I carry a little notebook around with me everywhere I go. I keep this notebook so that I can jot down the ideas for random businesses which pop into my mind. I’ve had plenty of them, and some of them I have pursued with mixed results. When you are considering venturing off, there’s a two part question you have to ask yourself when deciding to get up off the couch and start your next thing which will drive whether you are searching for happy face or sad face emoticon in your email to your buddies.

First, “do you have any relevant experience?” If the answer to that question is “no,” that’s fine. It’s more than fine actually, as many a successful business has been started by someone who was in way over their head. You need to understand that your lack of domain knowledge will necessarily create some hurdles for you to clear, and some of the hurdles universal to all new businesses will get a little bit higher. However, there have been plenty of people who learn on the job en route to building a very successful business. How you ask? Well, that’s the second question.

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That must be the reason, right?  I’m just not that good.  I’m not as smart as I think I am.  All of the talent, schooling, and work experience have failed me in my quest to hit it big.  Of course, I could put forth some of the statistics as they relate to the percentages of people who have actually accumulated a multi-million dollar net worth, but that wouldn’t matter.  Rest assured, it’s a very, very small percentage of the population.

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Microsoft makes most of its money from two products, Microsoft Windows and Microsoft Office. Nearly everything else it makes loses money, sometimes deliberately.

This is not an uncommon refrain, though most times people call MSFT a one trick pony.  This continues to confuse me.  I sat down with Scoble a couple of weeks ago at the Structure09 conference and we talked about MSFT.  He’s a former employee, and he too made this quip when the topic of Bing came up.

I read through the most recent 10-Q for Microsoft to see if I could pull out proof of what I am about to state, but the content wasn’t there.  There’s more detail in the 10-K filing from last year, so here goes.  If we start from the premise that Microsoft did $60B in revenues in 2008, and Office and Windows are the only products we have, where does that leave us?

The client business was $16.8B, but includes Windows Vista, XP, Media Center, and Tablet.  Note, it doesn’t include Windows Server, a completely different product.  Each of the client variants of Windows could certainly come under one product banner.

For Server you would have to look at the Server & Tools business (STB), which for 2008 turned in $13.7B in revenue.  STB consists of Windows Server and SQL Server.  It also includes our tools business, which is Visual Studio.  Let’s not forget Exchange.

Our online services business, though a money loser (at the operation income level), and perhaps the one that draws most of Cringely’s ire, put out $3.2B in 2008.  This includes all of our search and all online properties.  That’s multiple billion dollar revenue businesses right there.  Are costs out of control?  Sure, but it’s not like building a billion dollar business is something at which you sneeze or can do in a garage.

Next up is the Business Division.  This one churned out $18.9B.  Office is a part of that business, but so is Project, Dynamics, and Sharepoint.  I don’t have specific numbers, but those are not small products by any stretch of the imagination.

Last we have Entertainment & Devices.  E&D has the Xbox, all of our games, Zune, and our hardware.  Zune may not be a money maker on the revenue side, but we sell a lot of mice and keyboards, and those Xboxes are doing OK.  Our game attach rate is very high, and with some top selling first party titles.

We also have businesses built around premium support and consulting services, and those aren’t small businesses either.  Just consider what the scope must be given our product base.

So, for a company that apparently only has 2 products, the list I enumerated of “large” products – businesses that could be stand alone multi-billion dollar market cap companies – is pretty impressive.  There are only 332 companies listed on American exchanges that have market capitalizations north of $10B, and we could fill that list with at least 10.

I have to admit, since returning to the company a little over a year ago, I have had this sense that things are looking up.  Don’t get me wrong, there’s no shortage of frustrations for me, but that’s to be expected when you come from a tiny company where you were the founder and CEO to a large company where you a cog in a wheel.

With the new fiscal year, I have a new role and a new team, and I plan on making liberal use of my training and experiences in constrained resource environments to do some things that will harken back to the mojo days of the late 90s and IE/Netscape goodness.

