Real Is Mandatory

Real Is Mandatory

“Then you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’.”
 — Bob Dylan

The venture markets are a-changin’ with investors and public markets demanding rational business models, visibility to profitable growth and inherently sound economics. Companies like Homejoy and Sidecar have gone under while stars like Uber have raised capital at flat valuations from a year ago. Companies going public are now being valued off of EBITDA multiples (what is this?). The old is new again as greed has swung to concern, heading to fear in the venture business as the IPO markets and multiples have compressed.

Historically, this has been when the true breakout companies shine. They are maniacally focused on customer needs, efficient capital use and culture as their less disciplined brethren are swept away in the tides. Trial by fire as they say. Real is mandatory in Darwin’s eyes.

An example of this has been our company, SMS, who crossed a major milestone this week, raising $150m from Goldman Sachs and continues to grow at 50–100% a year while having been increasingly profitable for each of the past 7 years. Few companies have pipelines like theirs approaching several billion dollars. Our journey with SMS Assist has been exceptionally rewarding as we’ve rolled up our sleeves next to an extraordinary team and founder. They have built one of the fastest growing enterprise companies in the country, in one of the grittiest industries through technology…facilities management. SMS’s story is both inspirational and instructional in a world of increasing headwinds and fading unicorns.

The power of the SMS platform is simple. The ONE platform controls over 500,000 sub-contractor technicians performing over 1 million services across 46 services like HVAC repair, landscaping, floor strip & wax to over 100,000 locations. Store managers and home owners simply drop a service request into their residential or corporate portal and ONE’s cloud systems pre-qualifies (e.g. for HVAC, did the circuit breaker trip or is it a real problem), identifies the most qualified sub-contractor based on over 420 tracked metrics, dispatches, manages the service, confirms & rates the service, pays the provider and delivers reporting for over 70 levels at the corporation…all automated without a man in the loop other than an occasional escalation to the call center. While traditional firms or in-sourced solutions rely on call centers and owned/operated fleets with few people on their tech teams, SMS delivers most of this on an automated basis with a 140+ person global technology team. The company has been profitable almost since inception. They run weekly scrums to codify best practices and process learnings into their business logic in the cloud.

One of the greatest barrier to entry/competitive advantage in venture is that rare entrepreneur who has exceptionally deep domain knowledge and strong technology chops going after a gritty industry with a technology and elegance. They are rare. Flawed competitors fall into two major categories. One is the star technology team which doesn’t appreciate the traditions, relationships or behaviors of the industry. The other is the industry team with deep domain expertise that simply automates existing processes with complex, uncompelling technology. Mike Rothman is a true “unicorn” and visionary along with his star lieutenant, Marc Shiffman. Mike has a brilliance to see things that others simply can’t. They are exceptionally detailed oriented, highly complimentary to each other and able to translate complex business needs to technical requirement with tenacious speed while also seeing a larger strategic vision for the future. They also have a palpable sense of inevitability in their belief and have fused talent from industry, the Valley and the Midwest.

While SMS has a lot of hard work ahead of it to realize its full potential, it has done a number of things right:

  • conviction…when you talk with Mike Rothman, he has a Steve Jobs like inevitability about him. When there is setback, he figures out alternative plans A, B & C. He redefines tenacity. Jim Clark (founder WebMD, Netscape, etc) used to say “Great companies are built. They are willed into existence”
  • know your core advantage…early on, they realized their “tip of the spear” was technology and focused heavy resources on it, ramping the tech team from 10 to 140+. They are continuously automating and building business logic into the cloud which allows them to handle more locations & services with existing infrastructure. More locations/services gives greater density and lower operating costs, leading to lower pricing with strong profitability.
  • hire strong…Mike has hired strong management around him. Many founders under-hire, feeling intimidated. Mike has brought on stars like Shiffman from Ron Perlman, Matt Renner (top Oracle sales head), Mike Travalini (top RE ops manager from Starwood) and others.
  • focus…while the SMS platform could expand into Industrial or other sectors, they have stayed focused on where they can compound advantage/density in retail and now residential. Too often, firms grab opportunity wherever they can and do nothing well.
  • rapid execution…this team moves from concept/opportunity to implementation and test with significant speed. They rolled out a corporate portal for retail store managers to trigger/manage services in only 6 weeks. Many would over design this and take 6–8 months. Simplicity is king.

