A Friday series exploring Startups and the people who make them go. Read allIf the Shoe Fits posts here.
I said Tuesday that I wasn’t holding my breath in hopes of change when it comes to harassment in the workplace.
I blamed two main reasons, one societal and the other legal, but KG sent me an article yesterday that diminish the likelihood even more.
The articles cite an annual survey done by First Round on various topics, such as hiring, compensation, funding, etc. Last year they added diversity and inclusion and this year they added questions about harassment.
The companies are venture-backed and from all over — the Bay Area, New York, Los Angeles and other parts of the US.
Every year, we survey as many venture-backed startup founders as possible to figure out what it’s like to run a technology company right now. This year, we got more responses than ever before — 869 — giving us an even more precise pulse on what entrepreneurs think, feel, fear, and value.
These founders are the bosses of tomorrow’s tech sector, which doesn’t bode well.
As you can see they aren’t kids who are likely to change their attitudes when they “mature.”
55% have been in business for three to five years. Nearly 60% have an all male board and slightly more than half say their team is “mostly male.”
Actions speak louder than words and most don’t have any formal policies regarding diversity and inclusion or harassment.
Maybe I’m missing something, but there’s nothing about the majority of these new “leaders” that changes my mind regarding the likelihood of real change.
You hear it all the time, “build a product that solves your own problem.”
That’s exactly what JT Marino and Daehee Park, both software engineers, did when they quit their jobs to create mattress company Tuft & Needle, seeding it with $3000 from each each of them.
They didn’t take venture money because they wanted to build the company for the long term and borrowed the money they needed to grow.
“The reason why we turned them down all those times is because we figured it would change the way we operate as a company.”
Instead, Marino, 30, and Park, 27, took out a $500,000 loan, at a rate of 10%, from Bond Street, one of the new breed of alternative lenders, in order to keep control of the company and continue doing things their own way.
They built the business online — no showrooms and no salespeople.
No hassles returning a mattress you hate. And, perhaps most important, no gimmicks on prices, which range from $350 for a twin to $750 for a king.
They’ve considered other products, even developed a few, but with no investors to force them to expand, they are focusing on the mattress business.
Is it paying off? Absolutely, so no problem meeting their loan payments.
By its first year in business, Tuft & Needle had reached $1 million in revenues. And then it just kept growing, hitting $9 million in 2014, then $42 million in 2015. This year, Marino and Park expect revenues to reach between $125 million and $225 million, a three- to five-fold increase over last year. And, yes, it’s profitable.
However, recognizing that not everyone, especially older buyers, are comfortable buying a mattress online, they are opening their first retail store at 637 King Street in San Francisco (where else?) — first and possibly last.
“It could very well be our first and last store, or it could be the first of many,” Marino says.
That’s the priceless reward for bootstrapping.
Call your own shots, experiment as you choose and stay true to your values.
Today’s guest post is from Igor Sill, founder of Geneva Venture Partners in Silicon Valley and an active angel investor.
The Start-Up Venture Pitch That Gets Funded
Virtually all of the start-up funding presentations I see by newly minted, bright eyed MBA entrepreneurs are certainly well presented, but are nothing more than just another “idea”.
An innovative technology with a new business model disrupting a huge and growing market idea is great, however, a fundable company it does not make. Evangelistically presenting a slide deck borne out of a great idea is, essentially just that, an idea. It may be your “baby” but it’s just one piece of the overall entrepreneurial pitch. Unless the other start-up propositions are addressed it rarely finds funding.
There are several risk factors associated with funding early stage startup ventures, as evidenced by the 9 out of 10 failures. There’s:
the founderrisk,
the technologyrisk,
the consumer adoption risk,
the market size risk,
the future capitalization needs risk,
and, most importantly for me, the execution risk.
Let’s look at the technological risk first. If the technology doesn’t work, generally there’s no money left to start over or re-engineer it. It may take years to solve the technical issues, and generally some other entrepreneur working on it will inevitably get it done. Generally, it’s not about technology, as a competent group of engineers can usually program web-based projects, or find portions of the code that have already been developed and then quickly “put together” a working prototype via royalty sharing deals. So, essentially, the technology risk tends to be minimal.
Of all the failed internet businesses that I have invested, the culprit is usually a result of the lack of customers, or as some may tell you “it’s the inability to quickly penetrate the addressable market”. Business success is all about gaining customer traction, rapid market adoption and offering a compelling business model. Simply put, internet businesses fail due to lack of customers.
