I have heard of having a religious following, but my friend, Rob Albertson, has taken things to the next level. You can create these viral signs at: www.churchsigngenerator.com.
Buzz: The Sound of an Inflating Market
Entrepreneurs, dust off those business plans. The gang in the valley is eager to get capital out of their newly raised funds. Inspired by a couple of big exits, VC’s are starting to increase their bets out in the market. The industry moves in tandem. When things feel safe and it looks like the markets (acquisition or IPO) are starting to open up, VC’s start bidding up prices with the assumption that they can be taken out by higher market multiples. I am starting to see a variety of irrational behaviors. Some firms are reloading on sizeable capital raises after having blown through significant capital (and restructuring) during the first bubble. Discipline has not nearly deteriorated as badly as during the 1999-2000 period. My advice to entrepreneurs is to get your warchest now while it is more affordable, but continue your spending discipline honed during the past 5 years. It is very hard to do so with $20 million staring at you. Below is the excerpt from the recent Venture Reporter email:
Mirroring the health of publicly listed information technology and health care companies, median pre-money valuations for venture-backed start-ups in the U.S. hit $18.4 million in the first quarter of 2006, the highest quarterly level since it reached $23 million in the fourth quarter of 2000.
Median pre-money valuations climbed by $3.1 million in the first quarter from the same time a year ago, according to a study released today from VentureOne, which is owned by Dow Jones & Co., the publisher of this newsletter.
Health care companies led the way with valuations in the sector jumping to $29 million from $19.2 million. Within health care, medical device companies continued to have the highest valuations at $34.4 million, while health care devices followed with $22.8 million and biopharmaceuticals at $15 million.
IT deal valuations rose to $18 million from $17 million, boosted by electronics and computer hardware, an area that saw valuations skyrocket to $65.1 million from $25.3 million in the first quarter of 2005. Valuations of communications and networking companies rose to $23.5 million from $15 million, while software saw a similar increase to $17.5 million from $12.3 million. On the other hand, information services dropped to $5.5 million from $17.2 million and semiconductor valuations fell to $18.7 million from $31.8 million. Meanwhile, valuations in business, consumer and retail start-ups increased to $16.9 million from $12 million.
The explosion of consumer Internet companies last year gave tech stocks a shot of adrenaline with high-climbing stocks like Google Co. and strong exits like MySpace’s acquisition by News Corp., pushing private tech company valuations up along the way.
Bootcamp: Family Life and Entrepreneurship
Balancing work and family is one of the greatest challenges for an entrepreneur. Left unchecked, your business can consume every waking hour. There are always sudden firedrills, new customer pitches or urgent personnel matters. How do you balance everything?
I will be introducing a future feature called "Behind the Firewall". It will be a series of guest blogs from leading entrepreneurs and this will be the first topic.
While their perspective will be the more relevant, I have three comments on this topic:
1) Sanctuary: your family and friends are your greatest resource. They are your sanctuary from the often random corporate world. Keep your spouse in the loop and take care of the relationship. Also, it is key to make time for your kids. I wrote about how important this is in my post "Resilience in the Storm". This is the only thing you can count on when things gets rocky on the business front.
2) Team: build out a team that you can delegate to and trust. If you find yourself jumping deep into functional areas, you either a) need to learn to delegate better or b) have the wrong lieutinents. This is not to say there won’t be times when you need to get more involved, but too often we see entrepreneurs try to do too much of it themselves. This is the leading area that indicates whether an entrepreneur can scale with his/her business.
3) Funding: determine if you want your business to be a lifestyle business or a swing for the fence before you take capital. Also, assess which your business is best suited for. Fund it accordingly. Venture capital demands rapid growth. Once you have taken VC money, expectations rise and so will the demands on your time.
More to come on this topic from those in the trenches…
Bootcamp: Customer Serve Thyself
"Feed a man a fish and you feed him for a
day; teach a man to fish and you feed him for a lifetime."
