Category Archives: Venture Files

The Rules for Entrepreneurs

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Venture Files founder and former curator, Steven Fisher, wrote a series last year that remains one of the best of its time. Even though he has moved on and is working with Network Solutions, I think it’s as important now (if not more so) than it was last year at this time. This is a consolidated (and updated) version of that series.

Pay Yourself First

Over the last 9 years and two startups I have learned many things and screwed up royally in some cases. This series is about providing you best practices of lessons learned and avoiding the mistakes I have already made.

In the past, I have had good years and bad years. When you have employees, they expect to be paid and when you mess with payroll (and payroll taxes, but that is a post for another time) you create such a negative culture that nothing will get done.

With that said, when you are starting your business regardless if it is a service or product company, you will have startup costs and probably forgo paying yourself for 6-12 months to keep growing the business. That is fine and to be expected. What you should not do (and what I did) is keep adding staff and sacrifice your own salary in the name of growth. If you keep going like that and have a bad quarter you will have nothing saved for a rainy day and if the business fails you will probably be in immense debt and got nothing out of the business.

Granted, the balance between growth and cash flow is a tenuous one but it is one thing you should never defer to someone else in beginning. Plus, there is a difference between creating a lifestyle business and an enterprise. A lifestyle business is really making enough money for yourself and having some contractors or 1-2 people that gives you a good salary but is more about freedom. An enterprise is a business that scales and gets big over time but you will be working intense amounts in the beginning but will need to hire those smarter than you with the intention that you are looking for an exit and will have time for freedom when you cash out.

So when you are growing the business you should work the first 6-12 months paying off the initial capital expenses and getting about 6 months of cashflow for yourself before you hire anyone else. Once you have that done, start paying yourself something, even if it is small and will ramp up over six months, pay yourself first. This will get you in the habit of being committed to making the business pay for itself and you so you are not worrying about living month to month and let you find some resources to help you deliver while you continue to sell and grow the business.

Once you are looking at hiring someone use these two rules as a starting basis:

- Have six months of payroll for that person in the bank on top of your salary

- Have 90 days of projects or sales committed for that person to deliver so they not only have something to do but are earning their keep.

You may have to be conservative at first in your growth but in the end you will scale better and create a business that is focused on delivery and customer service without putting you and your employees on a cash flow roller coaster.

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Getting Physical

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“I love software,” my friend used to say, “But it’s soooo dehumanizing!” Perched 18 feet in the air atop a scissors lift the other day — I resisted the urge to shout, “I’m the king of the world!” — it occurred to me that variety in work not only makes work more enjoyable, it’s essential . . . especially, something physical to contrast and complement time spent at the computer.

Now, I’m not even a developer — most of my work on our social-networking app was wireframing and flowcharting with Adobe CS tools . . . when I wasn’t writing user agreements, business plans, and corporate docs. Still, I remember euphoric moments solving a UX problem, then excitedly assembling dozens of wireframes until 3am. World blocked out, mind starting to numb up, clicking command-O or command-shift-S and forgetting what it was I wanted to do. I can only imagine what it would be like to find oneself having similar brain-farts deep in the weeds of multiply nested subroutines. No wonder coders get cranky!
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But my hacker friend gets physical breaks. A lot of his code gets programmed into chips, so he’ll be at the “˜bench’some days, sticking parts into sockets, occasionally breadboarding things up, soldering.

(An EE and inveterate tinkerer, I love the smell of rosin-core solder in the morning. If I weren’t so afraid of the time-sink it would become, I’d so join HacDC. Have you seen the creativity springing forth around Arduino microcontrollers in the pages of Make? Btw, it’s a bit late, but the kits make great stocking-stuffers!)arduino-serb1

There’s a lot to be said about mixing it up. Adobe actually instituted a program to get their programmers away from the screen for a few days at a time working on physical projects — soldering, even — to refresh weary neurons and foment new thinking. I love the ‘real photoshop’photo above (hat-tip, Keith Casey). I imagined whoever built it was staring at the interface with bloodshot eyes, got the brilliant idea, and stayed up all night gathering the ingredients, cutting and folding cardboard, and lastly whipping out the camera for the glorious shot. (Turns out, it was actually some agency work — but we’ve all had these moments, when we jump out of our genres, driven by inspiration.