When I reflect on one of the biggest internet successes I funded, from zero revenues to IPO, then growing to $16B in market capitalization within 6 years, I recall that their first product offering was absolutely horrible and the beta customers were less than enthused. Lots of technical assumptions proved false in the real world. However, those customers offered key insights into their businesses and the improvements they truly needed—essentially taking a pretty good idea and turning it into an industry changing stellar solution. The start-up team learned the real value proposition to the customer’s pain. So, the second iteration grew from a dozen or so customers to hundreds, then thousands, then tens of thousands. More insight was gained, more customer satisfaction was earned, much greater value was delivered which evolved into higher product prices, more attractive business terms, bigger margins and an acceleration of both, customers and revenues, then profits.
The key lesson: all start-up ideas evolve based on customer usage and feedback. Generally, your business will evolve into something much more compelling, much more disruptive and industry changing—all of the great internet successes went through a very similar process.
During this stage of the growth process, the entrepreneurial founder’s leadership and company-wide execution was the key to overcoming the early risks, “crossing that chasm” and scaling that business successfully. The returns to investors proved phenomenal.
So, back to that slide presentation. Show your prospective investors that your idea was refined via actual customer usage, that you learned great insights and evolved them into a meaningful value proposition for your customers. That your customers benefitted geometrically and that you can now scale that into hundreds of new paying customers, increasing the profit margin as you grow, and your company’s market valuation. That you know the sort of talent you’ll need to grow the business to a leadership role and that you’re capable of recruiting and leading that talent.
Essentially, an investor needs to grasp how rapidly you can validate, learn, deploy, evolve and scale that business into the leader of a large, growing market. Investors typically extract that from how committed smart founders are about learning their customer needs and the correlation of market trends and dynamics. It’s not solely about a brilliant idea and a smart entrepreneur. It’s not about how great you are, what school you graduated from or that “J” curve chart you displayed in your slides. It’s about how prepared you are to attack a huge market, your ability to learn from your customers, evolve and design new solutions, and, it’s about people. Think Steve Jobs, Bill Gates, Larry Ellison, Marc Benioff, Tom Siebel, Larry Page, Sergey Brin, Bernard Liautaud, Marten Mickos, Peter Thiel, Evan Goldberg, Reid Hoffman, Mark Zuckerberg to name but a few. A clear pattern starts to emerge.
Remember that 9 out of 10 startups will fail. So the real question is how are you going to continually learn to solve your customer’s biggest problems while minimizing the market risk and scaling your business? Now, go put those ideas on your slides.
Igor Sill, is a Silicon Valley venture capitalist and founder of Geneva Venture Partners. He is an Angel investor, and Limited Partner in Goldman Sachs Investment Partners, Benchmark Capital, Norwest Ventures, Brentwood Associates, SV Angels, ICO Funds, The Endowment Fund and Granite Ventures. Sill was educated at the University of California, Berkeley, received his MBA from the Said Business School, University of Oxford and is a member of Merton College, Oxford University. He also attended Harvard Business School’s Venture Capital Program, Stanford Graduate School of Business Advanced Management College and Stanford Law School Directors College.
When possible I prevail on someone I know to attend the major AlwaysOn conferences, usually it’s KG Charles-Harris, but more recently it’s been Chris Blackman.
Last week Chris attended this year’s AlwaysOn Venture Capital Summit at Sand Hill Road in the heart of VCland and got a glimpse into the future investment strategies of that storied world.
From Chris Blackman
A culture of innovation? Customer driven? Family oriented? Work hard play hard? Top down or bottom up?
Do companies still embrace and boast about these corporate attitudes anymore?
Judging from what I heard at the AlwaysOn Venture Capital Summit they have taken a back seat to burnishing a reputation of being a green in many companies—but not all.
Amiel Kornel, senior managing director of the Emerging Technology Group at venture firm Spencer Trask still cares about those values and behaviors.
In particular, he looks for “companies that will define new market categories of business while emphasizing a top down approach to a balanced lifestyle.”
Innocentive is Kornel’s poster child for such values.
It also created the business category known as crowd sourcing.
For example, last week, the US government announced an online challenge with the aim of discovering a process for how the Internet can help with rapid problem solving. How was it won? A group of MIT students used incentive-based collaboration techniques to encourage individuals to share the winning information.
Innocentive is fast becoming the nexus of such competitions. They have the ability to bring together thousands of minds to solve intellectual challenges quickly.
Mr. Kornel reminds us why company culture is important: “Key individuals must be fun to spend time with because at the end of the day, this relationship is like a marriage.”
And to be productive it needs to be a good marriage.
For more than a decade my angel investor and many of our colleagues have been bemoaning what happened to the venture world. Call it the takeover of the walking investment banker.
It started when the name partners wanted to kick back a bit. That made sense, but unfortunately they went to Wall Street for their new people and hired a lot of the hot young turks who were great at manipulating money, but had never really produced anything.