SMS has been a great partnership with Pritzker. They quickly follow-up on resources and opportunities we bring them (or promptly say “no thanks”). We introduced a top technologist and operator to them and they engaged him, pivoted their platform to the cloud, rolled out mobile and expanded their team. We introduced a major institutional REIT to them (SMS was only in retail at the time) and they rolled out a major residential offering, staffed up a residential team and ramped business to nine figures in less than a year. We introduced a top enterprise sales advisor to them and they re-engineered their sales organization, hired a top SRO from Oracle and brought on 10 “chairman club” calibre sales people from industry and the Valley. This is how culture, vision, execution and responsiveness all meet.

We love our companies that bring next generation solutions with real business models to real customers. Whether it is companies bringing new technology to old industries like Fleetmatics (NYSE: FLTX), TicketsNow (acquired by Ticketmaster), Eved or technology firms bringing innovation to emerging fields (Viv and x.ai in AI; Mapbox and Airmap in GeoSpatial/Drones; Augury in IoT; SpaceX in transport or Facebook in Social). Real is Mandatory and Substance is King.

These times are a-changin’. Business models and fundamentals will increasingly be tested. Many in this market have not been through a down turn nor can fully appreciate the magnitude of its implications. Whether you have a month or two years, take this time to pressure test your business and assess if you’ll be the benefactor or the victim in the coming cycle. Also, look around and see if you have the people around you (team, advisors, investors, board members, partners, etc) that will help you thrive during these times. As Warren Buffett always says, “when the tide pulls out, you see who is wearing a bathing suit”.

Follow Your Bliss — Finding Joe

Joseph Campbell is the most influential person to have impacted my life. He was the world's leading mythologist and had an amazing capacity to show the common threads that cut across all religions, movies, books and stories. An awesome movie just came out about him and The Heroe's Journey that I have mentioned to everyone I know. Everyone of them has referred it onto their friends. It's that moving and insightful. For anyone trying to launch a business or to find their bliss or in a life transition or…, this is a great movie to see. You can buy/stream it at www.findingjoethemovie.com.  Below is the trailer for it:

 

Touched by Something Greater

Even in death, Steve Jobs connects us and reminds us of something greater. It is amazing the impact that Steve's death has had. Nearly everyone I know seems saddened almost at a personal level. It's as if we all realized this special, creative presence has now moved on…communal loss. Very interesting. I think some of us almost viewed him as immortal given his many recoveries. Others realized that his creativity and entrepreneurship reaffirmed our connection to something greater than ourselves. Most feel a tangible loss. He was the ultimate embodiment of innovation and entrepreneurship…how it inspires and raises us to a greater plane. 

I've reposted his 2005 Commencement Speech (over 15m views) which I first blogged about 5 years ago. Steve, we'll miss you 🙁

This Too Shall Pass

With all of the activity at work over the past 18 months as well as a host of mid-life course corrections, I have been negligent in feeding the blog gods. With Maria Katris's kind encouragement at Built in Chicago, I thought I would start posting more often.

One topic that comes up with increasing frequency these days is around managing one's future or career. In addition to all of the bubbly successes, there is a growing amount of stress and angst. Every entrepreneur and VC, at some point in time, has had one (if not many) gut wrenching, anxietal periods. Like a bad night at Texas Hold 'em, the cards keep coming up weak and you begin to question both your sanity and why you are doing what you are doing. Sometimes this is because others are hitting winners in the new SoMoLo (social, mobile, local) wild frontier while you watch and sometimes, it's because you are simply struggling to keep your head above water (dealing with debt, personal issues, non-scaling business, etc). Worse yet, you extrapolate out from today towards a draconian future. It's a terrific formula for sleepless nights (that or writing late night blog posts…).