I know I posted a joke leaked screenshot of Chrome OS, and many people found it funny, but I firmly believe that this pre-announcement was the absolute dumbest thing that Google could have done.  First, they are starting to show a trend of pre-announcing products, with ever increasing time between announce and availability.  You could see this with Java support in App Engine, but then Wave, and now Chrome.  What are they thinking?  FUD worked 10 years ago, but not anymore.

Second, operating systems are our thing.  We have *YEARS* of experience building and delivering operating systems to market.  If it we so simple as to slap a pretty face on a Linux distro, someone would  have taken us out a long time ago.  There’s a long road of tattered carcasses that have tried to be “the next great OS.”  I use a Macbook at home for personal work, and enjoy OS X, and generally regard it as a great operating system.  Even with the Apple Fan Boy magic, they are marginally high single digit market share.  Ouch.

Third, and this is the important one, Google has given us a rally cry.  Whereas you could make the case that legions within the company felt that Ballmer’s quest to topple Google in search was Quixotic at best, no one, and I mean no one, comes into our house and pushes us around.  Expect to see the company galvanize around this new encroachment.  Expect a wave of pride, and something akin to, dare I say, nationalism, sweep through the company.  To pre-announce a thing a scant few months before Win7 goes out the door is going to bite them in the rear.  Win7 hasn’t had a bad review yet, and people are very excited to get it.  I have been running it on all my personal and work machines (other than the Macbook) for months, and it’s awesome.

We’ve rounded the corner, for sure.  We’ve rounded it and rejoined the race.  We were off in the woods for a while, but we’re back in the race and have a lot of power in the engine.  The next few years are going to be incredible.  I’m excited to work at the company, but more excited as a consumer who is going to benefit from Google, Apple and Microsoft all going at it hammer and tongs for phones, search and operating systems.

UPDATE: Looks like the original post is top spot at Techmeme…this week is going to be interesting.  That’s all I can say out loud.

declined because of sat score pe firm

“pe firm” means Private Equity firm.  So this person thinks they got declined from a PE firm because of their SAT score?  I am going to go out on a limb and say the SAT score had nothing to do with it.  Generally, to get an interview at a PE firm, you have to have cleared a series of hurdles that act as pre-qualifiers.  Did you go to a top 10 University?  Did you work at one of the large and well regarded investment banks who generally only pull top talent out of the Ivy League?  Did you attend a top 5 MBA program?  If you manage to clear all of those hurdles, I am not sure your SAT score will figure into things.  I could be wrong, but I never once looked at the SAT scores in the two years I ran associate recruiting at the PE firm where I worked.

Stranger still was my inability to find my site in any of the search results for Bing or Google.  Maybe I am missing a big SEO opp? =)

It’s Friday, and it’s sunny out here in Seattle, which means that no work will get getting done.  In lieu of work, I did some digging with my contacts on the interwebs, and it turns out there is are a couple of screen grabs of the new Chrome OS floating around out there.  I like how Google is taking their minimalist design philosophies for their search engine and applying it to their OS.

At the very least, you can expect that the UI for the OS won’t change for 10 years, that the OS will work only about 80% of the time (the other 20% it’s will be working on some personal projects), and it will spawn hundreds and hundreds of processes which don’t really do anything, never really appropriately allocate a heap, and just kind of sit there completely unused until the master process removes them from the system without telling anyone.

Apparently (apparently!), I have said something that hit a nerve.  When I posted my thoughts on the whole issues as to whether or not the VC model was broken, I had no idea that it would be the most popular post I have ever written (and it’s not even noon on day 2).  Crazy.

Predictably, some of my VC friends showed up to the conversation to point out that 1) am angry, and 2) that the “good” VCs don’t have associates.  First, I am not angry.  It’s easy for the VCs and their ilk to cast those aspersions, but the reality is that they have a fantastic business model, and they are going to fight to the death to protect it.  Second, the venture firm that completely blew me up at my last company has no associates.  One day I will tell that story, but even firms with only partners can behave badly.

I certainly don’t want to over-generalize an entire industry, but I can say that the vast majority of VCs are either neutral to the value of your business or in fact do actual harm.  I would go so far as to say that 10% of VCs are net positive, 70% are neutral, and 20% actively destroy value in the firms in which the invest.  As I quipped on Hacker News, partners in VC firms tend to practice what I call seagull management: the fly in, make a lot of noise, crap all over everything, and leave.