We humans need that variety. Even when we’re doing something we really, really enjoy, it goes stale. Few writers just write. Workout routines become drudgery without variety. Even eating, veritable survival, gets uninteresting when day after day, it’s same-old, same-old.

Which is why I was having the time of my life (well, a good day at work) on a scissors lift, checking out the HVAC in our warehouse space. We build next-generation components . . . but right now I’m supervising the buildout of a clean-room area where some macho processing equipment will be housed. I really enjoyed surfing the web for a used 408V to 380V transformer (50kVA, three-phase, of course). Anyone got one?

My Illustrator skills came in handy, doing electrical, plumbing, and other floorplan drawings. And after unloading boxes of ceiling tiles and HEPA filters arriving from trucks, it’s really comforting to return to the computer. (Even to update my Project file . . . or Sharepoint — I will not let it beat me!) And vice-versa.

One programming friend builds boats. Another does stand-up comedy. Many are great cooks. Tell me: what do you do to mix it up? (Drinking doesn’t count!)

Bail Out Entrepreneurs, Not Big Auto

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So, the Auto Bailout bombed in the Senate. Good. (Never thought I’d be writing about it in Venture Files . . . but then, I never imagined it might affect entrepreneurs — including me — directly.) It’s an intriguing tale of desperation, fear tactics, and ironyLa-192-car-pileup2003.jpg.

Desperation because the auto industry leaders are out of options, and doing everything they can to avoid the only solution that makes sense: filing for Chapter 11 protection. (I used the word “˜protection,’rather than “˜bankruptcy’because it’s exactly that — a means of legally keeping at bay those who might otherwise come after you for moneys owed.) I’ve been through it with one of my startups, and I’ve written about it here.

Fear tactics because the auto industry leaders would have us believe that the world will end if they file for Ch. 11. In fact, it makes survival possible. It enabled the airline industry to survive. So why would the industry leaders oppose it? It wipes all the existing stakeholders clean — all stockholders, creditors, pension plans, and — most important of all, the unions. And it will wipe out industry leaders’individual stockholdings . . . and probably cost many of them their jobs.

But it’s the only solution. Lending the big automakers money to make payrolls is a short-term fix at best. There’s nothing they can do in the next six or even 12 months to turn their battleships around. I get as sentimental as anyone about GTOs of the past, but the model is broken, and dead. It’s time to clean house, start over. I feel for the folks who will lose jobs, but sorry — your management screwed up . . . and they’ve been doing it for decades. Instead of spending on R&D for new technologies, Big Auto spent on lobbyists to get relaxed efficiency and emissions standards.

It’s not about casting blame, or punishing anyone. It’s about survival. The crushing debt burden, inflated wages, and inefficient manufacturing infrastructure will never enable a US auto maker to return to profitability, even if it had a next-generation car ready to go. Unions are an antiquated and unnecessary burden, a throwback to times when bosses literally beat employees to make them more productive. The tech industry works fine without them (although there were several attempts to unionize them over the decades). More to the point: Foreign automakers have set up shop in the US without them.

I wonder if auto workers were given a choice of losing their jobs or taking a comparable job at two-thirds of their current salary at an electric-vehicle plant, which would they choose?

Ironic. Because there’s already a fully approved $25,000,000,000 in loans available to car makers. That’s right — $25B in direct low-interest loans (the Federal Funds Target Rate, currently at 1.0%). It’s the Department of Energy’s ATVM Loan Program (for Advanced Technology Vehicle Manufacturing), and it’s fully approved by Congress, under Section 136 of the Energy Independence and Security Act of 2007. So why aren’t they taking advantage of it?

Because they’d rather keep operating as they’ve been for the past 50 years, than do what they should be doing. And they’re woefully unprepared to shift manufacturing to projects that meet the ATVM criteria.

