the fact that success can come from everyone if they figure out their talent. Enjoy…

Out of Sight, Till Now, and Giving Away Billions

In yet another example of the new wave & breed of philanthropists, Feeney made his fortune in duty-free shops. In Out of Sight, Till Now, and Giving Away Billions, O’Cleary gives a taste of what is in Feeney’s upcoming biography The Billionaire Who Wasnt: How Chuck Feeney Made and Gave Away a Fortune Without Anyone Knowing . I love to hear about people who become successful, give back and keep their perspective on life, values and money.

Last year, the foundation Mr. Feeney created, the Atlantic Philanthropies, gave $458 million in grants around the world, more than any United States charity except two, the Ford and the Bill and Melinda Gates Foundations. Atlantic,
  and small predecessors also started by Mr. Feeney, have given $4 billion since 1982; the plan is to give away the remaining assets — now $4 billion, but growing every day — by 2017.

Despite this record, Mr. Feeney is little known, a result of the web of intrigues that he fashioned to disguise his identity, his wealth and his giving. Atlantic does not appear in the annual rankings of the biggest American philanthropies because it was set up in Bermuda, to avoid the disclosures required in the United States. A rare glimpse of Mr. Feeney’s story emerged a decade ago during a business dispute, but he quickly disappeared from the news.

Now, however, Mr. Feeney, who is 76 years old and grew up in Elizabeth, N.J., is stepping out from behind his veil. He cooperated with a biographer, the journalist Conor O’Clery, whose book, “The Billionaire Who
Wasn’t,” is being published by Public Affairs. In it, he describes how Mr. Feeney and his partners went into business nearly 50 years ago selling five-pack boxes of liquor to American sailors in ports around Europe, and expanded into a worldwide empire of duty-free airport shops — often one quick step ahead of police or immigration authorities.

As told by Mr. O’Clery, Mr. Feeney’s life makes a compelling saga, a fortune built on consumption by a man who is defiantly indifferent to it; what Donald Trump would be if he led his life backward. Mr. Feeney buys clothes off the rack. He owns no homes, but stays in apartments around the world rented by the foundation. He flies coach. He rides the subway or takes cabs. His five children — four daughters, one son — worked summers as waiters, hotel maids,
cashiers.

Corporate VC’s Up Their Activity

Vineeth forwarded this article onto me: Google’s new role: Venture Capitalist. In yet another sign of where we are in the cycle, strategic VC’s are accelerating their activity. Strategic activity tends to peak (along with angels’) right before a market pull back. Google may be a different animal, but many of the strategics are diving in. Maybe this time will be different…

Google’s New Role: Venture Capitalist

The tech giant’s startup investments are narrowing opportunities for
VCs. Other corporations are upping their venture investing, too

Just as it has done to companies in the software, publishing, and
advertising industries, Google is becoming a thorn in the side of
venture capitalists. The owner of the world’s largest Web search engine
is scooping up young tech outfits for a relative pittance, giving
itself first dibs on hot-growth technologies and in some cases boxing
VC funds out of potential big-bang acquisitions and initial public
offerings.

TiECON 2007

TiE Midwest is holding its annual conference on October 5th from noon to 6 at the Hyatt Regency in Chicago. This is a great event and this year, they have the dynamic and always interesting brothers, Glen (CEO of Allscripts) and Howard (founder CCC & CEO of Flashpoint) Tullman keynoting. Definitely worth the time if you can make it. You can register at TiECON Midwest 2007

VC’s As the Good Guys?

As many of you may have followed, there is a battle royal brewing around the taxation of carry (the 20% of the upside GP’s receive). Historically, this has been treated as capital gains (usually long-term) so enjoys a low tax rate. With the excesses of the hedge fund & buyout managers, Congress has begun evaluating different ways to tax carry as current compensation just as salary is. What preceded this is that Blackstone’s CEO, Steve Schwatzman, hosted a very high profile, $2m birthday bash for himself (like the Romans would…) and then followed this up by taking Blackstone public (thereby exposing the significant carry & fees they earned). Now, carry charged by all types of investment managers (VC, Buyout, Hedge, Real Estate, etc) is under attack and the various asset groups are trying to extricate themselves from snowball. Daniel Primack published an interesting piece today in PE Week that lays out some of the resulting behavior. As a VC, I’ll enjoy being in the good guy camp for short interim period…

"Private Equity Cleavage

An interesting subplot to the carried interest tax debate has been how venture capitalists keep trying to disassociate themselves from buyout pros. PE Week Wire considers both groups to be part of the private equity landscape (I take “private equity” literally), but most VCs would sleep better is Kleiner Perkins was never again mentioned in the same breath as Blackstone or KKR. Buyout pros, on the other hand, keep clinging to VCs like elderly straphangers on a bumpy subway line.

Why the fissure? Because VCs believe they are forces for good and buyout pros are forces for bad. Or at least they believe Congress and the general public believes that – and they are worried about their halos being dirtied. For buyout pros, it’s the same idea in reverse – with LBO mavens hoping to launder their reputations through the VC wash…"

Congrat, Al on the BuzzTracker Sale to Yahoo!!!

My friend from B-school and BCG, Al Warms, recently sold his firm, BuzzTracker to Yahoo.  Al created a viral approach to linking news stories with leading blogs to determine the importance of a given article. You have seen the VC channel of BuzzTracker in my left rail for nearly a year now. Creating channels is pretty straight forward in that the channel sponsor & BuzzTracker (often the same) define the influential blogs in a given space as well as the key news feeds. BuzzTracker does the rest. Now, Al is not only part of BuzzTracker but is taking over as GM of News. This is another great win for Chicago and for Al. He previously sold his stake in RealClearPolitics for a nice win last year. Definitely a rising star to watch…time to buy Yahoo stock!

Here is Al’s commentary on the acquisition: Joining Yahoo!