While the title of my first post included the associates, the bulk of the content was around what was wrong with the incentive structure and funding process.  The information asymmetry which has existed between those seeking capital and those who have it make it so that those seeking it are at an extreme disadvantage.  Further, those people funding the VCs (the pension funds, fund of funds, family offices, etc), have no incentive to hold these guys accountable so long as they continue to produce out-sized returns.  With sites like The Funded and pervasiveness of blogs, it’s now easier than ever for people to share their information about their funding processes.  Interestingly, I am hoping more and more information begins to find its way to the net as to how much money VC firms are actually making, how that persists over time, and the stacking effect which comes from raising multiple funds.  Many, many, many entrepreneurs simply don’t understand this, and if they did, they would have a far different perspective on where the interests of venture firms lay, and the likelihood that their interests and the VC firm’s interests are aligned.  The more time I spend thinking about Paul Graham’s model with Y!Combinator, the more I like it – very entrepreneur friendly.

Someone asked me in a direct message on twitter “how VCs add value?”  I think first and foremost they help you make your job easier.  If that means making connections to potential business partners, or identifying and recruiting talent, or thinking through potential stumbling blocks of your model – those are all good things.  Where the VCs break down is when they start taking their hammer and smacking everything with it.  There are many VCs who are afraid to say “I don’t know.”  They want to prove to you how smart they are or justify their existence.  Worse is when they prevent you from taking an action (I don’t know, say like the sale of your company which would net the founding team lots of cash) because it doesn’t help them hit the returns they need to justify their fees to their investors.  The scale of what “lots of cash” means to a first time entrepreneur and an seasoned VC are orders of magnitude different, and that has a direct impact on what would be meaningful in your life versus what’s meaningful in theirs.

I actually speak on the topic of getting bullied by investors and board members in an interview I did with Andrew at Mixergy.  I spent an hour speaking with him about my experiences at my last funded business, and he should have it up later this week.  There are a lot of lessons in that interview which I hope will be invaluable for entrepreneurs looking to raise money, get started, or even if you have already raised money.  I made a lot of mistakes, and I would love for others to learn from them.

In an effort to share those mistakes, I am going to be launching my community book project.  The working title is “The Failing Point: Hard Earned Lessons About What Not To Do” and I will be posting an essay a week from the book that I am writing.  Each essay will be titled in such way as to finish the sentence “Under no circumstances should you…”  Here’s the first essay from the Getting Started chapter.

The book is meant as the anti – “do this and you will be a millionaire” book.  It’s a set of essays on topics related to getting started, creating a product, building your team, starting the business, raising money, driving revenue and operating the business.  They say you learn the most from your mistakes.  I hope to take the mistakes I have made (a lot of them), and those I have seen made at companies for which I worked, and put them into digestible format for the entrepreneurial community.  I don’t have all the answers or a formula for success, but I hope I can help people looking to succeed with their business.

What I am hoping to get from the community is feedback, and for people to share their own stories in the comments.  If the content resonates with you, fantastic.  If you think I am full of it, tell me.  That’s the only way it will get better.  The content will be online, free of charge, and when the book is done, I will make a hard copy available for sale.  For now, I will have a category link here to “The Failing Point", but very soon I will have a separate site built out for the content.

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I can’t tell you how many great ideas I have had in the last decade. I am literally a legend in my own mind when it comes to creating awesome products that everyone in the world must buy. It seems like I have a new idea every day. Here are a few examples:

• Spinner rims for baby strollers
• A teddy bear with a beeper network activated voice box
• A book about the Internet for college kids
• A location based dating application for the iPhone
• An SMS based trivia text game
• Fleece gloves which are sleeve length
• Children’s utensils that have cars, trucks, boats built into the utensil

As much as I would love to believe that I am the master of generating million dollar ideas, one look at this list would tell you that I am as much a fool as the next guy. However, being the eternal optimist, when I came up with these ideas I thought they were, in the words of Kenny Bania from Seinfeld, “gold, Jerry, gold!”

