infoChachkie

Know When To Declare Defeat And Toss Out A Bad Idea – Do Not Be Afraid To Say, “That Baby Be Ugly!”

2010-08-24T23:22:03Z

As Founder and CEO of Motown Records, Berry Gordy devised an effective methodology to objectively evaluate and critique the label’s music.

Gordy created a unique culture which deemphasized cronyism and encouraged open and honest debate regarding the subjective quality of the company’s creative output. During the 1960’s, Motown’s artistic success was unprecedented. From 1960 through 1971, Motown released 111 singles which entered Billboard’s top-ten ranking, of which 28 rose all the way to #1.

Startups consistently identify more ideas and opportunities than they have the time or resources to pursue, such as potential partnerships, new products, entering emerging markets, etc. Motown’s disciplined quality control techniques can be mimicked by startups to objectively evaluate which initiatives should be pursued in the near-term, which should be considered in the future and which should be dismissed entirely.

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Idea Cronyism

The ability to objectively critique ones creative output is vital to an entrepreneur. Idea cronyism occurs when decisions are based upon the personalities, social status and other non-objective criteria associated with the idea’s champion(s). For instance, when a venture capital partner votes for a follow-on investment in exchange for the future support of one of her investments, idea cronyism is at work.

In the early 1960s, conventional wisdom in the music industry did not lend itself to a systematic manner of evaluating creative content. Record companies evaluated songs based upon a variety of informal means, such as the Old Gray Whistle Test. In addition, an artist’s stature dictated the extent to which promotional resources were applied to particular songs. In this subjective environment, established artists were able to exert disproportionate influence, irrespective of the underlying quality or marketability of their latest songs.

Motown’s methodology for assessing its songs was simple and effective. Gordy’s inspiration for Motown’s unique quality control process was the Lincoln-Mercury assembly line, where he worked prior to becoming an entertainment entrepreneur. The process started with Mr. Gordy and a non-partisan Assistant deciding which songs would be evaluated. This is analogous to a startup CEO selecting which ideas will be considered by a larger group for implementation. Someone must define the universe of ideas to be reviewed at the outset of the process, otherwise the task is impossibly inefficient.

Motown’s system was not just efficient, but it also allowed the company to avoid the cronyism that can infect organizations as they mature. Every Friday, Motown personnel convened to review the songs chosen by Mr. Gordy from those recorded during the prior week. Each song was played before a disparate group of listeners, each of whom had a yea or nay vote. A simple majority ruled, with Berry Gordy breaking any ties or close votes.

To emulate Motown’s methodology, instill the following characteristics into your adVenture’s opportunity evaluation process:

Menu – CEO defines the list of ideas and the opportunities to be evaluated

Blunt & No Reprisals – Encourage participants to be straightforward and honest, without concern for hurting a peer’s feelings. Everyone should understand that critiques are divorced from the person(s) supporting the idea. In his book Motown: Music, Money, Sex, and Power, Gerald Posner notes that Gordy established a culture in which, “…frank expression became not just a right, but rather a duty.”

Majority – Give each participant one vote per idea, irrespective of their title or status. Ideas with the most votes proceed to the next stage of evaluation. Do not allow participants to vote on their own idea.

Veto – CEO retains the right to override the majority. However, to avoid undermining the democratic process, such vetoes should be rare. It should generally be deployed only when the vote is close.

Snooze and Lose – Late participants are not allowed to vote. This ensures that all lobbying and discussions are performed in a single forum, thereby increasing the efficiency and transparency of the process.

Balanced Constituency – As detailed in Be The Beatles, balance is of utmost importance at a startup. You can inject objectivity into an inherently subjective process by exposing ideas to a cross-section of your organization. For instance, engineers will typically evaluate ideas differently than people engaged in sales, who in turn will consider ideas from a different vantage point from those responsible for product development and marketing.

Motown’s system worked because each song was evaluated on its merits and with consideration as to the impact each single could make on the company as a whole, without consideration to the contribution a particular song might have on an artist’s career. In the startup world, ideas should be evaluated in a similarly systematic and non-emotional manner. One way to evaluate and contrast the impact of your ideas against one another is to plot them on the matrix shown below.

As discussed in Beware The Consultant, an entrepreneur’s most precious assets are her Time and Money. The Impact Matrix attempts to assess the relative priority of an idea, based upon the following criteria.

