For those of us waiting outside the Finnish Embassy earlier this week to get in for Mobile Monday (a.k.a. dcMOMO)—all that was missing was the velvet rope. “Okay, we’re only going to let 20 more people in—to the rest of you, we’re sorry.” Me lucky.

Geez. You’d think it was a not new club. Well, to some, it is. Many attendants were prospectors with apps in their back pocket . . . and the prospect of generating hundreds of thousands of dollars in download revenue for an iPhone app is just too exciting to pass up. Forget Facebook and MySpace apps. This is real cheese.

Cheese indeed. Everyone knows the story of iFart, and no doubt many were there Monday night to hear Ken Burge (president of InfoMedia, creator of said gaseous phenom) tell his story. Download revenue to date: $490,000. Yet Burge’s electronic alter-ego (he attended from Colorado via Skype) actually let some, er, wind out of the sails: “The days of throwing something into the AppStore and getting traction—if they ever existed—are over.” Even with iFart, he acknowledged, they shilled for Mashable and TechCrunch. “Plan your costs based on a 50/50 mix of development and marketing.”

Ouch. Them windows of opportunity just seem to get smaller and smaller, don’t they? And what with development costs running a minimum of $10k to $20k per native app (according to panel moderator Viq Hussain, recently of Intridea, now launching his own media marketing effort at Kongruent), mobile launches start to get a little daunting. Panelist Isaac Mosquera of PointAbout, a DC firm that mobilizes sites, said it’s going to be a lot more, “because your first version is probably not going to be successful.” Multiple platforms, too. And don’t forget the server component. As Burge pointed out, you not only going to want to know who downloaded the app, but analyze and capitalize on all that valuable data.

Okay—enough of that negativism . . . let’s put on the pink glasses.

According to another dcMOMO panelist, Jason Siegel of Qorvis Communications (they built WashPost’s popular Going Out Guide for the iPhone—get it, it’s free), revenue from mobile platforms is destined to explode. “Mobile ad revenue will grow 36% to $200M in 2009, and by 2011 it will double to $400M.” Okay, peanuts compared to the billions in TV and online . . . but that’s a helluva ramp. Siegel is psyched because he’s seeing first-hand the movement of traditional advertising to the third screen—Qorvis is currently developing apps for, among others, AAMCO (the transmission folks).

Beep, beep . . . ring a bell? If it doesn’t, then you’re likely among the Millenials, who only register a 10% to 20% recall rate on the brand—vs. 90% for Boomers. Which is why all the panelists admonished “Choose your platform . . . wisely.” Blackberry, not iPhone, might be the place to start. (To some, the iPhone is still not a business phone.)

Still, it’s hard not to get excited about the potential for mobile apps. First of all, the platform is . . . mobile. You got it with you, right? So geolocation has a lot of buzz. Qorvis has partnered with PointAbout to do the kind of cool stuff you’d expect from a computer that knows where you are. “Step right into this Mall, son—and I’ll give you half off your second entrée at your favorite restaurant.” (And we know which is your favorite). Personal couponing, Siegel called it. Sweet. (Still, he creeped folks out a bit talking up Bluecasting—drive by, and your [mandatory] Bluetooth headset chirps “C’mon in, Ray . . . $10 off on an oil change for your Lexus today!”

Shades of Minority Report. Good afternoon, Mr. Takagawa . . .

Anyway, the future is bright through these glasses. Panelist Samuli Hanninen, the Director and Head of Ovi Product Marketing at Nokia (hey, it was the Finnish embassy, who’d you expect—Motorola?) got the geeks worked up a bit with visions of phones (sorry, mobile devices) supporting web runtime, and yes—Flash. “We currently have 300 million phones in the market that support Flash,” he noted, “and we’re working closely with Adobe to do more.” (Stick that in your pipe, Steve.)

The iPhone AppStore has generated in the range of $100M in revenue, according to InfoMedia’s Ken Burge. (Lightspeed Ventures’ Jeremy Liew has an interesting take on Apple’s take here.) Not huge, but then it’s really a driver of hardware sales.

Burge and others expect Android to eventually eclipse the iPhone (Google was to be represented on the panel, but got waylaid in travel).

All in all, a great evening, upbeat discussion—and extremely well moderated by Hussain.