In any event, once I have come up with the most awesome product in the world, I come up with the most awesome name, which of course has the proper awesome domain name available, and then of course I figure out how I am going to promote this awesome product via a blog, Facebook, or even Twitter. The romance period of thinking up ideas often involves thinking I am awesome, which I clearly am not. The challenge is that these are all ideas, without any action plan. I never once put in the time, energy and effort to kick start any of these projects.

As someone who used to be a semi-professional motorcycle racer (which basically means that I paid way more than I ever hoped to make), I can tell you that the time honored tradition of bench racing is not reserved for those of us who used to flog around a track on two or four wheels. As racers, we all used to love getting together after a race and talk about this lap or that pass. It’s pretty funny that I was always faster and closer to the front of the pack the more time that had elapsed from the race itself.

Startups and bench racing go hand in hand. It’s like peanut butter and chocolate (not to be confused with peanut butter and jelly, an abomination I don’t get, which is further compounded by those loons at Smuckers who put them both in the same jar). People love to sit around and talk about that company they are going to start “one day.” Or, better yet, “when the economy improves a little bit.” Or, my personal favorite, “when I’ve saved up enough money to tell my boss to shove it and start my own gig.”

What it is about the startup that has so many people spending so many hours fantasizing about taking on such huge risks, with extremely low probability of success, and really is quite a thankless task? It’s the fantasizing on which they spend so much time. Not the “start”-ing or the “up”-ing (as in – get up off the damn couch), but the fantasizing. Let’s call it aspirational dreaming. All the energy which is wasted thinking about how a person would spend the millions they are going to make when they eventually start their company would be far better served accomplishing tasks toward the goal of getting your idea off the ground.

The biggest mistake that people make is setting some big hairy audacious goal without properly level setting expectations as to what is required to get there. Nerds and tech folks love this big hairy audacious goal (or “BHAG”s as it’s called), because for them it’s like a badge of honor to have accomplished this big hairy thing. A great example of this would be Google. They want to “organize the world’s information and make it universally accessible and useful.” Wow. That’s big. Hairy even. Sergey and Larry didn’t start with that one though. Their original vision was slightly more mundane: "The anatomy of a large-scale hypertextual Web search engine.” You see, before you can start working toward your BHAG, you need to have accomplished a few smaller items to get some momentum.

There is no greater killer of an idea than lack of forward momentum. The easiest way to set yourself up for success is to decide what the end point is, and break the task into a series of smaller tasks. Preferably, there would be some very small, very easily accomplished tasks on the front end such that you can feel like you have made some noticeable level of progress in a reasonable period of time. This is a little trick I learned many years ago. You trick the mind into thinking you have forward momentum. Celebrate some of the early successes. You know what happens next? Each successive step actually requires less and less effort.

Here’s a great example. I’ve been saying I was going to write a book for 15 years now. Why haven’t I done it? All signs would point to the fact that I am quite the able bodied accomplishment engine. How could it be that this over-achieving, type-A person would have so much trouble getting off his ass for one of his ideas? To put in bluntly, it just seemed too hard. Every book on my shelf appears thick and meaty. Lots of pages. Plenty of words. That just seemed like too hairy a goal for me, for whatever reason, and I never got around to it.

This time is different. First, I broke the task down so that I could make progress every day. There was coming up with the topic, then coming up with the chapter topics, then working through the potential names, and of course finally getting around to writing the content. Specifically because I broke down the BHAG (“to be a NY Times Best Selling Author”) into a series of mundane tasks (“come up with a topic”, “come up with a name”, “come up with some topics”, etc) I was able to make some progress quickly, get my excitement levels up, and maintain the energy.

The moral? You can get off the couch and start that thing, whatever it is. If you can’t seem to muster the excitement, you either have a terrible idea, or too big of one. If the latter, then break it down to some smaller pieces and get moving.

I am about to go on a bit of a (LONG) rant here, but my point of view is one of someone who has worked in a private equity firm, sat on boards, invested privately, worked in multiple startups, founded a company, been a CEO, and raised money from angels and VCs, including securing term sheets from some of the most well known names on Sand Hill Road.  I am an entrepreneur first, and someone who has been smacked around by the VC community as a seeker of funds.