In all my years, somehow, that draconian future never seems to hit like people think. While they don't get what they want, they often get what they need (thanks, Mick, for the words). So, when things just don't seem to be going your way and others seem to be passing you by or your future is opaque (and driving you nuts), what should you do?

My friend Carter reminded me of a Lincoln tale. When asked how he dealt with setback and issues he recounted a tale about a king who sent his wisest sages out into the world to find out how to live a content and fulfilling life. They returned, huddled and came back with a common finding…the words "This too shall pass".

In my favorite personal blog post, The Significance of the Karma Bracelet, I discuss my own journey down such a path during the last Bubble apocalypse. And again, in the past two years, nearly every aspect of my life has changed and one thing that has kept me balance and moving forward optimistically are these four words. Another friend once said, when you find yourself reinforcing your stress by linearly projecting the present, stop…don't think out more than 2 days and focus on what you have the ability to change not the phantom ghosts you can't. Things will change, synchronicity will come into play and life (or company) will right itself. Nearly all great start-ups have to nearly dance with death at least once and you haven't earned your stripes if you have not found yourself lost at sea in a foggy mist. As my partner, Ed, once said, it is a lot harder to kill a company than you think.

That said, what have you found to be helpful in handling adversity, setbacks and stress?

 

Carter Cast on the “Drama of Comparative Living”

My friend, Carter Cast, gave a wonderful talk to a large group of Fortune 500 executives and non-profit leaders. I highly recommend everyone reading this to take this to heart given where Carter comes from. Carter has had a career unmatched by most I know. Starting as one of the star swimmers on Stanford's national championship team, he has progressed through a host of successes ranging from being employee 4 (CMO) at Blue Nile, defining its successful launch strategy to being the CMO of eBay to CEO of Walmart.com (growing it from less than $100m to several billion). On top of this, he is one of the most down to earth, humble people you'll meet and his former lieutenants will tell you how engaged he was in their development. Enjoy…

"For much of my adult life, a subtle form of fear has been my constant companion.  Eventually, I found myself in the position where I could no longer attempt to ignore it. It had sufficiently eroded my health that I was forced to confront it.

From my own personal experience, (and this is by no means an academic definition) fear can be grouped in three areas of descending intensity: 1) the anticipation of direct danger to one’s being—the guy in the alley coming my way, to fight or give flight; 2) the fear that something I have will be taken away—my house, my job, my loved ones. (In this category, the Buddhist preaching of acceptance of life’s impermanence has helped me.) 3) The feeling that I am not enough, that I don’t measure up to some ever-moving standard of worthiness. This last category of fear is the one I will discuss tonight.

In this categorization, there exists a kind of anxiety gap between what is and what we think should be. “I should have a PhD like Rob Wolcott.” “I deserve to be as wealthy as Ben Elowitz, because I was instrumental in building the Blue Nile business.” This is the drama of comparative living. Bertrand Russell, in The Conquest of Happiness, calls it “worry fatigue.” He says, “Envy is a form of vice which consists of seeing things never in themselves, but only in their relations.” He had a great example: “Napoleon envied Caesar; Caesar envied Alexander; Alexander I daresay envied Hercules, who didn’t exist.”

