If Larry and Sergey Asked for a Loan …

"Be fearful when others are greedy, and be greedy when others are fearful."
            — Warren Buffett

Well, there is no doubt that fear is running rampant through the streets. This will provide a great opportunity for entrepreneurs to take advantage of market inefficiencies not seen for decades. Those that intelligently manage the downside, will be well positioned for significant future upside. We call this asymmetrical risk. The key is to respect the global forces impacting our economy without letting it paralyze you. I like Friedman's distinction between risk-taking and recklessness. The former is rewarded highly and later punished severely.

Thomas Friedman had an interesting recent op-ed that Whitney Tilson recently commented on.

The hardest thing about analyzing the Bush administration is this: Some
things are true even if George Bush believes them.

Therefore, sifting through all his steps and missteps, at home and abroad,
and trying to sort out what is crazy and what might actually be true — even
though George Bush believes it — presents an enormous challenge, particularly
amid this economic crisis.

I felt that very strongly when listening to President Bush and Treasury
Secretary Hank Paulson announce that the government was going to become a
significant shareholder in the country’s major banks. Both Bush and Paulson
were visibly reluctant to be taking this step. It would be easy to scoff at
them and say: “What do you expect from a couple of capitalists who hate any
kind of government intervention in the market?”

But we should reflect on their reluctance. There may be an important
message in their grimaces. The government had to
step in and shore up the balance sheets of our major banks. But the question I
am asking myself, and I think Paulson and Bush were asking themselves, is
this: “What will this government intervention do to the risk-taking that is at
the heart of capitalism?”

There is a fine line between risk-taking and recklessness. Risk-taking
drives innovation; recklessness drives over a cliff. In recent years, we had
way too much of the latter. We are paying a huge price for that, and we need a
correction. But how do we do that without becoming so risk-averse that
start-ups and emerging economies can’t get capital because banks with the
government as a shareholder become exceedingly

Now is one of the worst time to become risk-averse…just be intelligent about it.

Helpless or Master

"Genius is one percent inspiration and ninety-nine percent perspiration"
                                                                                     — Thomas Edison

I have often written about how the lessons and factors affecting us as children seem to strangely enough, also impact us in similar ways as adults. I find that I will see something at work and then go home, only to see a modified version of it at home. One of the most recent experiences in this realm I’ve had relates to a Scientific American article,  The Secret to Raising Smart Kids. In it, the author writes that there are two types of mindsets they see in children: fixed & growth (or helpless vs mastery). In the former, children view their success as being reliant on their inherent abilities which are fixed. In the latter, they view their success as being driven by effort and that any setback can be remedied over time by additional effort.

This distinction is also critical regarding successful entrepreneurs and those pulled under in the Darwinian tech eco-system. This has implications on how one views & motivates employees as well as how one views themselves. I won’t do the article justice summarizing it here, but highly recommend it as a read both as a parent and an entrepreneur.

"A brilliant student, Jonathan sailed through grade school. He completed
his assignments easily and routinely earned As. Jonathan puzzled over
why some of his classmates struggled, and his parents told him he had a
special gift. In the seventh grade, however, Jonathan suddenly lost
interest in school, refusing to do homework or study for tests. As a
consequence, his grades plummeted. His parents tried to boost their
son’s confidence by assuring him that he was very smart. But their
attempts failed to motivate Jonathan (who is a composite drawn from
several children). Schoolwork, their son maintained, was boring and
                    — Carol Dweck, The Secret to Raising Smart Kids

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

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

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…


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.

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…

Business Musings From Carter Cast

I was having breakfast the other day with a friend of mine, Carter Cast, and we were discussing the dynamics and effort necessary to successful build an entrepreneurial company into a larger organization. Carter is a great guy and well known for his balanced approach to management and the effort he spends on building effective teams. Over the years, he has been head of marketing for Blue Nile (one of the first 5 employees), CMO of eBay and CEO of Walmart.com. He mentioned that he has a set of principles that govern him which he shares with employees when he comes into a company. He is a big fan of transparency and believes if employees have clear understanding of the rules of the game, they are more productive. He has captured them in a short, one page document "A Few Musings on Business Life" which he hands out to his team. I’ve attached the Word doc, but the content is below. (Download carter_cast_musing_on_business_life.doc


A Few Musings on Business Life

1.    Integrity
•    “Honesty” usually comes to mind when you hear the word “integrity” but it’s more than that. It’s also “candor” and “managerial courage”—saying what needs to be said for the good of the business or for a person’s development. By the way, anyone can say, “I emphatically and categorically disagree with you.” The challenge is to say it with a little finesse, communicating what needs to be said clearly yet tactfully.