I remember a client telling me how the Board member from his VC investor had a tantrum yelling for the company’s ROI numbers—when the company was six months, working on a revolutionary hardware/software system and the product was still in development. Sheesh.
“The biggest names in the industry are concerned about low returns and are blaming several factors: funds that have grown too large, the M.B.A.’s that have invaded the industry and older partners who have lost touch with what is new in technology.”
For those who don’t understand, typically a partner sits on the board of each startup that the firm funds and this limits the number of companies in which they can invest. In 1990 VCs invested $2.7 billion, at the height of the dot bomb it was $104 billion; it’s dropped back to around $30 billion now.
Because the money must be put to work, too much money is often forced on firms that didn’t need it.
“That often means forcing $3 million into a company that needs $300,000,” according to Ben Horowitz.
Now a number of VC firms, some old players and some new ones have decided to change the game.
“Marc Andreessen, who co-founded Netscape, is announcing on Monday that he and Ben Horowitz, a longtime business associate, have raised $300 million that they intend to invest in technology companies. The venture capital firm, Andreessen Horowitz, will risk small sums, as little as $50,000, on new ideas.”
This is good strategy, far better than pushing millions on a company that needs far less for no other reason than the money needs to be invested and the number of partners is limited.
So what does all this mean to you?
Well, it won’t happen overnight, but it could mean dozens or even hundreds of new, solid startups with doable business plans and backed by patient money.
The kind of companies that grow and flourish because their investors don’t have to have a multi-billion return next week to look like heroes to their investors.
And that’s what made our economy and country strong.
Image credit: Mark Coggins on flickr and agoldfisher on YouTube
Recipes have changed over the years, with the biggest change being the elimination of fat. Ingredients for business success have similarly changed—no fat. Now it’s content and communities—not capital
Recessions have traditionally been good times to start new ventures and to expand SMBs (small and mid-size businesses). Larger competitors retrench, leaving some market niches exposed and unprotected. Workers are available, often at reduced rates.
Recessions loosen long-time business relationships and create brand-new opportunities. Recessions are Joseph Schumpeter’s “creative destruction” on steroids.
This recession is exceeding all expectations for creative destruction; but with a few substantial differences.
First, while risk capital was available for emerging ventures in previous recessions, it has simply vanished in this recession.
Second, the need for risk capital has dropped dramatically for certain types of businesses, particularly those focused on information services.
The New “New Business Model”—Everything You Need is Free.
OK, “free” is a little bit of an exaggeration. But the cost of business expansion is dramatically lower than in the past. For instance:
You don’t need an extensive network of offices. Most knowledge workers already have home offices. They work at a customer site, at home, or with co-workers at a coffee shop.
You don’t need a sophisticated telecommunications system. Virtual PBX’s, portable telephone numbers, internet-based telephone service, and conference call services are inexpensive and readily available.
You don’t need a big advertising budget. With Google Ad Words, you can pay only for results. Better yet, create your own promotion with social networks, blogs and email communication.
You don’t need production equipment, raw materials, or inventory. The data is the business.
You don’t need a computer facility to host your information database. Google, Amazon, Microsoft, Salesforce and others offer cloud computing for free.
You don’t need any back office. You can outsource accounting, HR, IT, CRM, and almost every other internal business function.
You don’t even need employees. You do need a team, but new business models use clusters of associates.
If everything is free, then what do you need to build your business?
You need content and communities.
You don’t need capital!
This is an over-simplification, but allow me to make the point.
You Need Content
Your business needs something of value to provide to customers.
In the information age, this is content—not just entertainment content, but a cluster of information, typically housed in a set of inter-connected databases. In previous posts we discussed Google, Jigsaw, and Alexa.
Another example is deCODE Genetics. For only $195 and a sample of your DNA, deCODE will map your genes, identify a collection of your genetic risk factors, and map your genetic ancestors. This business model combines a proprietary database with a physical connection to each customer.
Granted, the actual consumer service is a “nice to have,” but the business model is powerful. Your business generates a continuous stream of data. Package it and build a data business.
You Need Communities
Communities are more than just a collection of customers, suppliers or employees. Communities have common interests.
Your business is only the conduit, or the meeting place for your communities. The most effective communities have some structure. Online games are excellent models for your communities. Provide enough structure and rewards to stimulate the community, but then let it grow.
You Don’t Need Capital—You Do Need a Cash Business Model
This may be one of the biggest surprises of the new century. The internet, low-cost communications, and the availability of low-cost support services have dramatically leveled the playing field for new businesses competing with established organizations. You don’t need huge capital investment to build an information business.
With no investment capital, you need a business model that generates cash quickly.
Here again, technology and the internet have conspired to meet your needs. Credit card payment systems eliminate the collection hassle. Internet delivery and prepayment terms shorten the cash cycle.