I am fairly certain that the destructive emotion of envy has increased in the age in which we are living. Amidst all of the opulence we not face the alarming gap between the have and the have-nots, we now also have the ability, due to the opening up of the world through technology, to compare ourselves to others with just a few keystrokes. We all do this. Everyone in this room has done it. How many of us have gone on Zillow or another real estate site to check out the value of our neighbor’s house? How many of us, when perusing Facebook, have seen that one of our friends just dined with someone fancy, dined somewhere fancy or become downright fancy themselves? And then and felt…envious. Today we have the dubious “opportunity” to gauge our progress relative to just about everyone with an Internet connection. And we can gauge the progress of those without one too. Meet your new neighbor, commit to memory his name, and Google the guy when you get home…Only a few hundred years ago, we compared ourselves to the work product of the one other blacksmith in our village. Now we compare our work to all the blacksmiths in all the villages throughout the land…If our values aren’t strong and properly reinforced, we will feel envious. And if we don’t pay attention to this destructive emotion, it can spin out of control and turn into a deep-set fear that we just aren’t good enough.

If you think about it, this comparative frame of reference should only matter when we’re competing in a zero-sum situation. He gets it, I don’t. There’s a winner and a loser. Yet most of the situations we find ourselves in, on a daily basis, do not involve zero-sum outcomes. In most of our life experiences, we find ourselves working with others in situations where we all can benefit. Even in very complex negotiations, creative solutions exist that expand the pie and leave plenty of slices for everyone.

So in reality, in the vast majority of the many millions of discrete moments that make up our lives, we have the ability to choose not to participate in the drama of comparative living.  And that is my epiphany: that through awareness and discipline, I can choose to see things not in their relation to others, but only in their relation to myself—in relation to my own spiritual and intellectual development. Am I increasing in my capacity to show compassion to others? Am I increasing my business skills in order to be more useful to others? Now, at night, I reflect and remind myself that my development as a human being is relative to no one else, just myself and where I was at a prior state of development.

Everyone in this room is in the bonus scoring round of life. We’ve taken the tests and passed. We’ve auditioned and gotten the gig. We’ve made it—the degree, the car, the house. We have respect. Yet the only respect we really need is our own. We can choose keep trying to make it, over and over again, or we can realize we don’t have to live our lives in pursuit mode. We don’t have to keep trying to keep up with the beat of an imaginary metronome. We can say, “I am enough.” As Thomas Merton said, “We have what we seek.” Harmony, for me, lies in this thought."

 

The Entrepreneur’s Greatest Enemy

Anxiety and fear are the greatest enemies of the entrepreneur. You attract what you focus on and anxiety and fear not only focus on negativity, but eat up energy that can be applied more productively. Even worse anxiety and fear trigger the fight or flight portion of your brain which literally shuts down your ability to do abstract thinking. With this region asleep, it is hard to visualize a new revolution.

During the Bubble implosion in 2000, I lived perpetually in this state for 18 months until exhaustion and 16 lost pounds forced me to reconsider. I got nothing done during this time.

In this market there are three things are creating anxiety and fear in the entrepreneur. Economic conditions are poor, leading to stress around funding and revenue. Secondly, the market is in a momentum phase in which each entrepreneur is trying to keep up with the latest exit of momentum exit. Third, by definition start ups have poor visibility and their success depends on non-linear, unpredictable outcomes.

Anxiety is toxic. No one wins and it is a remnant from our evolution when it was essential for our physical survival. Healthy paranoia and respect/understanding of what you don’t know is essential but not energy draining emotion.

Top entrepreneurs use a handful of techniques to manage this.

0) live in the present and stop fearing what horrible outcome might happen. You will always amplify the worst case case. They focus on what they can effect…the here and now.

1) they clearly visualize and define the promised land and communicate it clearly to their employees.

2) they remain focused only the core subset of activities necessary to reach them (versus frantically throwing noodles into the storm).

3) they maintain a calm conviction and confidence in the inevitability of the end success (will the company into existence).

4) appreciate and accept the possibility of the worst case…the Samurai’s would accept death first and then enter battle with no fear.

5) try to take care of themselves by eating and working out as needed.

6) focus on the things that count in your life…family and friends and mentors. Use them as your foundation and sounding board.

So, be aware of your anxiety level. High anxiety helps insure failure with your firm/team and health issues. It leads to nothing productive and it is driven most often by fear of the unknown future. Know where you are going but focus on the tasks at hand and bypass Anxietal Paralysis.