Customer self-service will play an increasingly important role in the software industry. One of the toughest parts in making a technology sale is changing customer behavior. The key to the battle is actually getting the technology into their hands, letting them kick the tires and then getting feedback. Under the old licensed software model, there was/is too much friction in the process…high ticket prices, long & expensive installations, extensive training and so on. The current generation of applications relies more on hosted solutions. They reduce the initial price tag and simplify the installation and maintenance processes. While large enterprise applications are not likely to go away anytime soon, more and more companies are embracing software as a service. However, these still scale somewhat slowly due to market adoption challenges and revenue is spread over years versus upfront with a licensed solution.
The next generation approach…simplify it, host it, give tastes away for free and let them do it all by themselves. Let them get addicted and sell themselves. One of the amazing facts about Google is that a significant percentage of their ad sales come through without any human involvement. Feedburner has been growing at over 20% a month with a small staff because of the simplicity and self-service components of their offering. Everdream has launched one of the first corporate SaaS offerings from their self-service website. They will let corporate customers register, self-qualify, pay, provision and upload data.
Eliminate friction. Take everything out that could give customers pause about trying it such as requiring registration information, credit cards or personal information. Give them a lite version that hooks them but leaves them needing more (reporting, scale, features, etc). If they like it and use it, you will have plenty of opportunities to get the remaining information. The trick is getting the customer to use it and to change behavior.
This is not a panacea for all, but I expect that you will see more and more firms using self-service and the advantages of the web to scale their businesses while driving costs down.
Our Tipping Point
"The best way to understand the dramatic transformation…is to think
of them as epidemics. Ideas and products and messages and behaviors
spread just like viruses do."
— Malcolm Gladwell
We, in the entrepreneurial world, live or die based upon Tipping Points. Al Gore is enjoying a rebirth talking about global warming tipping points. Malcolm Gladwell wrote a best seller called the Tipping Point. Venture capitalists talk about market inflection points. Chaos theory, complexity theory, self-forming networks…the list goes on.
The Midwest technology community, or any region’s for that matter, hinges on Tipping Points. Gladwell lays out a very interesting framework and San Diego provides a great example of how this works. Gladwell’s core elements include self-organizing networks, stickiness and context. Ian Kaplan gives a great summary of this framework.
When you examine a social network (or technology corridor), you will see that there is a person or company at the center, which acts as a hub and is central in the spreading of information. It is central, well connected, knows the right people and knows what is going on in the network. Gladwell refers to this as the Law of the Few and describes how Paul Revere played this role and was central in raising the resistance in the American Revolution. In La Jolla, Hybritech was the core to that region’s biotech explosion. Before Hybritech, there was a lot of technology (Scripp’s Institute, Salk Institute, UCSD, etc) but few companies. Once Hybritech was sold to Eli Lilly, its managers spun out to form their own companies. The key, however, is that these managers were connected to each and had a common legacy. By the second generation of successful companies, again many connected to each other, the region hit a tipping point.
Gladwell’s more interesting element is not about how these networks take-off, but rather when they do. He describes how "the Stickiness Factor" can have a significant impact by pushing the system out of equilibrium. The more contact that factor has, the more impact will result. It gives that influence significant leverage. In his example, he describes how disease normally remains in check. The number of people getting sick and those recovering basically offset each other. However, at certain periods, such as around holidays, people interact more with each other. Soon, more people are ill than are getting better and the system begins to spin towards epidemic. In the technology world, this equates to the rate of new companies entering versus leaving the ecosystem. When these companies have common touch points or legacy, like with the flu, the network spreads more rapidly, heading towards “epidemic” (in a good way).
Lastly, he describes the Power of Context and how visual cues & other environmental factors can have such a dramatic impact on a change in behavior and in the development of these networks. He lays out how eliminating graffiti and cleaning up the streets have been shown to significantly reduce crime. People begin to view their environment differently. It’s like my kitchen. As soon as two or three dirty dishes remain in the sink, it signals to everyone that it’s okay to leave dishes there and soon the sink is overflowing with dishes. The Tipping Point has been hit. The same happens with celebrating success stories (or promoting repeated failures). The community begins to view itself increasingly one way or the other.