2.    Managing people
•    If you let people know you care about them and want to develop them, they’ll reward you by cutting you some slack–they’ll look past your foibles.
•    Listen, not only to what’s being said, but how it’s being said. Ask questions—actively listen.
•    Don’t underestimate a person’s bias toward self-interest. Saying that isn’t harsh, merely human. We see things from our own vantage point. We’re all trying to survive and thrive in the concrete jungle. So put yourself in the other person’s shoes as much as humanly possible to understand what they’re going through, what they need, and what they aspire to.

3.    Productivity
•    Congratulations on working hard, but working smart is more sensible. Organize your day, have a game plan to maximize your productivity and ask yourself, “Am I focusing on the key activities that will move the needle?”
•    Don’t be afraid to show your passion. Be intense. Be demonstrative. It creates energy.
•    Ignore the noise. Don’t get head rot. Generally, other people’s gripes are…other people’s gripes. Anyone can see what’s wrong. How many can see what’s possible?

4.    Learning
•    Take the time to become an expert in your area. As long as you learn, you’ll progress. Don’t worry about titles and promotions. If you focus on learning, the promotions will take care of themselves.
•    Learn the value chain. There’s no substitute for knowing how it all fits together and what activities drive organizational value. It will lead to good decision-making and will also give you credibility in the organization.

5.    Communication
•    Business is a complex set of interdependencies. Few good decisions are made in a vacuum. Solicit input. Shop your agenda. Get out of your cube for goodness sakes.
•    Communicate a consistent agenda. I suppose that’s the Reagan Rule.
•    Get to know the agenda of others—especially those outside your department. Take them to lunch.
•    Put yourself in the other person’s shoes when encountering conflict.

6.    Zoom in, pull back
•    Details matter—the trick is figuring out which you need to make the call.
•    Don’t ignore Malcolm Gladwell’s notion of “thin-slicing.” Listen to your immediate reaction to things.
•    Sit and stare at the wall—it doesn’t mean you’re not working. Throw assumptions out the window and reconceptualize the business.
•    Monitor the marketplace. Most great ideas are borrowed.

7.    Have fun
•    When you’re loose, creativity blooms.
•    We work for 10+ hours a day. I’d rather sashay, not shuffle through it.
•    Work is more fun when you’re optimistic.

Life Is Too Short…

"In looking for people to hire, look for three qualities: integrity,
intelligence and energy. And if they don’t have the first, the other
two will kill you."
— Warren Buffett

I was having dinner with a good friend the other night and we began to talk about ways to deal with the increasing pressures and velocity of today. We were talking about my recent post on burnout. He agreed that the current late stage of the business cycle increases demands on the average person but added that the intrusion of instant communications (Blackberries, IM, etc) exacerbates everything. You can’t wind down and it becomes more difficult to escape the rat race.

My friend is one of the most productive people I know. He gets more done by Tuesday than most people do by Friday. I probed him for a nugget or two on how to manage the 28 hour day. Instead of a time management strategy, he surprised me with one simple piece of advice:

                          “ Life is too short to deal with assholes, so I don’t"

As I reflected on his advice, I realized how much this resonated with my world. There is no shortage of stress, surprises or setbacks in the life of an entrepreneur or venture capitalist. Over 50% of VC deals end poorly and the ones that succeed usually dance with death at least once or twice. While this is not enjoyable for either entrepreneur or VC, it is the interpersonal behavior that makes life bearable or miserable for all involved.

As I look back at the variety of experiences I’ve had, I see several themes or characteristics that emerge. I’ve had successful investments like FeedBurner where the management team was phenomenal to work with. I’ve also had situations where, despite the success, it was contentious to the very end. I’ve also had less than successful investments, like 800.com, where the team (led by CEO Greg Drew) worked ethically, hand in hand with the investors to find the best solution for all.

