It's Not Necessarily Who You Know

In the world of social media, there has been a dramatic shift in how business ideas and implementations get done. David Armano touches on it today where he suggests that knowing the influencers will get you much farther in your effort.

In that case, it’s up to all of us to find them. Perhaps take a look at something like the Power 150 and start the list backwards (or maybe get out of the marketing echo chamber all together).  If you yourself have become the new breed of “gatekeeper”””ask yourself “is it who I know, or what they know?”. Ideally, its both””but up to us individually to strike the right balance.

Armano and I proceeded to have a lively discussion on Twitter over this idea. I agreed with his assessment  that the current landscape of the social web does cater to the idea of knowing people being more important than having a good idea. I disagreed on his conclusion that people should seek to extend their influence by knowing more of the top people on the web.

On principle, the “top people on the web” is a bit elitist and self serving. Both Armano and I enjoy being “top people on the web”, yet, I know my ability to scale is small compared to the ideas and conversations being pushed around. The web is bigger than me. It’s bigger than Armano. We both enjoy large networks of people that we know, and I don’t mean six degree of separation type stuff. We both can show you 10,000 or more collected business cards from over the years. At least I can. I presume it is the same for him.

I can brag about knowing over half of the Technorati Top 100 bloggers personally. I can point to the multitude of networking events that I attend (at least one major one every month) where I have a difficult time talking to everyone who wants to share their ideas and thoughts with me.

The problem is scale. The web is bigger than we are. You can put a gallon or five gallons or ten gallons of water in a sink, but if the drain is only an inch thick, you won’t be able to process more water out of that bin. You need a bigger drain to do that. In fact, it will take longer to drain that bin with increasingly more water. It’s physics.

Unlike Armano’s assessment that communicators, entrepreneurs, and brands should exploit the current landscape that values the personal connection over the business process (that is, good ideas can thrive on their own if they have merit), I see it as a hybrid. You must have a one-to-one network and you must have a one-to-many network, but your many-to-many network (the 2nd, 3rd, 4th, 5th and 6th degree of separation) becomes fairly useless fairly quick. Good ideas cannot thrive in a vacuum.  However, simply knowing influencers aren’t going to make it fly either.

I can’t tell you the number of people who are friends, not just business network contacts, who have talked to me with great gusto and passion about an idea and I simply look at them blankly. They know me personally, but realistically, they have a sucky idea. It’s not going to fly and no amount of knowing the right people is going to make it fly.

On the flip side, having a great idea and knowing the right people can make all the difference in the world. This is a reflection of the truth that many of the worlds greatest idea people don’t have the communication prowess to “sell” that idea and make it work. Likewise some of the greatest communicators in the world have great bullhorns, but suck at innovating themselves. So we end up in a world where we all need each other for something.

This blend of traditional (networking) and innovation is really where we need to be. We’re getting there, but we ain’t there yet. Reinforcing an unscalable paradigm of who you know as the primary enforcer of innovation is a dangerous trend that really does need to be changed. Sometime. Hopefully soon.

Update: Armano chimes in in comments and corrects the record. He is recommending a balance, as am I. Different slants on the same issue.

The Rules for Entrepreneurs

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.

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

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.