So what does this mean? It means that a technology community can take off quickly, triggered by simple elements. Social networks, information flow and connectivity are critical in governing the rate and suddenness of this development. Furthermore, how the community views itself and takes care of itself sets the stage or “context” as Gladwell calls it. While you can never predict exactly when a community will go “viral”, you can continue to stress and build upon the core elements that you know eventually lead to it happening: building social hubs, increasing interaction/stickiness and promoting a positive communal image & environment. We have a ways to go, but we are definitely heading in the right direction on all counts.
One last, unrelated point, Al Gore gives perhaps one of the most chilling examples (pardon the pun below) of a Tipping Point in his new movie “An Inconvenient Truth”. Global warming can continue for some time without a noticeable impact or difference. However, at some point, the ice shelves at the arctic, Antarctic or Greenland warm up enough and fall into the ocean. This would supposedly raise the sea level worldwide 20ft. This presents a small issue to a couple of parts of the world (like NYC…). Furthermore, while the ice reflects 90% of solar heat, the water absorbs a significant percentage of it (raising ocean temperatures). So, once we hit the Tipping Point, not only do you suffer (or benefit) the impact of the primary factor, but also from the secondary effects as well. Let’s hope Chicago becomes a tech haven before it becomes a seaside destination…
Doing Good: Entrepreneurship and Our Kids
VC’s can be a cynical bunch. It takes a lot to get our attention. Well, this morning I was absolutely blown away by what I saw at the NFTE/Chase Teen Business Plan Competition. David Weinstein, CEC’s high energy entrepreneurial czar, helped to launch NFTE’s competition here in Chicago with funding from Motorola (thanks Jim O’Connor!). NFTE (National Foundation for Teaching Entrepreneurship) is a national organization that runs entrepreneurship programs at schools in low-income communities. Christine Poorman and Lauren McLaughlin oversee the Chicago chapter and ran the competition. Over the course of a school year, students take a course in entrepreneurship while also preparing a business plan for a potential business.
I sat through 3 hours of presentations and watched in amazement as kids from some of the poorest communities in Chicago spoke about P/L statements, sales & marketing strategies (4 P’s for the MBA set), ROI, ROS, sources of start up capital and more. Over half the kids had actually launched small businesses and some were pulling in several thousand dollars a year. Over 60% of the presenters were girls, which I think is huge as this kind of involvement has a dramatic impact on life choices regarding teenage pregnancy, future studies and such. All of the kids were hoping to go onto 4-year colleges. All the plans also had a philanthropy component in them such as food to shelters, donations to causes and such.
As I have written in the past, we are in big trouble if we don’t get kids interested in engineering and, more importantly, entrepreneurship. Small businesses drive the majority of job creation in our economy and are the key driver of innovation for our society. This is where the next Cisco or Google comes from. We are also seeing a massive digital divide form between economic classes. Just as I hope we start rolling out engaging science programs in our schools, I believe we need to bake as many entrepreneurial experiences as possible into our youth’s schooling.
Other great programs involved in teaching this include Biz World and Junior Achievement.
Resilience: Steve Jobs on the Power of Failure
""Nior dhun Dia doras riamhnar oscail Se ceann eile"
(God never closes one door without opening another)
— Irish Saying
I have often written about the importance of Resilience in entrepreneurship. As they say, what doesn’t kill you, makes you stronger. This is easy to say in the abstract, but when you are going through massive set backs or failure, it is hard to feel that anything good will come of it. I certainly did not welcome the catastrophic yard sale of one of my most promising deals back in 2001. In one short year, this company went from being a potential $2B IPO (making 20x for us) to an $180m smoking hole in the ground. That said, I learned more about venture investing on that one disaster than I did on my previous 8 deals.
One of the most moving speeches I have read/heard has been Steven Jobs Stanford University Commencement speech last year titled "You’ve got to find what you love". It is a must read for any up and coming entrepreneur. In it, he describes how fortunate he was to experience three normally traumatic set backs which all contributed to his stellar success. These were his dropping out of college, his very public firing from Apple and his bout with cancer. I won’t ruin the punchline…but take a look.