Speed – How quickly will the ideas manifest themselves and begin to impact the adVenture.

Impact – The degree to which the ideas further the adVenture’s objectives. For instance, how much money will the proposed idea save the company or how much revenue will the proposed opportunity generate?

Risk of Defocus – To what extent is the idea aligned with the adVenture’s overall vision. The less strategically congruent a particular idea is, the greater the chance that its implementation will impede the company’s ability to achieve its broad, strategic goals.

Resources Required – At most high-tech startups, the resources will include developers’ time and the opportunity cost associated with alternative uses of the developers’ 12-hour work days. Additionally, many opportunities require financial investments which must be considered in tandem with non-financial resource requirements.

Evaluate each of the following metrics on a scale of 1 – 10. For instance, a particular idea might be scored as follows:

Speed:
8 – relatively fast
Impact:
3 – relatively small
Defocus:
-7 – relatively high risk (zero = a deal with no risk of lost focus)
Resources:
2 – relatively small

Total:
6 – mediocre opportunity

The higher the overall score, the closer it will appear in the upper right corner of the Impact Matrix and the higher it should be in the company’s implementation queue. In the above example, a score of 6 is probably not high enough to merit immediately moving forward, although it might warrant reassessment at a later date.

Once all the opportunities are mapped, they can be visually compared against one-another. An individual idea’s relative position will shift over time, as shown in the matrix below. For instance, from 2001 – 2003, I frequently lobbied for a Mac-compatible version of GoToMyPC. However, at that time, our resources were better applied to exploiting our primary, PC-based market. A Mac-compatible version of GoToMyPC was not released until 2010.

You will probably never execute most of the ideas in the Do Ad Hoc quadrant, but some, like a Mac version of GoToMyPC, may eventually shift to the Do Now quadrant as your adVenture acquires additional resources and markets shift.

Evaluating ideas via such a matrix force discipline on business development deal junkies, commission-driven sales leaders and engineers engaged in product feature creep. The Impact Matrix can be used at a departmental level with each department’s projects eventually rolled up to a more macro, company-wide view.

The Motown Sound Alike

For all of its commercial success, Motown has its share of detractors. One of the most consistent criticisms is the “sameness” of its songs. Motown’s finite stable of musicians, songwriters and singers naturally crafted songs which sounded similar over time. Gordy’s quality control process, which avoided the crony system, also disproportionally rewarded songs which were “middle of road” and relatively “safe”, which made the similarity of Motown’s songs even more pronounced.

By the early 1970s, Motown had become a Big Dumb Company. Its objective methodology had broken down and egos began to inappropriately influence the company’s decision making process. Barry’s Founderitis exacerbated Motown’s idea cronyism by frequently and arbitrarily wielding his veto right.

In particular, Marvin Gaye’s 1971 breakthrough album What’s Going On was initially rejected by Gordy. Marvin was forced to re-record many of the songs and eliminate the loose, party-sound which made the record unique. Fortunately for music fans, Marvin Gaye’s prior commercial success was sufficient to thwart Mr. Gordy’s capricious veto and the initial version of What’s Going On was ultimately released. In 2003, Rolling Stone magazine rated What’s Going On #6 on its list of the 500 Greatest Albums Of All Time.

As your organization matures, crony relationships are more likely to develop and ultimately disrupt the idea evaluation process. To avoid the creative demise which befell Motown, your Core Team must maintain a disciplined method of assessing the veracity of the potential opportunities faced by your adVenture. If you do this effectively, you and your team will always know What’s Going On.

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John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.
______________________

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Mark Suster on Influence and Persuasion

2010-08-20T18:18:10Z

Noted entrepreneurial blogger and respected Venture Capitalist, Mark Suster, who is also a Partner at GRP Partners, recently published a great post related to influence and persuasion, which is excerpted below:

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Mark Suster – Both Sides Of The Table

I recently read a book I’d highly recommend to every reader of this blog called “Yes, 50 Scientifically Proven Ways to be Persuasive” by Robert B. Cialdini who is also author of a very well received book called “Influence” (which I plan to read).