What are the early signs that your partner (VC or entrepreneur) will be easy to work with or a potential nightmare? Looking backward, I’ve come up with several guide posts:

1)    Are communications open, transparent and proactive or are they reactive and filtered? Good CEO’s communicate frequently and openly with investors and give them the good and the bad. They take responsibilities for poor decisions and identify potential icebergs well before others see them. Poor CEO’s filter the information that flows up from the ranks. They continually spin bad news (only after having to divulge it). They suppress comments from the rest of the management team and make comments/threats to them like “are you committed to being a member of this team or not…”. Both sides know when the other is being insincere and less than forthcoming.
2)    Do they help others or are they always taking? Good CEO’s realize that building up goodwill is critical for future success. Opportunists are always trying to figure out how to suck more out of others. Look at their behavior and see how often they are helping others advance, especially when there is nothing in it for him/her.
3)    Is the leadership in the game for a greater good/purpose or solely as a mercenary? When you ask a CEO what motivates him/her, will he/she say “to make a lot of money” or “to change a part of the world”? Investors are playing with fire when they back leadership that is looking primarily to strike it rich in two or three years. They are driven primarily by profit motive and will either begin to self-optimize or head out when things don’t go as planned. This is not to say that managers don’t burn out or lose conviction in realizing the greater good, but how they interact and respond to crisis illustrates a lot.
4)    Does the CEO (or VC) strive to grow the pie or simply to enlarge his/her piece of it? If the different sides continually try to recut the deal or comment on how they are getting screwed, you will have trouble on your hands. Should things not go well, the in-fighting will make the external developments pale in comparison. CEO’s or VC’s that portray themselves as “victims” will make very poor partners.
5)    Does the CEO (or VC) look out for the other key team members or will he/she self-optimize his/her own position at each point in time? Early on, you get a taste of this when dilution from a new financing occurs. Some CEO’s will take less for themselves so that others on the team are taken care of. Others will spend very little time discussing the impact of the event on others.
6)    In the end, do you trust your partner or are you plagued by suspicion? Your gut is very accurate on matters like these. Does it question your own behavior/actions or do you worry that others’ key actions are going on behind your back? If you find either your partner’s responses evasive or that you are being evasive, then you’ve got trouble brewing.

A good partner is rewarding to work with and you are appreciative of their commitment and value-add. In venture capital & entrepreneurship, whom you back or hire will amplify the good or the bad. Good CEO’s attract top talent and deceptive ones repress it. Both types are competitive but one sees a broader horizon while the other simply looks at his/her own path.

Julian Robertson, the legendary founder of the Tiger hedge funds, was maniacal on the importance of management. “Have you done your work on management?” He’d grill subordinates on all aspects of management ranging from where they went to school to actions they had taken to details about their lives. He wanted his team to know everything there was to know about the people running the companies they invested in.

Life is too short to deal with assholes. Be very careful with how you pick partners to work with. It is very difficult to stop the cascade of misery once you start down the path of “overlooking” certain personality flaws or “explaining away” certain aberrant behaviors. Over time, work towards creating an asshole free environment.

My BarCamp Fundraising Talk

Jason Rexilius pulled off another great BarCamp in Chicago over the weekend of 6/23. I loved the energy and creativity flowing at the event with developers coming together from a broad array of backgrounds to code, share and bond. We definitely need a lot more of this in Chicago. Jason asked if I would do a quick Q&A with the crowd on fundraising for start-ups. I would give an overview here on what I talked about, but David Dalka and John Mascarenhas did a much better job than I could at this.

David’s post, Matt McCall gives venture capital investing tips at BarCamp Chicago, which includes John’s guest post, is at the link above.

As I’ve gotten to know Matt McCall more, I begin to appreciate his approach. He doesn’t fit the preconceived mold that many would think of when they picture the typical venture capitalist. He’s more of…

Thanks guys for pulling this together.