Here are some salient bullets, in my view. (For another view, see the Top 10 Tweets)

• Stretch your dev dollars by developing in-house, and incentivize your stars by offering a revenue share.—KB
• Cloud computing will play more and more into the architecture, taking over processing and storage once bandwidth (4G?) is sufficient, rendering mobile devices little more than thin clients.
• Make sure your mobile app has ‘share’ functionality—help spread it, duh.
• Try to figure out ways to be paid when your audience makes use of your content, as in couponing. “Bake revenue into your content.”—JS
• Stay focused on the business model.—KB
• Make sure you have the right people on your team. “Great thinkers, yes . . . but also flexible, and with a sense of humor.”—KB
• Context is key. “Remember to keep it personal.”—SH
• Don’t put all your eggs in one basket. “Create several apps—if one takes off, your others can feed off its success.”—KB
• Be ever mindful of privacy issues. “It has to be good for the consumer.”—SH
• And stick with it. “Stay stubborn.”—SH

Not motivated enough? Check out Entrepreneur magazine’s roundup of iPhone moneymakers.

Several times in my career, I’ve excitedly joined up with a partner — usually technically adroit, often visionary, always inexperienced. Each time, it seemed a natural fit. We were complementary — I brought a wide variety of tech-marketing and business skills, and most important, experience. And we got along really well. So why didn’t it work out?

The simple answer is . . . missed expectations.

Rushing to the altar (startup/wedding analogies are cliché, but true), partners rarely take the time to share their vision, sort out their roles, and agree to a process. (What, you haven’t discussed your childrens religion? How about whether you even want to have children?)

Here are a few missed expectations I’ve experienced:

I had raised more than $30M over the course of several companies. Co-founder’s expectations: I would make a few calls, and funding would come flooding in.

It never works that way — even entrepreneurs that generate home-run returns to VCs will walk a hard path to funding their next idea. Money-raising takes dozens (if not hundreds) of pitches, six to twelve months at best, and more likely, years. Especially these days. But we never talked about it. I wrongly assumed that the founder understood the game. In fact, I thought we were cruising along just fine.

The co-founder had several successful products under his belt. My expectations: He would deliver the product on time and under budget.

Well, that would be great. Truth is, it hardly ever works that way. (Why am I always surprised by this?) In fairness, fashioning great technology that has never been done before is hard. Often, it depends on invention. Ever try to plan an invention? But even taking into consideration all the Laws of Software Development, things go wrong. They take longer. They need to be redone. Meanwhile, I’m making commitments to customers, or investors, or the media. And, I’m embarrassed.

But it became such a touchy subject, we couldn’t talk about it. (You know, just ignore it and pretend it doesn’t exist — like that Giant Squid in the Kitchen.) The lesson again: communicate. Doesn’t matter if your company is just two people, meet weekly — formally, same time each week — and revisit the schedules and goals. Above all, be honest.

I’ve served in Bus Dev, Marketing, and Corporate Development roles. Co-founder’s expectations: I would do all the things the co-founder didn’t want to do.

This actually wouldn’t be bad — I’m not the coder, or the chip designer, and it’s always better, IMO, when founders are sufficiently complementary that they stay out of each others’ sandboxes. But it can easily erode when there’s insufficient trust. In the course of going my about the ‘mundane’ business and corporate-development activities, co-founders invariably leapt into my sandbox. And when founders start to second-guess each other is when things can deteriorate.

Which is why I emphasize putting together a Business Plan. It’s not so much about crafting a document, as articulating exactly what we’re going to do. Technical founders are especially good at hand-waving how to make money, because ‘great products always do.’ But working on The Plan forces the conversation, and the drill-down.

Typical issues surround the business/revenue model, IP protection, partnering strategy, and the pyrophoric distribution of equity (Investors are going to get how much? Why are we giving this new hire 10%?). I’m not suggesting that my view was the only view — chances are, the founder knew his/her space well, and had some pre-conceived notions about go-to-market strategy, and what partnerships/alliances to forge. I only point out that it’s imperative to devote time — early on — to these potentially explosive topics, to avoid a breakdown in your relationship.

Much as I’ve sworn to avoid these and other missteps, it still gets down to a question of ‘fit.’ The right roles at the right times, a healthy, collaborative working partnership, shared passion and dedication to the project and the vision. Isn’t that what we all want out of entrepreneurial life?

Which is why I continue the quest — for the partner, gig, and team that needs me as much as I need them.

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.