“Yes” was given to me by one of my favorite angel investor / seed VC’s to work with – John Greathouse of Rincon Venture Partners and author of the blog InfoChachkie that you should check out because it is filled with great info from a guy who has been a very successful operator. Rincon is part of the new breed of Seed Stage VCs and with the leadership of Jim Andelman has charted out the most authentic early-stage investment strategy in Southern California. Any SoCal entrepreneur raising early-stage money should put Rincon on their short list.

John gave me the book after I spoke at his entrepreneurship class at UCSB. I was excited to read it because Robert Cialdini had been a speaker at Google when my wife worked there and she told me that many members of the senior management team at Google had been raving about his work. I decided not to be bothered by the cheesy title and to read it anyhow. You should, too. (no, I don’t take affiliate commissions!)

<<<Click Here to Read More>>>

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If you are not already a subscriber of Mark’s Both Sides of the Table blog, you need to be. There is a reason Both Sides of the Table is one of the most well-read startup blogs. I strongly encourage you to check it out.

Intellectual Property – Worthless To A Startup, Priceless To A Big Dumb Company

2010-08-10T22:01:50Z

“Good Lord Boyet, my beauty, though but mean,
Needs not the painted flourish of your praise:
Beauty is bought by judgment of the eye,
Not uttered by base sale of chapmen’s tongues”
William Shakespeare, British Playwright, from Love’s Labour’s Lost, 1598

Intellectual Property (IP) is an ugly thing at a startup. It requires you to expend your two most valuable resources, your time and your money. Yet, it does nothing to help you execute your business model.
However, to a Big Dumb Company (BDC), a startup’s IP is a thing of beauty. Although BDCs often act irrationally, in this instance, their perception of beauty is highly rational.

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How can IP be worthless to a startup yet very worthwhile to a BDC? Because IP has intrinsic value, but only in the right hands.

Patents held by startups generally have a limited ability to reduce competition. The average time required to obtain a patent is 36-to-40 months, during which there is no guarantee your adVenture will ultimately receive patent protection. Even if you are granted a patent, the scope of your claims may be significantly denuded.

Three years is a lifetime at a startup. Given that the average lifespan from startup to exit is five to seven years, the first half of a startup’s life is lived without explicit patent protection. Thus, if a startup team asks, “What is this patent worth to us?”, the answer is likely, “Not much.”

However, this is the wrong question. A more appropriate question is, “What is this patent worth to a BDC?” When answering this question, consider the following:

Wherewithal To Defend and Prosecute – IP litigation is immensely expensive. Most startups do not have the financial means to either defend the veracity of their IP or prosecute potential infringements by others. According to a 2003 survey conducted by the American Intellectual Property Lawyers Association, the average cost of patent litigation was $2 million, while trademark litigation averaged $600,000.

BDCs Are Risk Adverse – In general, BDCs are often more concerned with loss aversion than with pursuing potential gains. As such, they are hesitant to acquire a company which has not sought formal protection of their IP for two reasons. One is obvious, without protection, such IP might prove to be of little worth, as other companies can mimic the technology without recourse.

The second reason is more subtle. The very nature of formal IP approval process ensures that some level of vetting has been performed to assess whether the IP is infringing on another company’s technology. Although patents can, and are, granted which explicitly infringe on the rights of others, there is some comfort in the knowledge that a particular piece of IP has been approved for a patent or registered as a trademark. Even though such official sanction by the PTO does not guarantee that the protected IP does not infringe another party’s IP, it does provide a convenient excuse by which BDC executives can cover their butts, thereby reducing their perceived downside risk.

Complimentary And Derivative IP – In many instances, the IP created by a startup is a subset of a larger solution. It is often a feature or set of features which enhances the overall efficacy and value of a more comprehensive technology. As such, formally protected IP can have significant value in the hands of a BDC which may own or otherwise have access to complimentary IP.

In addition, a BDC may have developed derivative IP that on a standalone basis infringes on the startup’s IP. In such instances, acquiring the startup may be the shortest path to unmitigated IP ownership. This was the case when Intuitive Surgical purchased Computer Motion. This acquisition resolved the surgical robotic IP landscape and allowed Intuitive to dominate the market.

Even if your company is not acquired and you elect to access the public capital markets via an IPO, the above tenets remain valid. Once the IPO proceeds are in your bank account, your adVenture will have the ability to leverage and defend your IP and thus its intrinsic value will increase, just as it would in the hands of a BDC.

