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While on vacation last week I had a chance to read Danny Meyer's new book Setting the Table. I thought it was a great read. If you like food and wine, and/or enjoy reading stories about successful entrepreneurs, you'll enjoy the book. There are some good reviews on Amazon which go into more depth than I have time to here.
I recently passed along some advice to a first-time CEO who is contemplating his first raise of outside capital in the not too distant future. He's built an incredible business on his own over the past 5 years, and is dealing with primarily Tier 1 venture firms. With specifics to his situation and company removed, herein is the context of what I sent. Just my $0.02 - as I told him - take it for what it is worth. If you find them helpful, let me know.
Here are the points, some strategic and some tactical, and not necessarily in order of importance:
1) Create several financial models and options. While your potential investors are talking about investments of anywhere from $10-$25M, it's important that you give yourself options and have a very clear view on how you'll use the proceeds. Additionally, give yourself the option of not raising any outside capital at all. While the revenue growth curves attached to the different capital raise models may differ greatly, having a "no outside capital" plan gives you confidence and leverage as you go through the process - leverage you'll want when it comes time to talk terms. And being clear on your use of proceeds (in a measured manner) is a nice check and balance to the push you'll get to "go go go" for growth.
2) Nail the financials and legal. Nothing can derail a successful venture investment faster than a screwy set of books or legal structure. In my last company, we gave an above-market option grant to a CFO we trusted implicitly (I'd known him for 10 years, and his track record as a banker and VC was impeccable) - and I never had to worry about our financials (or our cap structure either, for that matter) again. Having absolute trust in your CFO frees you up as CEO to focus on growing the business, and you know when you walk into that board meeting that your numbers are accurate and well-thought out. A good CFO will also work well (and proactively) with your investors, saving you time and letting you focus on strategic dialogue with this group and your Board. On the legal front, once you take in outside capital, you become a shareholder like everyone else - and your law firm's obligation is to the company, not to you. See point #7 below.
3) Build the team. Focus on key management team hires and assume you're going to make a few mistakes. A great hire can have a big impact on a company, but a wrong one can have an even bigger impact. Carefully craft the metrics your management team members are responsible for, and address performance issues asap. As the Chairman of my first company told me - "The common elements I see in first time CEO's: a) they don't hire fast enough, b) they don't fire fast enough, and c) they don't manage their board and investors well." Board members can also help provide an objective view on a senior management player if need be.
4) Craft a marketing plan. Given the market you are playing in (customers are enterprises), PR can be an important catalyst to help you appear "bigger than you are." I am NOT a fan of big marketing plans or budgets, but a well-crafted PR strategy and a good web site can go a long way. I utilized an outside contractor in my last company - paid her $5-6K a month for 5-7 days a month - and got phenomenal output and focus (happy to send you her name - she's fantastic). A good professional in this area will help you craft a PR strategy that identifies your audiences (customers, employees, investors, analysts, etc.) and creates 3 messages for each, then works to get these noticed by the appropriate media and analyst outlets. I've used both big firms and independent contractors, and it would take a miracle for me to go back to using a large firm in a startup environment again.
5) Nail down your sales process. This includes the tactical - what the stages are for qualifying and closing deals - as well as the strategic - who do you sell to, why do they buy, what are the decision criteria, what are your strengths against the competition, etc. If you are selling something relatively new to your buyers (may not be the case in your situation), you may have to "teach them how to buy" your products/services. In any case, definition around these concepts will greatly improve not only common understanding among the management team, but also do wonders for consistency and reporting as you start to keep investors posted on your progress.
6) Build a Board. Your new investors will likely take 1-2 board seats. I'd stronly suggest you bring 1-2 non-investor board members onto the team prior to financing. If you are already in discussions with a potential investor, you should co-opt them in this process. If not, go ahead and build your Board. I'd focus on people who a) you can trust, b) have a track record and understand the space(s) you are playing in, c) can bring ideas on talent, financing and growth (sales, product, etc.), and d) understand the venture and growth financing landscape. In my last company, I had 2 board members who had "been there done that" several times and were incredibly valuable to me - we probably talked at least every other week - and were a great catalyst and compliment to our venture investors. As a young CEO, these "more experienced" Board members can be incredibly valuable in new hire, financing and partner discussions, where appropriate. Brad Feld's blog site also has some interesting posts on Boards and Board management.