Teach A Man to Make Cell Calls…

"Teach a man to make cell calls, and he eats for a lifetime…"
  — Matt McCall

Home run blockbuster companies have historically driven both the venture and entrepreneurial worlds. Large infrastructure plays (like Cisco) and service plays (like Amazon or eBay) have defined this landscape. However, with the tepid IPO market impairing exits for the venture and entrepreneurial worlds, VC’s are trying to rethink their models (e.g. Sevin Rosen). Furthermore, as in the computer world (chip speed–>bigger apps–>higher chip speeds), application waves follow infrastructure waves which then enable further application waves. We are clearly in the midst of an application wave (MySpace, YouTube, Web 2.0, etc) powered by the massive infrastructure spending on internet and wireless. Today, it is very consumer centric, but business centric plays continue to emerge (e.g. Innerworkings, Echo Global Logistics, etc).

While entrepreneurs often dream of large, game changing ideas in order to raise venture capital before eventually going public, most would be better off thinking of more immediate and applicable solutions. With technology as cheap as it is (open source, commodity hardware, ad models, etc), it does not take much to get a concept up and running. Since less than 5% of all start-ups get venture funding, most should be thinking about clear business models that lead to cash flow in a moderate amount of time.

They should also be thinking about applying technology to the myriad of processes and industries in their everyday lives which could be improved, if not revolutionized, by technology. The Economist gives a very basic example of this in Kerala, India. Sardine fisherman, when they bring in a good haul of fish, have to figure out what ports to pull into to sell their fish. Often, other fisherman have likewise been successful, and when they all descend on the same port, prices plummet and they end up with significant waste.

Robert Jensen of Harvard studied this and found that on one given day (like many others), 11 fisherman had to throw away their entire catch even though there were 27 buyers for the fish within 15km of the port he chose. In other words, they either a) chose the wrong port or b) were not able to contact the right buyers (just the ones at the doc).

Starting in 1997, some fishermen began to use cell phones to call in to ports to forward sell their catch. They surveyed the different ports, while still at sea, locked down their sale and then pulled into that port. Under the old model, if they chose the wrong port, they would not have the money (gas) or time to go to the next port. As a result of this, waste nearly disappeared and their profits grew over 8%.

Why do I mention something as mundane as a small sardine fishing village in India? Because it is mundane. Every part of your life has mundane processes and businesses that are inefficient or ineffective because of basic impediments. With the advent of technology, many of these go away. For most entrepreneurs, this is the best course of action. Use your specific domain expertise (or partner with someone who has it) to go after basic business and supply chain challenges, even if it includes taking on a principal role (e.g. being a retailer, distributor, etc). Technology enhanced business services will play an increasingly prominent role in entrepreneurship especially at high speed internet access and now cellular high speed service penetration continues to increase, thereby changing people’s behavior and adoption of it.

Look for situations:
1) that have significant cost & inefficiencies due to basic processes
2) where there are clear technology solutions that address these issues
3) where it doesn’t require dramatically changing people’s behavior
    — this often means making your firm look like the others but you embed your technology internally
4) there is sufficient new profit from your application for a strong ROI
5) preferably, this technology helps create barriers or lock-in

Teach a man to make cell calls, and he eats for a lifetime…

AsktheVC: How Do You Calculate Operating Cash Flow

Yesterday I posted the following as a guest blogger to Brad Feld’s and Jason Mendelson’s popular blog, AsktheVC.

Matt takes on the following question: What are some of the best
ways you’ve seen to sensibly estimate and/or calculate capital and/or
operating cash flow, and how do you like to see this presented to an

Cash is the life’s blood of any company. It comes from either the
company’s operations or from raising capital.  There are a number of
definitions of cash flow. I prefer to focus on what the core operating
business is generating or burning net of any financing activity. As a
result, I look at Operating Cash Flow minus Cap-X. A gross
generalization of this includes (apologies to all of my accounting
& finance profs):

Net Income
plus depreciation, amortization and other non-cash cash income statement items
minus working capital needs
minus core, recurring capital expenditures (exclude large one time charges)

Since both working capital and cap-x can vary significantly monthly,
you should average across a period of time that smooths out the swings
such as the average monthly cash flow for a 3 or 6 month period. You
should also understand how this changes as your business ramps since it
will impact your financing needs.

I define capital as debt plus equity. Should your business consume
cash (as defined above), you will need to finance it through either
raising equity or taking on debt. This can include facilities such as
working capital lines to finance receivables and inventory or lease
lines to finance capital expenditures.

In the end, cash flow and capital are two sides of the same coin.