All you have to do is provide compelling value for your customers.
The significant reduction of investment capital ranks as one of the major challenges affecting businesses in 2009. While 2008 may be the year that investment capital evaporated, we are only now learning to live with the loss.
The drought in venture capital has been well documented, with only seven venture-backed companies completing IPO’s in 2008, generating a meager total of $551 million in liquidity (Dow Jones VentureSource). Liquidity through acquisition also fell, by 50% from 2007, both in total dollar volume and in median price paid. In 2009 venture funding will be both smaller and more difficult to close.
Start-up funding from other sources, such as angels investors and friends & family has also plummeted, in direct relation to the decline in the stock markets. Bank credit, either from loans or from credit cards, has shriveled. This deleveraging will become a permanent part of the economic landscape, for the next decade or longer.
Business Models for the New Decade—Small is Beautiful
In response, many small businesses are exploring new business models that do not depend upon external investment capital and long time horizons for liquidity. While these models are only beginning to emerge, a few trends are already evident:
Immediate cash flow—without investment capital, cash generation becomes critical. The criteria for business investment shifts from total ROI to payback period, measured in weeks. New business models will generate cash almost immediately.
Small scale—Scalability has lost its luster. First, there only limited investment capital to fund infrastructure for scaling. Second, the pressure for immediate cash flow shortens the window for investment in scaling. Third, the value of scaling is much lower when the traditional exits—IPO and M&A—are reduced.
Multiple revenue streams—in the current risk-averse environment, multiple cash streams have strong appeal. Multiple streams can create challenges with business focus, but the combination of smaller scale and overwhelming drive for cash flow can help to keep the organization on track.
Linked, but not integrated—Linkage generates benefits to the organization, but preserves flexibility and maintains focus for each individual cash stream. Tight integration, often a requirement for scalability, needs more capital and a longer time frame.
High dependence on the owner/operator—this is a significant diversion from the venture capital business model, in which the investor/owner becomes a central actor in the success of the company. In the venture model, the entrepreneur develops and prototypes a business concept, then raises venture capital. At some point, the venture owners often replace the entrepreneur with a “professional manager” to grow the company into an acquisition candidate, or rarely into an IPO. Then the “IPO executive” steps in to provide the leadership to close the acquisition or acquisition. Note that the venture investor / owner, not the entrepreneur, provides the continuity in this model.
Example—Building Contractor Reorganizes for Multiple Revenue Streams
The Texas building contractor we met in the last post refocused his business on restoring foreclosed houses owned by banks when financing for new home developments dried up. He targeted small investors searching for cash flow from rental properties. Then he assembled several small service teams to deliver a complete package to rental property investors:
house acquisition and restoration,
mortgage lender,
property manager, and
long-term maintenance service. Each team is a separate company and a separate revenue generator with a separate revenue source.
Two threads link these companies economically. First, they all focus on a specific type of customer—a private investor in small rental properties. Each company provides a separate service, but all the services are necessary to offer a complete solution for the customer. Each individual company succeeds better when the entire group succeeds. Second, each company owner has some ownership in the other companies. As a result, the companies are more than just mutual suppliers to the customer. From the customer’s viewpoint they function as a single operation. They are linked, but not integrated.
Build Your Business for Life—Not for the “Exit”
This is perhaps the single biggest change in the emerging business model.
There is no exit.
This is not a threat from Jean-Paul Sartre, the author of the depressing existentialist play No Exit. Rather it is the opportunity of a lifetime. The entrepreneur is a business owner for a long time, even for a lifetime. The rewards for building and owning the business must directly from the business. Any financial rewards come from a stream of profits generated by the business. Any personal rewards in satisfaction come from the business itself. This new model, surprisingly, leads us back to the roots of entrepreneurship.
Entrepreneurs face difficulties that are hard for most people to imagine, let alone understand. You can find anonymous help and connections that do understand at 7 cups of tea.
Crises never end.
$10 really does make a difference and you’ll never miss it,
I said Tuesday that I wasn’t holding my breath in hopes of change when it comes to harassment in the workplace.
Virtually all of the start-up funding presentations I see by newly minted, bright eyed MBA entrepreneurs are certainly well presented, but are nothing more than just another “idea”.
When possible I prevail on someone I know to attend the major AlwaysOn conferences, usually it’s KG Charles-Harris, but more recently it’s been Chris Blackman.
It started when the name partners wanted to kick back a bit. That made sense, but unfortunately they went to Wall Street for their new people and hired a lot of the hot young turks who were great at manipulating money, but had never really produced anything.
Recessions have traditionally been good times to start new ventures and to expand SMBs (small and mid-size businesses). Larger competitors retrench, leaving some market niches exposed and unprotected. Workers are available, often at reduced rates.