7) Get your personal house in order. Although this is last on the list, it is perhaps most important for you personally. Make sure your option and equity agreements are rock solid, and your employment agreement is fair and competitive with what an investor would expect. If you have corporate counsel, I'd still recommend using a third party personal attorney to draft your employment agreement. I can provide you with benchmarks on what is considered competitive in today's market, as can any attorney doing this kind of work in Silicon Valley. I can shock you with stories of scenarios gone bad in this area, both mine and others, but suffice it to say this is one area you want to absolutely make sure you get right well in advance of a financing.
Most of all, ENJOY THE RIDE. Building a company is an incredible experience. Done right, it can be incredibly rewarding - both financially and emotionally. Enjoy it.
Jeff
TechCrunch today has a profile on Jingle Networks, which just raised another $60M in funding from Goldman Sachs. Jingle is another great data point for the mantra that, as an entrepreneur, you don't need to reinvent the wheel to tap into a monster market.
The company provides a free 411 directory service in exchange for the caller listening to a 15 second advertisement. Apparently consumers make more than 6 billion directory assistance calls per year, and Jingle claims to have already captured 3% of the market. Even if you think web apps on mobile phones will eventually replace standard land line and wireless services like directory assistance, it will take a long time. Plus, Jingle's service is sticky - once you've got 1-800-373-3411 on your mobile speed dial, will you ever go back to paying $1.25 for 411 service from your carrier?
I'm not an investor in Jingle and don't have a stake in its outcome (nor does VeriSign), but I do think it's a clever concept that continues to push the ad-driven revenue model, and it's another reason I believe consumer-driven and advertising models in the mobile and web spaces are just getting started.
Steven Levitt and Stephen Dubner's book Freakonomics is well worth the read. It's not going to change your life, but it is an entertaining (fairly quick) read with some thought-provoking concepts (including a position that the drop in crime in the 90's was due to the legalization of abortion in the 70's, an in-depth look at the finances of a Chicago crack dealer and his gang, and a data-driven position that sumo wrestlers are cheating). The latest edition of the book has excerpts from the blog the author and economist maintain - one of my new favorite sites. Next book: Danny Meyer's Setting the Table.
I've been waiting for someone to create a consumer-driven referral and shopping site (I'm not a shopper, I just think the concept is a no-brainer), and I think this is pretty close to what could work: ThisNext. Check it out. I found it via VentureBeat, then linked to a post on CNET. Unclear how they'll drive traffic to the site, and as we saw with YouTube, traffic wins...
The rise of "web 2.0" has been surprisingly fast, and is starting to add up to really big $ (see: MySpace, YouTube). When any massive technology trend takes hold, it is always interesting to watch entire industries crop up around said trend (witness the entire market that has been built around Google's AdSense). One that will be particularly interesting to watch is the trend towards paid user content in the blogosphere and product review spaces. Michael Arrington put up an interesting post on TechCrunch yesterday on several new companies (PayPerPost, ReviewMe and others) playing in this space. The issue comes down to trust - can I trust the content I'm reading?
For example, a mother reading a product review on a stroller by other moms who have proactively chosen to place a positive review on a site is much more compelling than one placed by a paid "reviewer" (potentially paid for by the stroller manufacturer) - but how does the reader know which is which?
The product review space continues to evolve, with companies like BazaarVoice rapidly growing hosted platforms in addition to traditional sites like CNET and ePinions.com. Additionally, companies like VeriSign are offering "brand intelligence" services designed to help companies garner intelligence from blogs, traditional media and other sources to monitor their brand in the "digital" world. As consumer brands learn more about the online world, and the increasing influence it has on shoppers and readers, be sure the trend will accelerate.
It'll be interesting to watch...
If you aren't aware that YouTube is being acquired by Google, you must be living under a rock. What is always fascinating about these kinds of success stories is the interesting parallel stories that crop up. Two that caught my eye this week are particularly interesting.