Why You Should Start a Company in Chicago

The folks at Fast Company have a series on articles on starting up companies in different regions of the US. I had a chance to talk with them about Chicago, my home town. Below is the beginning and link to the article Why You Should Start a Company in…Chicago.

Why You Should Start a Company in… Chicago

By Laura Rich
 
Chicago may lack the crackling energy of other startup hotspots like Seattle [1], Austin [2], Boston [3] or Boulder [4], and its reputation for back-office, white-collar companies such as the former Andersen Consulting firm doesn't help much. But Chicago is where many Internet mainstays were launched, from the jobs site CareerBuilder and travel service Orbitz to RSS technology innovators Feedburner (bought by Google in 2007) and the online audience measurement outfit comScore. One hot startup right now is the coupon site Groupon [5].

Health-care companies also have realized great potential in the area, led by Abbott Laboratories. And lest one forget, it was at nearby University of Illinois Urbana-Champaign where Marc Andreessen developed Mosaic, the Web browser that paved the way for the commercial Web. So there's that.

These days Chicago's startup culture is aimed at the steady and sure. As Matt McCall, a partner at New World Ventures and managing director at DFJ Portage, notes, Chicago is home to many of the largest companies in the country, including Accenture, Boeing, Integrys Energy, MillerCoors, McDonald's, ACNielsen, Trans Union, and Fortune Brands. The list is long and comprehensive. For startups, it means a rich source of customers for products that fill a need or enhance their businesses.

McCall spoke with FastCompany.com about what makes Chicago's startup scene so strong.

What makes Chicago a great place for startups?

continued at Article link…

Do You Need to Be in the Valley?

I often hear entrepreneurs talking about how they need to leave Chicago or Austin or Denver to be in the Valley in order to succeed. This has puzzled me since results would indicate otherwise. Yes, a lot of the high profile firms (many still not exited) are out there. However, each region has its strong ecosystems that are capable of generating industry leading opportunities. Over the past 3 years, our firm has had exits worth nearly a $1 billion in enterprise value. Of these, only 1 deal representing $125m, was in the Valley. Nearly 90% of the liquidity (when little is coming out of the Valley or industry overall), came from elsewhere. This is the reason that many of the Valley firms have located offices in Asia, India and that DFJ has over 30 offices worldwide. Innovation takes place and can succeed anywhere.

I will not deny that the Valley has a strong culture of innovation and that it produces an array of marquee firms. However, it also suffers from higher deal valuations because of all the capital there, which often leads to overfunding & high burn rates. Talent is expensive and hard to hold onto. For new entrants, there is a lot of noise, so it is harder to be recognized either for a job or for funding. 

In fact, I can not think of a single company that went on to become successful that couldn't get funding in my backyard, then went to the Valley, got funding and became a huge success. It is a little like the pretty Kansas farm girl who goes to Hollywood to become a star, enticed by the glitter. The landing is often much rougher than expected and the success more elusive.

Fred Wilson had a great post today, Startup Hotbed Inferiority Complex, in which he discusses this topic succinctly:

But at the end of the night, the 'silicon valley' question came out. A participant in the audience wanted to know if it was crazy not to do his startup in Silicon Valley. This is what I call the startup hotbed insecurity complex. Deep down inside, every entrepreneur working outside of the bay area worries that they are not as competitive and will not be as successful because they are not in Silicon Valley….

…To which I responded that the idea that you cannot build an important tech company outside of Silicon Valley is 'a crock of shit'. Somehow that line was tweeted numerous times as 'silicon valley is a crock of shit' which I found humorous.avc.com, A VC, Jul 2009

Like anything, there are situations where it makes sense to move (starting a router company in Indianapolis) and there are often others where it does not (starting an e-commerce or internet services business in Chicago).  However, too many people feel insecure if they aren't in the Valley. Just be certain why you have come to your conclusion…because the ecosystem can't support your idea or because you're just following the herd. 