So, despite the fact that, it’s all there, fully approved by the House and the Senate, with applications due by the end of this month, and decisions to be rendered by March 31, 2009, there’s that hitch: applicants have to have bona fide projects that meet the criteria of an Advanced Technology Vehicle. That could be anything from new high-efficiency gas-sippers to plug-in electrics. (You can read all about it in the Interim Final Rule.) The funding is not designed to resurrect Oldsmobiles.

For decades, Big Auto chose to avoid the transition to alternatives. Not that they didn’t do some work on them. (If you haven’t already, be sure and rent the documentary, “˜Who Killed the Electric Car?’ GM built one — the EV1 — people loved it, and every last one of them was destroyed . . . by GM.)

The automakers should be forced into bankruptcy. And rebuilt. Federal funding should be provided — but only to fund the new businesses emerging from Ch. 11.

If I seem personally peeved, I am. On behalf of my new company, I attended the DOE public meeting for the ATVM Loan Program in Washington DC last week. See, the loans are also available to makers of components for ATVs, which is what we are. I’m fairly confident we’d qualify for the program (although not in time for the year-end deadline, but no problem — there will be rolling application deadlines — and 90-day decisions — every quarter.)

But there are a couple of gotchas: 1) the bailout that just failed (thank God) was going to “˜steal’$15B from the program (since the money was already approved); and 2) even though it will go forward, a subtle point came up in the DOE public meeting — once a ‘magic number’of $7.5B targeted for bad debt (based on the committee’s analysis of aggregate applicants), after which the loan program is ended. That means, say, GM receives a $4B loan to set up a plug-in hybrid plant, but the committee calculates a 50% probability that GM won’t be able to repay the loan. Then $5.5B is left for the others. You get the picture: the DOE might only end up lending a total of $15B — mostly to the big guys — based on a 50/50 chance that they won’t make good on the loans.

And us little guys — the entrepreneurs who should be getting the money for new technology — will be squeezed out. We were all there (at two separate meetings) at the DOE meeting last week — lots of technology companies developing radical new engine designs, patent-pending alloys with greater strength at a fraction of the weight, energy-efficient components, electric alternatives (including Tesla Motors). Oh, and a few representatives of Ford, GM, and Daimler, and the Japanese car contingent.

And although the Interim Final Rule makes no provision for ensuring that small companies get a piece of the pie, there is still hope: Section 136 also provides for grants, but the lawmakers haven’t gotten around to defining that part. Let’s hope the new Administration sees the wisdom in targeting that money for those who will put it to best use — the entrepreneurs. (They’re ahead of us in the UK on this one.)

Still, the (sitting) President is pushing the rescue, this time from the bank bailout fund. I reiterate: ‘Oh, Thank Heaven . . . for Chapter 11!’

Are You Captain of Your Destiny?

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Returning to quickly skim my blog reader 1,000+ after two weeks’head-in-the-sand, I see ‘Pownce acquired,’ and ‘Yahoo’s Chief of Insights Joins Bunchball.’ My spin radar immediately starts blipping, because I know that behind the ‘good news,’guts are wrenching. Decisions are being made for people, and that never feels good. Yet another reminder that all the sacrifices may well be worth captaining your own destiny.

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Sustaining yourself with a small business doesn’t make headlines. Money-raising has been the mainstay of startup news since venture capital exploded on the scene in the ’80s. ‘Huffington Post Nabs $25M.’ And why not? It was validation that the company ‘has arrived.’ It was the Big Show. But ask any CEO what changes when investors step in. Everything.

No, they’re not (necessarily) evil. They’re just bound and determined to turn your company into a successful exit. It’s their job, in fact. It’s not about you, or even your technology.

Chances are, your primary mission is not to achieve successful exit. (If it is, you’re probably going to fail.) For most of you, it is about you — your passion for your technology, or your customers, or what you do.

If it sounds like that’s at odds with investors, well it often is.

So when Bunchball (the Silicon Valley company that applies gaming mechanics to making sites stickier) announces its new ex-Yahoo CEO, I hear a founder’s gut wrenching. When crafts-aggregator Etsy announces former NPR Digital head Maria Thomas taking the helm, I hear a gut wrenching.