Let’s start with the venture funding process.  The Funded rightly points out that the junior folks at these VC firms are all business school guys who have no depth of experience from which to draw on when they are deciding which deals to pursue.  That is mostly correct, though there are a few I have met in my travels who at least had some real operational experience before going to a venture firm.

The trouble isn’t so much that the associates don’t know what actually constitutes a good business, it’s that they believe that they are uniquely qualified to make that determination.  Further, they actually believe that their few years of business school entitles them to an opinion as to whether or not a leadership team is going to get the job done.  This is particularly pronounced and troubling when the management team has 20+ years of experience, but the associate doesn’t think is “cool.”  If the associate doesn’t like you, you don’t get through them as a gate keeper.

When working to raise venture money, your path to meeting with the partnership must and will run through the associates.  They are primarily concerned with their ability to remain employed, which means minimizing their risk.  They are not going to push hard for anything, for that would entail taking on risk.  They don’t score points for being risky, and they certainly don’t score points for pushing for a deal which doesn’t get done.  They score points by not wasting the partners’ time, and showing the partner what the partner thinks they want to see.  As such, they are even more risk averse than the partners will seem.

The incentive system that the partners have laid out for themselves is a great one.  I have to admit, it’s one of the main reasons I wanted to get in venture investing.  What greater business than to sit around and get paid to dole out money to companies you think might build something for which you can then take credit?  When capital was scarce, and risks were high, the 2 and 20 model made a ton of sense.  Unfortunately, we now live in a world that is not only flush with capital, meaning the cost of capital has dropped precipitously to the point where it is essentially free.  The risk premiums that the VCs want for their money to go into your deal don’t make sense when there is plenty of capital out there that doesn’t require that premium or their desired levels of control.  Further, the capital requirements (both human and financial) for starting a company have also declined to the point where the amount of capital that a VC can deploy into a deal is far below what they need in order to justify their time on a deal.  That’s a big problem for them.

The problems with the VC model further compound themselves when you consider what the investors are buying.  I used to work at one of the largest private equity firms in the world.  You would think I have enough good sense to know what type of security to allow investors to invest in for one of my companies.  When you are trying to raise money, it’s very easy to lose your senses, and you find yourself just wanting to get the deal done; afraid that if you don’t, the deal will fall apart.  The security that was created for the angel round of my last company had some features (more on that in a moment) that were horrifically bad for the common shareholders, but I allowed it to happen anyway.  I not only should have known better, I DID know better.  I can only imagine how hard it is for young kids, some barely out of college, to navigate this process and not have a security thrust upon them which ultimately is unfair to them.

I had a conversation with Andrew Warner, of Mixergy, about my last company.  This is a guy who built a very, very successful business with a nice exit (he even bared his soul and showed the financials in a blog post – wow) and even he was completely clueless about the venture funding process (he never raised money – there’s a lesson in there kids), and what goes into a security that investors buy.  This was astounding to me.  What I take for granted is a black art to even the most successful of entrepreneurs.  I suggested that he get the book Terms Sheets & Valuations, by Alex Wilmerding.  This is a MUST HAVE for anyone who is thinking about raising capital.

The main rule for VCs is that they want to protect their capital.  They are going to use terms like “liquidation preference”, “participation”, “anti-dilution”, and “control provisions” to ensure that you don’t do what they don’t want you to do.  These “features” enable them to recoup their money, ensure that they are getting “adequate” returns, and keep you, presumably the expert, from doing anything they don’t want you to do with what they view as their money.  Funny, it’s “our company” and “our product,” but “their money” when they are talking to the entrepreneur.

Worse, the anti-dilution features enable investors to retain some level of their original investment percentage should the company have a down round in the future (meaning the valuation of the business went down).  The entrepreneurs and any common shareholders have no such provisions.  VCs are your friend on the way up, and tax you on the way down.  Painful.  They are penalizing the entrepreneur for making a good initial deal (for the entrepreneur, getting a higher initial price means retaining more ownership), or, paradoxically, taxing the entrepreneur for the idiocy of the VC because they paid too much up front for the deal.