Not All Patent Types Are Created Equal

Another factor that impacts a patent’s value is its type, of which there are essentially two: utility patents and design patents. Note that I am ignoring other, far less common patent types, such as plant patents.

Utility patents represent 90% of all patents granted. They remain in effect twenty years following the filing date and, according to the Patent and Trademark Office (PTO), they protect: “the invention of a new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof.”

Utility patents generally offer more protection than design patents and are thus usually more valuable. They also often take longer to secure and are more expensive to obtain and prosecute.

An emerging subset of utility patents is business method patents. Such patents were especially popular when the Internet spawned new ways to solve old problems during the late 1990’s and the first decade of the 21st century. However, in most cases, the courts have not upheld business method patents and thus startups should not expend resources pursuing such broad and pervasive patents.

Design patents make up the majority of non-utility patents. They remain in effect fourteen years from the filing date. Per the PTO, such patents protect: “A new, original, and ornamental design for an article of manufacture.”

An example of design patent is shown at left. It would not be difficult to emulate the design of these sunglasses without violating the patent. As such, the protection afforded design patents is generally limited and difficult to defend. However, they are usually easier and less costly to obtain, as compared to utility patents.

As seen in the patent at left, you can obtain a patent on virtually anything. PTO examiners consider a very narrow set of criteria which does not include the commercial efficacy of an idea.

Thus, the answer to the question “Can we get a patent on that is generally “Yes”, assuming the invention is remotely novel. However, a more appropriate question is “Should we get a patent on that?”

Return To Sender, IP Unknown

There is a common misconception that an idea can be protected by documenting it, placing it in an envelope and then mailing it to yourself. Underlying this presumption is the belief that if the envelop is unopened, the postmark will “prove” the date the idea was conceived (or at least when it was documented).

Although such a letter might make an interesting plot point in a movie, in the real world, it provides you with absolutely no protection of your idea. Unlike an unregistered copyright, which you gain automatically by expressing an idea in written form, you cannot gain intellectual property protection by simply being the first person to describe an idea in writing.

For instance, if you document a novel, commercially viable idea and never file a patent to protect it, the only thing you will own is an unregistered and worthless copyright on the text describing the idea. However, anyone and everyone is free to exploit your idea and to even obtain a patent on it, if they are the first to file for such protection.

Provisional Approach

Most US high-tech companies begin the utility patent process by filing a provisional patent application. The PTO allows one year to elapse after filing a provisional application before you must submit a formal patent application. This approach makes sense for the following reasons:

You gain a year to write a thoughtful, defensible patent without delaying your filing date. The filing date is often the deciding arbiter in IP disputes

It is relatively inexpensive, thereby minimizing your sunk costs if you later decide to not pursue a formal patent filing

You can describe your technology as “patent pending”, which may or may not be worthwhile, depending on your product and target customers

Your solution will likely evolve as you gain market feedback and validation. As such, the additional time will help ensure that your patent claims accurately reflect the technology underlying your solution.

Know Thou Prior Art

As noted in Roping In The Legal Eagles, you have the responsibility to write the layman’s description of your patent claims. In order to do this effectively, you must understand the prior art germane to your application. Patentcafe defines Prior Art as: “the total body of knowledge, which teaches or otherwise relates directly to an invention. This is the primary criteria in determining the patentability of a new invention.” If you do not fully understand the prior art associated with your intellectual property, your patent request may be denied.

Just as you should anoint someone within your adVenture to be Watson and monitor your competitors’ activities, you should also explicitly assign someone to manage your adVenture’s IP portfolio. If you leave this to a committee, you risk your IP becoming a priority which no one person has adequate time to address.

It Ain’t The Number Of Patents, It’s The Number Of Defensible Claims That Matter

Some companies take pride in the number of patents they own. However, there is no direct correlation between a patent portfolio’s value and the number of patents which comprise the portfolio. A single patent with a number of comprehensive yet defensible claims can easily be worth far more than a legion of vague and narrowly defined patents. As such, focus on creating a manageable number of patents, each with multiple clear and defensible claims.

Patent examiners generally ask for clarification during the review process. The multiple claim approach provides you with greater flexibility to augment your claims when you address the PTO examiner’s objections and questions. Any accepted changes are subsumed within the original filing date of your provisional patent. This is especially important when your patent addresses an emerging technology that significantly changes during the course of the typical, multi-year review.