Often from the outside, the decisions seem right. Geeky founders often don’t make the transition to leadership — ubergeek Bill Gates is an exception — and Heidrick & Struggles and CTPartners (formerly Christian & Timbers) and the like make a lot of money plucking SVPs out of big companies and placing them in VC-funded startups. (The genealogy of silly titles can actually be traced back to CEOs being made to step down — where do you think Chief Product Officer, Chief Strategy Officer, Chief of Insights, and other staff titles came from?) But then, investors aren’t all-wise. Gross blunders are made at the highest levels. (Remember when Pepsi head Sculley was brought in to run Apple? Not to mention Gil Amelio . . .)

There’s really only one way to avoid decisions in your company being made for you: captain your own destiny.

That usually means going slow, growing customer by customer, often staying small. If you want to go ‘big’— and not everyone does — you’re most likely to find yourself at the investment/management crossroads. As an ambitious technologist/hard-core developer, you might decide to bring in someone to run the business. (Hey, it happens — sometimes founders themselves honestly recognize the need for new leadership.) That bespeaks true wisdom on the part of tech founders. Eric Schmidt’s install at Google was a coup — not a coup d’etat.

In his blog post, ‘10 Tips for Building a Profitable Business,’ Dogster CEO Ted Rheingold’s entreated:

So constantly ask yourself, are we spending 50% of our time selling? I bet you’ll always realize you’re focusing too much on the product and not enough on finding customers that want it.

Any of us who’ve consulted know that hard truth: love doing the work, hate hustling to get it. If that’s you, and you find yourself running a company, you either need to embrace being the CEO (read: chief salesman) and quit coding, or find someone who’s a good complement to you to do that job and leave you to program (or design, or write, or do whatever it is that you really do best.)

Once you’ve piloted your ship (to belabor the metaphor) past the shoals into the smooth waters of profitability and solvency, and feel the need to raise cash, get big, and pull away from your competition, the dynamics of a deal with a VC changes radically — you get the money on your terms. Still el capitan!

I’ve observed a lot of folks in charge of their destiny lately. (In the month of November, 533,000 who were not, had their ships sunk for them — so much for job security.) Software, the Interwebs, automatic ads, SEO, and (yes) social networking have made it a greater possibility than ever — unlike the previous waves of semiconductors, PCs, and computer networking. It’s akin to the artisans of the Renaissance — with skills, there’s always work. Entrepreneurs today can be captains of their destiny.

And I truly admire you folks. The ones scrapping it out, making a living, while they build their business, serve their customers, and develop a following. Those of you who eat, drink, and sleep (not much) your startups.

Remind yourself this at the end of your crappiest days: You’re the one making the decisions. Go make some really tough ones.

Term Sheets Series Introduction (Classic)

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We continue our Venture Files Classics Series – posts written by Steven Fisher prior to Venture Files joining Technosailor.com – that are either great analysis pieces, or have offered some level of prediction accuracy… Or simply, they are of interest to this audience. In this case, Steve wrote a great series on Term Sheets from an entrepreneurs perspective. This was the introductory article and was originally published on March 8, 2006.

I have read Brad Feld’s blog “Feld Thoughts” for some time now.

Although I haven’t met him in person, I have exchanged e-mails a number of times and will say that he is a very insightful guy. I hope to move to Denver or buy a place there soon, so I owe him a beer for all his good advice.

Plus he is a huge 24 fan like me, so that gives him the extra gold star.

About a year ago, he started a series on “Term Sheets”. It is located here and it is what I will mirror in its structure. Why mess with a good thing, right?

I will link to it in my entries as reference and will probably quote it.

What I am looking to do is expand upon it and comment on each of these things from the Entrepreneur’s point of view.

I know Brad was an Entrepreneur, and a darn good one, but he wrote it from the VC’s perspective and is an awesome foundation to work with.