Read up on the participation features to really have an emotional moment.  While Fred is right that it’s just an economic issue, so too was it with the feudal lord and their serfs.  I would hardly argue the case for the benevolent feudal lord.

Subterfuge and confusion are the names of the game when you are allowing a VC to invest in your company.  There will be plenty of VCs who decry this and say that they have the entrepreneurs interests at heart, and they want to form a partnership, blah blah blah, but it’s all bullshit.  They want to protect their capital, and the VC is already thinking about how to show the founder/CEO the door once the money goes in so that they can bring in “proven” talent.  As long as you know this going into your deal, then you are OK.  I would just hate for any would be entrepreneur to be surprised by this.

If there was one thing that continues to surprise me about the way that VC (and all alternative investment classes) works is that the people who are chartered with supposedly assessing the risk of funds, and making the decision to invest or not in those funds, are usually people who were neither as well educated or well paid as the very people they are looking to measure.  An extreme illustration of this would be like having a high school flunkie teaching a university level calculus class, and relying on the students to make their case as to whether or not their work is correct and what their grade should be.

If you are wondering why there appears to be no amount of risk assessment in the finance world (hellooooo, AIG anyone), it’s because the people in charge of monitoring are not as smart, capable or (and this is the important bit) well financed as the people they are watching.  The system isn’t fair, and the incentives are for VCs/hedge funds/PE funds to take excessive risks with other peoples’ money.  There is no risk to their own personal wealth (which they amass over time through management fees or bonuses), and their mobility within the industry is surprisingly high, even when they blow up in spectacular fashion.

The sad reality of the finance world today (and I say this as a guy who graduate from Wharton, and has done stints on Wall Street) is that the people who are being disproportionately rewarded are not the people who are actually taking any risks of their own.  You are better off working in an investment bank for 2-4 years and then taking the hedge fund job and living the cush life than you are actually trying to build a company that makes something people want and will pay for.  It’s stunning to me to see how many times this has played out with my classmates and peers.  The folks that tried to build companies and make things, more often than not, have fared far worse economically than those who invested other peoples’ money without risk of loss to their own capital.  That’s the way it is folks.

To make this point more real, I would like to quote from the most excellent book “World War Z” by Max Books (seriously, read this book if you haven’t…what will you do when the zombies come?):

Ours was a post industrial or service-based economy, so complex and highly specialized that each individual could only function within the confines or its narrow, compartmentalized structures.  You should have seen some of the “careers” listed on our first employment census; everyone was some version of an “executive,” a “representative", an “analyst,” or a “consultant,” all perfectly suited to the prewar world, but all totally inadequate for the present [zombie] crisis.  We needed [people that made things]…over 65 percent of the present civilian workforce were classified F-6, possessing no valued vocation…we needed to get a lot of white collars dirty.

The cost of starting your own thing has never been lower.  Go build something people want.  This imbalance should force the number of VC firms down to a scant few.  It may take a few years, but there’s a shake out coming.  That has two implications.  First, the power has shifted to the entrepreneur, but the entrepreneur has to realize this and take advantage of it.  Second, there will be a great number of unskilled (except in the art of “doing deals”) blue shirt and khaki pant wearing MBAs walking around Silicon Valley looking for biz dev jobs.  I’m not sure if they are the zombies or the F-6 workforce, but either way it’s a bad deal.

After my conversations last night at the Structure VIP reception, I came to the conclusion that the word “cloud” is like catnip for nerds.  You can attach the word cloud to anything to attain relevancy.

During his panel at the Structure 09 conference (being live streamed from GigaOm), James Lindenbaum from Heroku said that he doesn’t want to think about the question anymore; in fact, he wants to avoid the word “cloud” all together.  Instead, he would prefer that people focus on building applications and rely on abstractions provided by the development frameworks than to think about to cloud or not to cloud.

This just in, local San Francisco entrepreneurs are launching the world’s first cloud gas station.  They supply a true multi-tenant, pay by the drink model, removing the need to purchase your own refineries, and abstracting the gas production process to deliver a truly seamless experience for downstream customers.

Next up on the zeitgeist watch?  Attaching the word “scale” to the name of your company.