No Patents, No Interest

In addition to witnessing BDCs overvalue patents, I have also been a party to transactions in which the lack of formal IP protection caused BDCs to shy away from a potential acquisition. In one instance, I was on the Board of a small software company that declined to file any patents as the Founders felt they could not afford to take the time required to craft a meaningful application. This proved tragically shortsighted, as the company developed valuable augmentations to various open source technologies that likely qualified for patent protection.

After an extensive period, we eventually sold the company. However, the acquirer was a relatively small company that essentially purchased our install base of customers so they could sell them additional products. We received almost no value for our technology, even though it was effective and held in high regard by our customers. Little explicit value was affixed to it, because we did not have formal protection over it.

Mind Thine Eye of The BDC

As Shakespeare aptly notes, the beauty of a startup’s IP is bought by the judgment of the BDC’s eye. As such, when managing your IP portfolio, base your decisions on the understanding that the ultimate value of your IP will be determined by an acquisitive BDC or the public capital markets, not its worth in the hands of a capital-challenged startup.

Legal Caveat: I am NOT a lawyer. This advice is from a layman and it may be inappropriate and/or in conflict with the local laws of your county/state/province/country, etc. You should always seek local, qualified, legal counsel when addressing intellectual property issues.

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Create An Industry Alliance: Entrepreneurs Need Friends On The Startup Playground

2010-07-29T17:15:44Z

In early December of 1818, Jose de la Guerra devised a brilliant plan to thwart the French pirate Hippolyte de Bouchard who was lurking off the coast of Santa Barbara, contemplating an attack. Even though the Santa Barbara garrison was outmanned nearly six to one, Commandant de la Guerra tricked de Bouchard into believing that his force was formidable by repeatedly marching his small cavalry over a ridge that could be readily seen from the pirate’s ship.

Each time the men crossed the hill and descended out of view, they changed clothing, mounted different horses and then paraded again before the pirates. This ruse caused the pirates to assume that each corps of horsemen was a different contingent of soldiers streaming into the Presidio. Believing he was outnumbered, Hippolyte aborted his plan to sack Santa Barbara and proceeded south where he subsequently pillaged San Juan Capistrano.

Entrepreneurs can emulate de la Guerra’s strategy and make their adVenture appear far larger than reality and thus increasing its influence and market reach while discouraging competitive threats by creating an industry alliance.

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Friends On The Playground

As a child, I moved frequently. At each new school, I had to quickly assess the playground politics and determine with whom to form alliances. I knew that having friends and allies on the playground that would back up “the new kid” was of paramount importance. The same phenomenon is true for startups. As noted in Corporate Venturing, startups should pursue allies who have a vested interest in their success. Such playground friends serve to ensure the startup’s ongoing viability by providing resources, access to customers and technology and market validation.

At Computer Motion, we created two alliances, comprised of a dozen companies with an aggregate market capitalization in excess of $28B.

At the time we established these Alliances, our annual sales were less than $20 million and our market value was approximately $60 million or one-fifth of one percent of total capitalization of our Alliance members.

Audacious? Exactly.

Creating an effective alliance requires a delicate balance between humbleness and hubris, as described more fully in Humble Pride. You must be highly presumptive when approaching potential members of your alliance. Big Dumb Companies (BDCs) are surprisingly compliant when they are presented with a “Program”. BDC employees are used to playing by the rules, so give them a rulebook. To this end, we created an Alliance Program which generated few objections from our alliance members.

By centering our alliances around our products and not our company, each group was comprised of complimentary partners. This enhanced the relevance and cohesion of the alliances. Members were also more comfortable aligning their brands with an emerging technology, as opposed to a fledgling company.

Our Hermes Alliance was based on the first voice recognition technology approved by the FDA for use in an operating room. A variety of medical device companies joined this alliance, in order to voice control their beds, electrocautery cutters, surgical lights and endoscopic equipment.

Our Zeus Alliance was based on our surgical robot which enabled a number of complex medical procedures to be performed minimally invasively, including cardiac surgery.

The Zeus Alliance members sold visualization equipment, surgical instruments and special sutures, all of which were incorporated into our robotic system.