The first is a post by Josh Koppelman who runs First Round Capital out of Philadelphia. Josh is a friend of a friend and recently posted an email exchange he had with Chad Hurley from YouTube back in August of '05 about investing in YouTube. For whatever reason, the investment didn't happen, and the rest is history (Sequoia made an estimated $480M on its $11M investment in YouTube).
The second is a "fifth Beatle" story in USA Today this morning about Jawed Karim, the 27 year old "third founder" of YouTube. While Hurley and Chen have received an immense amount of media coverage over the past year, Karim left the company in '05 to head to Stanford for a graduate course in Computer Science. Apparently much of the idea for the site was his. Don't feel too bad - he still owned a big chunk of the company when it was acquired :).
We recently put on our annual Market Leaders Forum at Pinehurst Resort in North Carolina. The agenda consisted of a few days of speakers, interesting dialogue, and of course a round of golf on the famed Pinehurst #2. Attendees included executives from industry leaders such as CVS, Novartis, Unilever, Kimberly-Clark, UPS and others. Below are a few insights, trends and observations gleaned from the sessions.
Our speakers for the sessions were fantastic, and represented a cross-section of views on Retail, Globalization and Consumer Marketing. A few of their insights:
Brian Gildenberg, Chief Knowledge Officer at Management Ventures, led off with a focus on trends in the Retail industry. Two of Brian's key points: 1) an increasing focus on localization in the Retail space, and 2) an increased focus on "the facts" - running the retail store environment based on sales insights, rather than forecast and ship data (we're obviously big fans of this second trend, given our strong position in providing "real time" POS from retailers to their suppliers). Brian also pointed to the trend among top retailers to very specifically target specific customer segments via both marketing and in-store product assortments, something CVS and Best Buy, for example, do very well.
Florian Zettlemeyer, Associate Professor of Marketing at the Haas School of Business (UC Berkeley) followed Brian with a deep dive into some of the incredible things companies like Harrah's are doing with customer loyalty programs (notably, a few weeks later, Harrah's received a buyout offer from a group of private equity firms led by Texas Pacific Group). Using a sophisticated set of programs designed to market to consumers across a variety of properties, Harrah's has successfully driven key metrics like profitability per customer and repeat visits up dramatically. With loyalty programs an increasingly profitable part of leading retailers' operations, Florian's talk was right on the money.
Our third speaker, Navi Radjou from Forrester Research presented a number of compelling views on globalization. One of the most compelling takeways I heard from Navi's talk concerned the way American companies look at markets like India and China. For the past few years, most of the focus has been on these markets as low-cost sources of labor and services. Going forward, however, with the "BRIC" (Brazil, Russia, India, China) countries leading population and spending growth on a macro scale, more and more companies are (and should be) looking to these markets as sources of new revenue and customer acquisition.
All in all, it was a great set of sessions led by a diverse set of speakers. And of course, the setting wasn't bad either :)
I spent the past few days in Cologne, Germany (photo from room at Hyatt Cologne at left), with the board of a global standards body focused on EPC. Asked to speak on correlations between adoption of the Internet and the potential for EPC, I highlighted the amazing adoption we've seen over the past 10 years of the Web, with e-commerce and other markets far surpassing even the wildest expectations circa 1995. MIT professor/Oat Chief Scientist Sanjay Sarma spoke as well, and gave a rousing talk about the Japanese auto industry's adoption of Six Sigma to overtake the U.S. "BIg 3" automakers, drawing the parallel to EPC and RFID as enablers of similar market shifts - for those who take advantage of them before their competitors. Herein are a few additional thoughts, insights and observations from Cologne.
1) "EPC" is not the same asl "RFID". Most of us who spend time around this industry understand this, but the media often used the two terms interchangeably. RFID is a technology, EPC is a standard. Today, we are using the EPC standard data structure on 2D barcodes as well as RFID, and who knows where it may be used in the future. Let's not confuse the two. They are, probably inextricably linked for some period of time as EPC correlates to serialization and RFID is the "hot" serialization technology of choice right now. Let's see if we can start to use the terms correctly, and the coverage will follow.