Each week I will take a topic as part of the “VC Speak” area of this blog. This is in addition to any other “VC Speak” stuff that comes along. In any regards think of this like a mini-course in Venture Funding with getting the MBA.

Please share this with all your fellow entrepreneurs in the hope they might learn something new, laugh in agreement or lament at our shared experiences. I really look forward to you comments as a form of group therapy.

Editors Note: Steven and I have a mutual respect for Brad Feld. Feld is a principal investor with the Foundry Group, based in Boulder, CO. In full disclosure, Brad is also an investor at Lijit where I (Aaron) work as a consultant. This article was written long before there was any other relationship.

Bubble, bubble, bubble – In Private Equity not Web 2.0 (Classic)

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This is the first in an ongoing “Venture Files Classics” written by former Venture Files Editor Steven Fisher. The selections are chosen for historical reference as well as a notorious ability to be right. The original post from January 12 of 2007 can be found here

Being a serial entrepreneur I have been through many business cycles, but the Internet boom of the late 1990′s was an extremely heady time. People were so enamored with what the Internet could do, every one really believed that the old rules didn’t apply.

The reality was that those rules applied more than ever and with the crash in the early part of the century we have tried to learn our lesson.

With these new companies deemed Web 2.0, everyone is expecting another bubble. So many of the same types of companies have been funded so there are bound to be consolidation and just plain failure.

According to Michael Arrington, his entry “Bubble, Bubble, Bubble“, the despite the fact that some companies are failing, the sky is not falling.

In fact I would call this time around the ol’startup track “saner, saner, saner”.

Despite many of these companies basing their success on being an aftermarket for Google, the smart ones I think many people know that you have to be in this to create a real enterprise and one that makes money. It is not so much about the VC’s but about the ability to use the low cost and barrier of entry to innovate.

But the Dead Pool is not cool

I think that the blog A VC gets it right his counter points on “Building It Up and Then Knocking It Down” are right. He says “over hyping young companies where people are working their butts off and then throwing them overboard quickly into a “dead pool” when they fail is not healthy.

I believe it is dead wrong to put this up there. It just feeds the fire for the chicken little’s of the world. Mike Arrington has known successes when he co-founded helped flip Achex and sold it to First data. I don’t know if he has experienced building a company from scratch and having it fail, many times from circumstances out of your control.

But there is a bubble developing and not where you think…..

The bubble is not with companies it is in the private equity market itself. The model of funding and the way people are evaluating companies is changing. The way investors look at companies is not based on a fast IPO but aligning it to be a sweet acquisition target.

This is helped in no small part since most VC’s invest like they are teenage girls. “Oooo, you invested in a video sharing site, I want one too! You put $5 million into social networking for eco-friendly baby boomers? Find me one so I can get one too!!

Here is how I got there:

  1. The amount of money chasing deals have lightening strike twice to find that repeat of unrepeatable past returns is growing rapidly
  2. The number of opportunities are declining and there are too many copycats plus the cheap money is pouring out to fund them.
  3. Not enough VC’s to serve on boards effectively and make the existing investments get to a proper exit
  4. IPO market is still not there and there is and there are only so many acquisition partners
  5. Higher prices of entry and lower returns

What I don’t know:

  1. When the IPO market might be friendly to tech stocks
  2. If investors will broaden their portfolio choices to get their money working in unique ways
  3. If funds might start giving their money back

Only time will tell if this comes to pass. If you have a good idea, the money is out there but might not be for very much longer.

Crystal Ball? 2-3 years or mid-2008 this is gonna come to a head. Only time will prove me right or wrong.

Editors Note: At the end of 2008, we do now know that the economy has imploded, not simply from web valuations. In fact, web valuations hardly played any part like they did in 1999-2000.

In fact, the web sector has seen much less damage, than the rest of the economy. In fact, there are still investments taking place, if devalued. A series investments for web companies typically range in the $1-2M range which in the larger picture is fairly small. Biotech companies, for instance, typically pull in around $20M for a Series A round.

That does not make the web sector immune, and in fact, Steve is correct in recognizing that there would be a bubble coming, and that it has arrived.