Without these partners, neither Zeus nor Hermes would have been commercially viable. In addition to commercializing our technologies, our alliances afforded us a number of other competitive advantages, including:

Rule Maker – Creating an alliance is akin to defining what is cool when you are in High School and self-servingly including yourself in the definition. Our alliances helped establish Computer Motion as a thought leader within the emerging digital operating room.

Exclusivity – As noted in Excludesivity, startups should avoid entering into exclusive arrangements. Our alliances included arch rivals, each of which preferred to be the exclusive provider of their products within each alliance. Despite tremendous pressure, we avoided exclusive relationships, with one troublesome exception. We knew that if we had created alliances which included only one manufacturer for each type of medical device, we would have alienated potential partners and ultimately encouraged the creation of competitive alliances.

Ironically, our non-exclusive approach created a sense of exclusivity within each alliance. We certified each member’s devices as compliant with our standards and allowed each member to market their products using the Hermes and Zeus Alliance logos. Such certifications and associated PR opportunities were highly valued by our members. The proliferation of the alliance logos, across a variety of leading products, also reinforced our Hermes and Zeus brands.

Validation – The reflected glory of our high-profile associations gave us significant visibility in the medical device community, which enhanced our sales, business development and fundraising efforts. Like de la Guerra’s small garrison, our creation of the Hermes and Zeus Alliances caused us to appear much larger, and thus more influential, than otherwise would have been possible.

Allies – On and off the playground, friends are preferable to enemies. By delivering value to our alliance members, each had a vested interest in our continued success. This manifested itself in a number of ways, including prospect lead sharing, joint marketing, sharing space at tradeshows and warm referrals to alliance members’ customers.

Revenue – We generated significant fees, over and above our product sales, from our members. Such revenue included membership fees, certification fees, non-recurring engineering charges (to integrate our technology with each member’s products) and User Conference fees. This last category proved to be especially lucrative.

We hosted an annual user conference in Santa Barbara, attended by a couple hundred of the world’s top surgeons. It was readily apparent that large medical device companies were willing to pay significant sums to gain access to these leading surgeons, especially in the intimate setting we provided. We naturally exploited this market reality by allowing alliance members to set up small booths at our conferences. Even though we charged substantial fees for this privilege, our rates were far below those of traditional tradeshows and thus the BDCs generally participated without complaint. As a result, we transformed our conferences from expense line items to profit centers.

The conferences also served to enhance our stature and influence within the medical device industry, which drove sales and business development partnerships. By design, they were Computer Motion lovefests in which alliance members sang our praises to the world’s leading surgeons, many of whom were prospective customers. Our alliance compatriots were not acting altruistically. It was in their interest to promote the alliance, in order to sell their products as part of an integrated solution.

When Does An Alliance Make Sense?

Clearly, creating a formal alliance is not appropriate for all startups. They require significant energy and focus to ensure each member gains an adequate return on their out-of-pocket expenditures and implicit opportunity costs. At a minimum, your technology should meet the following criteria:

Key component of larger system which delivers significant value to end users

True differentiator to each member’s products

Difficult for alliance members to replicate

Sexy enough to garner public relations coverage and breathe new life into otherwise staid product categories

Road Rules

Given that some members of your alliance will likely be sworn enemies, you must actively maintain the peace. Although the analogy is distasteful, when you organize an alliance of rivals, you are akin to an arms dealer who sells weapons to all sides of a conflict.

Some methods to minimize discord and drama within your alliance include:

No Favorites – Just like rival siblings, alliance members are resentful of real and imagined preferential treatment of alliance peers. Thus, take care to be consistent and transparent in all your member interactions. This can be facilitated via formal communications sent to all members simultaneously, such as newsletters, podcasts, webinars or conference calls.

Share No Sensitive Information – You will gain tremendous industry insights by listening and learning from your members. However, never cross pollinate anything that could remotely be construed as confidential. If you share sensitive information learned from an alliance member, you risk losing your position as a trusted arms dealer, which could jeopardize the very existence of your alliance.

Safe Environment – Encourage members of your alliance to meet in person and interact on periodic webinars. Do not force them to communicate with each other, but provide them a safe and comfortable venue for them to do so. Positive personal interactions, especially those built around social events, will strengthen your alliance’s effectiveness and longevity.

Pirates Be Gone

As evidence by our experience at Computer Motion, creating one or more industry alliances can be an economical (and profitable) way for your startup to gain mindshare and visibility that would otherwise be impossible. Much like de la Guerra, we appeared far larger than our actual size which enabled us to exert an outsize level of influence within our industry.