2) EPC is global. We hear this, know it, and believe it, but sometimes it takes a room full of executives from around the world - China, Germany, the U.S., the U.K., Korea, etc. - to confirm it. There is wordlwide interest in the potential for EPC and RFID, and global players are playing a meaningful role in helping move things forward. Wal*Mart and Metro get a lot of the attention, but believe me there are 100's of other global players involved and taking very visible roles (and not just in Retail).
3) Security and Privacy are real issues, and the industry needs to do a better job of addressing both. On the consumer privacy front, I have been impressed with the steps our customers have taken where and when seeking to pilot RFID and EPC in a customer environment - and we haven't had a single complaint from a consumer. However, despite sometimes being confused around the actual capabilities of passive RFID technology and EPC, the policy concerns raised by consumer privacy advocates are very real, and the industry needs to do a better job of innovating and responding to these concerns. On the security front, we've seen some early "hacking" by groups exposing some of the holes in early versions of RFID and EPC. There are numerous initiatives to get ahead of the curve on this, including various working groups within EPCglobal and elsewhere, but the industry needs to work harder to incorporate best practices and capabilities from other markets such as the Web (see: RSA/EMC, Symantec, VeriSign and others).
4) There's more happening than you think. Companies throughout the world are running incredibly compelling pilots and small-scale rollouts, you're just not hearing much about them. There are several reasons for this, teh two primary ones being a) fear of backlash in the media (over consumer privacy concerns) and b) true competitive advantage. This second point bears more coverage - having been involved with and led more than 50 RFID engagements worldwide (including many at the item level in pharma and retail), I can vouch for the concept - there is very real, and very significant, competitive advantage at stake. Companies are not only learning more about their own processes (good and bad), a concept Dr. Sarma highlighted (correlating RFID to a tracer in the bloodstream, designed to show at a very granular level the good parts and bad), but also gaining more insight into the real potential for RFID and EPC in their future operations. These learnings are being incorporated into design (products, packaging, shelving, store layouts, manufacturing lines, etc.) as well as budgets and technology architectures. Thus, many of these industry leaders are not anxious to share their insights with others, believing they are uncovering true sources of competitive advantage. It will be interesting to see 10 years from now whether some of these companies "slingshot" past their competitors, much like the Japanese did in the auto industry via the use of Six Sigma (per Dr. Sarma's analogy).
Nothing revolutionary here, just a few observations that reinforce the positive momentum EPC and RFID are making on a global basis. It's going to take some time, but we will see a major impact from these innovations over the next decade.
Jonathan Knee's book The Accidental Investment Banker is a moderately entertaining read about his career on Wall Street, covering roughly ten years at Goldman Sachs and Morgan Stanley during the 1990's and early 2000's.
You'll find many stories about dot-com IPO's and other banking follies from the 90's, but if you've got experience in the banking space, or know much about it, you won't find much in the book shocking or insightful. Moderately entertaining, light reading.
Now, onto my next read: Freakonomics.
Check it out: Moixa Energy. Another really cool technology - this one I discovered on MobileCrunch. I haven't used the product yet, but per my post about CFL's in September, there's a lot of potential, and it goes beyond just getting more people to use rechargeable batteries.
As covered in Information Week and elsewhere, last week California Governor Arnold Schwarzenegger vetoed a bill targeting restrictions on the use of RFID technology in the State. I happen to be a big supporter of both consumer privacy and new technologies, and the Governor hit the nail on the head with one simple statement:
"I am concerned the bill's provisions are overbroad and may unduly burden the numerous beneficial new applications of contactless technology."
I will not go into laborious detail in this post, but the fundamental points to be understood here are as follows:
1) Consumer privacy is a major issue that can and should be dealt with by both the private (through innovation, new technologies, etc.) and public sectors (primarily through debate and legislation). In fact, I would probably fall into a camp arguing we do not yet have an adequate legislative structure to deal with the onslaught of consumer privacy issues that have arisen in the past 5 years via the Internet, mobile, credit cards, etc.