Strategic Protectors

In difficult times, strategic partners can be essential to survival. As companies fight for air in these cash strapped times, larger corporations have valuable resources. Our portfolio companies have leveraged partners in several ways.
1) Pre-paying revenue. Some customers will pay in advance of delivered goods. Future takedowns are applied against this.

2) Venture leasing: if an entrepreneurial company is investing heavily in equipment and capacity for a customer ramp, see if they can help finance it. This can be thru their in-house finance group or by helping guarantee payment of the loan. They understand that they benefit from your getting this capacity funded.

3) Distribution agreements: corporations with global distribution can expand the addressable markets and customers you can reach. If you deliver revenue to them (bundling with your product or a cut of the sale), it can be a win-win.

4) Strategic investment: corporations that see your strategic value to them may be more likely to invest in your firm than the traditional venture industry.

There are a million caveats around embracing strategics. You want to avoid firms who are known to be litigious or difficult to negotiate/ work with. More so, if they are known to absorb information and then build competing product, avoid them at all costs. There are many in the consumer electronics world that frequently do this.

Realize that corporations have limited cash themselves. But bringing solutions or ideas that bring incremental revenue or discretely reduce cost today (no “productivity gains”) and they will take the discussions seriously.

Be careful not to lock yourself into having a one acquiror situation. Getting multiple strategics engaged, having other distribution channels and creating other alternatives gives you more freedom.

More importantly, use these activites as a way to start courtships with potential acquirors. Both sides will get a chance to understand where synergies and fit are. It is an investment in the future.

So, be careful but realize that strategics can provide essential lifelines to you.

The Art of Selling Your Firm

Despite the markets’ gyrations, 2008 was the best year for liquidity in our firm’s history. In fact, our largest exit (Lefthand Networks) closed in November in the heart of the downdraft. In looking across these exits, the strong exits all had several common elements:

1) Self-sufficiency: the old saying in venture is that companies are bought and not sold. If the acquiror knows that time is it’s friend, they will slow roll the process, driving harder terms with each passing month. Don’t go into the process without a long runway (or a strong forcing mechanism). Your gut will tell you how much of the process is your pushing versus their pulling. Don’t push.

2) Mortal Enemies: the surest way to have a healthy process is to get two bidders that viciously compete with each other. During one process, we tried to leverage a weaker competitor to motivate our lead buyer. They laughed and encouraged us to sell to them. We subsequently engaged their fierce competitor. The result: LOI in weeks, closed in 6 weeks.

3) Existing Relationship: people do deals with people they know. You can either try to convey your value during an impersonal pitch or let them experience the specific facets/nuances of your firm or technology through interacting with you over time. Most firms know who are the likely buyers. During this downdraft, it is a good time to build these relationships. You can get their attention if you can deliver revenue to them or reduce concrete costs. Don’t ever taint this process by pushing or even hinting at selling the firm as it will set you back.

4) Few Alternatives: scarcity is at the heart of a good sale. Few or inferior alternatives swings the balance in your direction. If there are an array of available solutions, you will lose your leverage in the process. A superior/strong product can sell itself. If you have strong synergies with competitors,you can carefully & selectively consolidate or rationalize your sector. Now is the time to distance yourself from the pack, outlive competition and consolidate so you are the logical acquisition.

5) Visible Scalable: you invest in companies if they demonstrate a scaling revenue model which has visibility on the growth drivers going forward. Acquirors will do the same. Have you proven out your revenue model and can you show how it will ramp significantly if owned by them. Show it becomes more profitable with them.

6) Strategically Central: if your product or service is a central component to the acquiror’s future, you will get attention. If not, you may likely get lost in the noise. This can be the product that is missing but is a key growth driver in their industry or can protect/enhance core existing products.

So, while exits are harder today, now is a key time to position for exits when the conditions improve in coming years. Build relationships now that will be essential later.