Resilience: Steve Jobs on the Power of Failure
""Nior dhun Dia doras riamhnar oscail Se ceann eile"
(God never closes one door without opening another)
— Irish Saying
I have often written about the importance of Resilience in entrepreneurship. As they say, what doesn’t kill you, makes you stronger. This is easy to say in the abstract, but when you are going through massive set backs or failure, it is hard to feel that anything good will come of it. I certainly did not welcome the catastrophic yard sale of one of my most promising deals back in 2001. In one short year, this company went from being a potential $2B IPO (making 20x for us) to an $180m smoking hole in the ground. That said, I learned more about venture investing on that one disaster than I did on my previous 8 deals.
One of the most moving speeches I have read/heard has been Steven Jobs Stanford University Commencement speech last year titled "You’ve got to find what you love". It is a must read for any up and coming entrepreneur. In it, he describes how fortunate he was to experience three normally traumatic set backs which all contributed to his stellar success. These were his dropping out of college, his very public firing from Apple and his bout with cancer. I won’t ruin the punchline…but take a look.
Buzz: Mary Meeker Unplugged
"You say you want a revolution…We all want to change the world"
— Beatles
Mary Meeker, Morgan Stanley’s Internet Diva from the Bubble, is back and firing on all cylinders. She gave a great presentation at the Stanford Graduate School of Business on "Global Technology/Internet Trends". I highly recommend it as it is full of a broad array of interesting statistics and analysis on the next technology wave. Some of the more interesting facts:
1) the US prominence in consumer Internet use is waning quickly. North America represented 66% of Internet users in 1995 and only 23% in 2005. More and more activity, market focus and innovation will be taking place overseas.
2) technology often follows a boom, bust, boom pattern. Google, Yahoo!, eBay, Yahoo! Japan and Amazon had, cumulatively, a $2B market cap at IPO, $178B value at peak in 3/00, a $32B value at trough in 10/02 and a $262B market cap as of 11/05. Buy when there is blood in the streets as they say…
3) we are entering into, perhaps, the biggest of all technology cycles led by PC Internet (broadband) and the Mobile Internet. Previous cycles were Mainframe –> Minicomputer–>PC–>PC Internet (Narrow band). Now add –> PC Internet (Broadband)–> Mobile Internet.
4) Driving these two cycles are a) broadband penetration (hitting 25-30% in 2004) and b) 3G penetration (expected to hit 25-30% in 2007). When people are able get high speed service to their phones and laptops wirelessly, we will truly see information become untethered. Seamless mobility…
5) Two key risks threatening are:
a) the lack of engineering students in the US (heard this before???)
b) litigation: 2001, US industry spend more on tort litigation ($205B) than on R&D ($184B).
6) The PC-Mobile Device is the next "client-server". Users make changes and control preferences on their PC which pushes to mobile (or provides for abbreviated versions of content).
7) VoIP, IP Video, User Generated Content…the list goes on of "game changing" technologies enabled by broadband to home and mobile.
8) US Ad spending on Internet continues to rise, slowly displacing each of the traditional channels.
9) watch the kids for future of information and technology usage…
Click on the link above and check out the full 58 page presentation. It is one of the most interesting and insightful presentations I have come across in a long time.
Return to the Gulag
I’ve written in the past about how future success in technology is going to be around execution and not necessarily about superior technology. I have been painfully reminded of this fact over the past 4 hours as I left my Mac Powerbook at home by accident and have been using my Dell this morning. In 4 short hours, it has frozen opening a PDF file, again printing another PDF file, yet again trying to play a Real Time clip and now Outlook is messing with me. Check out the new PC/Apple ads. They are hilarious. They are getting great reviews in the Ad press.
New Apple Ads.
With Apple’s new Intel chip, it will be interesting to see how much penetration in the Windows base it can go. Currently, you can set your Mac to dual boot (either PC or Mac). Where things get better is when you can open Windows Applications natively from within OS X.
As an investor or an entrepreneur, it always makes sense to go out into the field and use your product or service as a customer. There is no better way to truly understand its short-comings or advantages. Also, buy a Mac!