2) In our zeal to develop new consumer privacy legislation, however, we should not be focused on the means, but rather the end. In other words, remain focused on the issue and policies around the issue, not the technologies which may (or may not) be used to protect and impact consumer privacy. This is a point that I, along with other industry leaders (from RSA, The Center for Democracy in Technology, McKenna Long & Aldredge, EPCglobal and others), stressed at the U.S. Congressional Internet Caucus back on June 27th of this year.
3) If we do focus on the means to the end - RFID in this case - we are completely missing the "problem" and focusing on the "symptom" - and of course ignoring many, many other technologies that have the same types of capabilities. If you understand technology cycles, RFID is just a starting point for a whole new world of sensor, "mesh networking," and "Internet of Things" technologies that will come onto the scene over the next 5-10 years and make a positive material impact to our daily lives (see: Zigbee, Wi-Fi, WiMax). Watching our legislators focus on the "hot" technology that happens to be attracting media attention and venture funding, rather than the core policy issues at hand, will not only be painful but a very constraining environment for innovation and growth. For example, had legislators grabbed hold of WiFi (one can come up with many fantastic scenarios under which the wireless technology could be used to violate consumer privacy) the way they are RFID, I may not be writing this post (I'm using a T-Mobile WiFi Hotspot in Weisbaden, Germany).
4) The other implication of focusing on the technology, as opposed to the policy, is we potentially place great limitations on the future uses of the technology - many of which have not even been conceptualized yet. I think most citizens would favor technology that can place a high degree of certainty on the authenticity of prescription pharmaceuticals. While this is not a huge problem in the U.S. - an estimated less than 1% are counterfeit in the U.S. - it is a rampant problem in countries like China, Russia and elsewhere (driving the worldwide esimates to more than 10%, or $45B+ per year). RFID, along with other technologies, has the potential to make a major dent in the global counterfeiting market (via serialized authentication) - but not if we pre-legislate the technology's viability before we've even gotten started. Hence, the Governor's quote so aptly described the situation:
"I am concerned the bill's provisions are overbroad and may unduly burden the numerous beneficial new applications of contactless technology."
Thank you, Governor, for understanding the issues and taking a long term view. We will continue to generously support legislation, education and other efforts to help the market make the right decisions around consumer privacy. We hope others take the view the Governor has - focus on the policies and issues at hand, not the specific technologies.
Amazing article today by Joe Sharkey in the NYT called "Colliding with Death at 37,000 Feet, and Living.". He was a passenger on the private jet that collided with a 737 from Brazil. If you haven't read it (and a lot of people have - it's the most emailed article on nytimes.com), check it out - it's worth a read and will give you a bit of context into the overall story as it develops.
As covered in a great article by Scott McCartney in the Wall Street Journal this weekend, this Fall we'll start to see the first Very Light Jets delivered to customers. If you like technology, and you travel, you'll want to learn more about this very cool shift taking place in the air travel industry.
For the past few years, Eclipse Aviation, backed by Bill Gates and others, has been attracting media attention for its pioneering new jet, the Eclipse 500. Traditional player Cessna and fellow startup Adam Aircraft (backed by Goldman Sachs and others) are also launching their first offerings in the VLJ category over the next 12 months.
Heavily written about in aviation magazines and by pilots like Rich Karlgaard of Forbes, VLJ's promise to revolutionize the way we travel - creating a new class of short-range "air taxis." VLJ's are also appealing to wealthy individuals who are willing to spend $1.5M for their own light jet instead of a share in a fractional jet ownership program like NetJets. The three companies have taken advanced orders for more than 3,100 VLJ's so far - before the first customers have even received their jets.
You need a subscription to the online version of the WSJ to read this past weekend's article, or access to the print copy, but if you're interested in VLJ's, it's worth the read. According to McCartney's article, he's the first person to fly all three of the new models (Eclipse 500, Adam A700 and Cessna Mustang) and his reviews are pretty cool (the Eclipse has the smallest cabin of the three, with an interior "20% smaller than the inside of a Honda Odyssey minivan," and sitting on the back seats of the Eclipse is like "sitting on a floor cushion at a Japanese restaurant").
The new VLJ's have a ton of technology packed into them, including new lighter, stronger composites and completely redesigned avionics. There are a million articles on the web about VLJ's - including others like Karlgaard who have written about their test flights - check it out.
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