“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!

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!)

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!)

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 irony.

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!’

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.

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.

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.

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.

As the song goes, it don’t pay my bills. So I signed on with a startup that does. Hopefully, I can do both (time permitting). But talk about two different worlds . . . Hardware, not software. Distinctly un-social (for now). Government, not commercial. Business, not consumer. And funded, not — well, self-funded.

I’m working in semiconductors again (you may recall I cut my teeth there)– and very next-generation. And managing programs for a company working (for now) on government contracts may not sound sexy. . . but the work we’re doing is awesome in every sense. Eons away from the silicon chips found in laptops and phones, what we build is for big power switching. We’re talking big.

And did I mention that it’s well funded? Primarily through SBIR grants, a thought-provoking (read: nondilutive) alternative to VC funding — even in good times — if you’ve got some unique IP.

In times like these, it seems like a godsend.

But my reorientation was (still is, in fact) intense. It’s the main reason for my blogging hiatus. Coming up to speed on nearly a dozen programs. Managing them using MSFT Project . . . which threw me back onto Windows XP . . . on a Lenovo laptop . . . and got my introduction to (drum roll): Sharepoint! We social-network app developers spend most of our time trying to make our interfaces intuitive and user friendly — it’s about love, not money — and a company with more money than Croesus creates the most convoluted, nonintuitive and just plane murky interface. Did they put a sadist in charge of navigation?

Still, I believe it will all be worthwhile. Why? Because we’re working on something that will be a game changer. In a non-technical word, we’re building — inventing — devices that will be the key enablers of alternative energy systems. Large scale adaptation of wind, solar, and energy storage systems — and their efficient connection to the grid — will absolutely require the kind of super semiconductor devices we’re producing.

That makes me feel good.

Okay, a paycheck makes me feel good, too. But I’m really trying to be deeper here. It goes back to when I saw Tim O’Reilly’s keynote. Not the one at Web 2.0 Expo in San Francisco in April. That was all good times. But Tim’s tune changed after that. By Web 2.0 Expo New York in September, O’Reilly was downright somber (and news hadn’t even broken about the financial meltdown). Global warming. The U.S. losing its edge in science and technology. A growing income gap. “And what are the best and the brightest working on?” he asked, displaying slides of SuperPoke on Facebook, and the iPhone application iBeer. “Do you see a problem here?”

I did. In fact, it been brewing (sorry) in me for a while.

I consoled myself saying sure, the best and the brightest should be working on world-changing things . . . good thing I’m not one of them.

Then, eerily, I was sitting in church, and heard it again. (A calling?) Not to get all ‘religious’ here . . . but for someone who doesn’t, ahem, make it every week, last Sunday I was there to hear the Parable of the Talents. (I learned, too, that talent originally referred to a unit of weight of silver — value, as in money, like fractions of shekels). But the message was clear: it’s a sin not to use your God-given gifts.

I’ll be doing that. But I’ll still be applying some other skills to make the world a better (funner?) place with CHALLENJ. Just in my off hours.

A great side-effect of entrepreneurs’ optimism in tough times is creativity. At our OpenCoffeeDC last week, discussions got lively when talk turned to bootstrapping — not just self-funding, but all sorts of alternatives for producing live-giving capital and conserving what you do have. Time to put on your thinking caps.

Have you gone through the check list of capital sources? Here are several (offroad from the traditional angel and VC route) that popped up in our discussions, plus a few others.

1. Sales! Duh. Number one will always be revenue. It was just February when Wired magazine chief editor Chris Anderson dubbed this the era of ‘Free.’ (Yeah. A lot of good that’s doing us now.) But don’t blame him — he’s just the messenger. Consumer expectations have been set at $0.00 by big dogs like Google, Craigslist, and Yahoo, leaving everyone to figure out creative ways of making money in the new ecosystem. Wired elaborated with a wiki for Making Money Around Free Content that provides some novel notions for doing so. It’s even been suggested (heaven forfend!) that Facebook start charging — something, anyway, for a premium services (the freemium model) of some sort. Careful thought needs to be given to just what it is that paying customers get, above the non-paying. Look into currently working models (Flickr vs. FlickrPro, Mozy free online backups vs. MozyUnlimited and MozyPro, etc.)

2. Corporate Investment Corporate customers and prospective partners can be turned into investors. In pre-Web 2.0 era, it happened all the time — usually to ensure that the product or service would prevail, the corporation made an investment. The terms were often good, with one twist: if the startup were to fail, the corporate investor got rights to IP. So it was interesting to see Martha Stewart Omnimedia lead a $2.85M investment in Evite-clone Pingg. We’ll probably see many more of these in the coming months.

3. Consulting/Contracting Doing work for hire can be extremely morale-robbing for a startup that had its heart set on making a living with a new web application — but many startups have turned pragmatic. The duality approach is simply more conservative . . . but when external funding is in a state of flux (like now), it may be key to survival. What makes it hard is the emotional and cultural schizophrenia (maintaining a solid reputation in contracting, vs. the live-or-die passion for a product and the customers who count on it are two different head sets), but some organizations appear to be making it work (Intridea, SetConsulting), while other have made the full-scale transition from services to products (37 Signals).

4. CIT GAP Fund Not to be overlooked, Virginia’s Center for Innovative Technology (CIT) provides (through its GAP program) loans of up to $100k in the form of an interest-bearing promissory note that converts to preferred stock in a forthcoming round of fundraising. It’s a great, low-pain process that helped mobile-gaming platform Mpowerplayer and a dozen other Virginia-based startups. (Disclosure: I’m a shareholder in Mpowerplayer.)

5. Venture Loans Used to be, firms abounded that provided venture lending — growth capital and equipment financing to startups that had already secured equity investment from top-tier VCs. It was still a But these firms — which were a notch less risk-averse than banks, and usually in solid association with VCs (they only made loans to startups that already boasted top-tier VC investors). But a few entrepreneurs have recently mentioned offers of ‘loans from VCs’ as a recent funding alternative. The exact nature of these isn’t clear — did they mean convertibles, which pop up whenever valuations get shaken up (like now)? But one thing to keep in mind: promissory notes and loans of any kind need to be repaid, even if the business fails. Moreover, they often have covenants that allow them to be called ahead of schedule. And finally, you may be asked to personally guarantee them. (Did you really want to lose your house?). I say, steer clear of them.

6. Bank Financing Banks, wha? Not often on entrepreneurs’ radar, but if you’ve got any stream of revenue underway, financing receivables can be a relatively straightforward process for smoothing cash flow. In fact, whether you have receivables or not, or venture-capital funding or not, banking relationships should be struck up sooner rather than later. Credit lines can buffer slow-paying customers — this economy is certain to increase receivables aging — but everything you’ve heard about credit lines tightening is true. Even established businesses are seeing them dry up.

7. Factoring At one of my service companies, we relied on factoring to keep cash flowing. (Truth be told, we would have missed several payrolls without it.) Factoring firms — which purchase your invoices and collect on them, advance you some portion (up to 90%) of the invoice, depending on the caliber of the customer, and charge a fee (usually 1% – 3%) — can pull revenue that might normally arrive in 30 to 60 days ARO into a week or less. And, unlike banks, the only due diligence is verification of product acceptance; I bet they’re seeing a pick up in activity lately. Of course, you have to be comfortable with you customers knowing that you’re resorting to factoring (not exactly a sign of stability) . . . so better pick only those you have a close relationship with.

8. SBIRs Not too likely a candidate for social-networking startups, but a wide range of technology companies have taken advantage of Small Business Innovation Research (SBIR)and other grants. The Small Business Administration (SBA) Office of Technology administers the SBIR program, as well as the Small Business Technology Transfer (STTR) program. All told, 11 federal departments participate in the SBIR program and five departments participate in the STTR program, together awarding more than $2B annually to small high-tech businesses. Unfortunately, these things take time . . . sometimes more than a year.

Last bits of advice:

- Hoard cash — but don’t tie it up; in other words, even if you’ve raised capital, acquire PCs on credit (don’t lease them, if the lease lines need to be secured). And never secure borrowings with cash.

- Barter when you can — services of any sort.

- Co-habitate — during the last downturn, we opened up our oversized space to another company. If you’re looking for space, post on Craigslist and message boards to co-habitate — you may be surprised at the response.

- Crowdsource design work (logos, literature) you may need. Consider GeniusRocket, or Crowdspring, which Frank Gruber recently used to update his logo. Or do the logo your own damn self, until you can afford a professional.

- Pay with stock/stock options, rather than cash. Or a mix of the two. Worth a shot.

- Negotiate everything.