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Building a Successful Startup Team

2010-07-15T16:51:31Z

In this video John Greathouse does a small Q&A about building what traits/roles are needed to create a strong start-up team.

Q&A:

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Want to learn more on this subject? Read the post about building Tribes:

The Tribe

You may not realize it, but your adVenture’s Core Team is akin to a primitive tribe. The Core Team is of the three to five key individuals upon which your company’s leadership and direction is derived.

Thus, understanding the tribal organizational structure is vital to gaining an appreciation of the various roles played by your Core Team. The tribal structure works, as evidenced by its survival over eons, ultimately leading to Man’s position at the top of the food chain.

Click Here to see Full Article

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De-risk Your Startup By Doing It Again: The Joy Of Getting The Band Back Together

2010-07-07T22:41:06Z

In 1980, following the breakup of the American band The Eagles, Don Henley was asked when the group would reunite. His response, “When hell freezes over.” Surprisingly, hell froze over 14-years later, when The Eagles launched a highly lucrative tour and TV special. According to Guitarist Glenn Frey, “We never broke up, we just took a 14-year vacation.”

The story is familiar. A young band gets into music for the sex, drugs and fame. They record a few songs, have a couple hits and then hit the road. The rigors of touring, along with the instant notoriety and unending public scrutiny cause the band to disintegrate, often to the point of declaring they will never work together again.

In many cases, once the money (and sex and drugs) run out, the band members forget the days of rancor and only recall the “good old days” when creating something from nothing was fun. Eventually one of the band mates swallows their pride, picks up the phone and proposes a reunion tour. A similar phenomenon occurs in the startup world, without the drugs or drama endemic in the music industry.

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It is not uncommon for successful entrepreneurs to work as a team, take some time off for a victory lap or two and then “get the band back together” in order to build upon their prior successes.

At Rincon Venture Partners, the single most important facet we consider when contemplating a new investment is the quality of the Serial Team. One way to assess quality is the degree to which the team has demonstrated success in an adjacent market.

Rincon’s Fund I portfolio is comprised of a number of such Serial Teams, some of which include:

Alma mater, Rent.com: sold to eBay for $430 million. After nailing lead generation in the apartment listing space, they are now killing it with respect to lead generation for higher and career education.

Alma mater, CallWave: 2005 IPO. At its peak, CallWave generated $55 million of recurring subscription revenue in the Internet telephony space. The team has applied its deep understanding of telephony and online marketing to create an infrastructure which allows advertisers to track phone calls like clicks.

Alma maters, Traffic Marketplace and Tagworld: sold to Vivendi and Viacom, respectively. The team is applying its ad network and ad serving insights to the emerging world of mobile advertising.

Alma mater, Overture: sold to Yahoo. The team is leveraging its expertise in search infrastructure and optimization to dramatically increase the reach, relevance and profitability of search campaigns.

The Upside

Focusing on serially successful teams and not individual serial entrepreneurs offers investors a number of advantages, including;

Group Dynamics – Serial Teams have already resolved potential interpersonal issues. The chances that the team will blow up because of personalities and/or office politics is significantly diminished. Roles are understood and the team is able to efficiently leverage each member’s strengths while shoring up individual weaknesses.

Shared History – Serial Teams can draw upon a common history that facilitates communications and problem solving. However, as discussed below, this advantage can also prove to be limiting, especially if the team does not embrace a diversity of opinions, as described in Dirty Team Building,

Fox Hole Mentality – Social bonds made under duress are extremely resilient, as evidenced by well attended military reunions decades after the soldiers fought together. Although clearly not on the level of battle-tested warriors, Serial Teams who toil together often form life-long social bonds which motivate them to ensure the team’s mutual success, even at the expense of personal gains. This deep mutual respect also serves as the cornerstone of a healthy corporate culture, as described in Core Values.

The Downside

Serial Teams also entail certain risks and disadvantages. Although the advantages usually outweigh the potential drawbacks, the negative aspects of Serial Teams should be heeded in order to minimize their impact:

History – Serial Teams speak in shared code, based on their prior collective experiences. This common set of experiences facilitates communication but can be bewildering to new entrants to the team. Such history can also cause adVentures to apply inappropriate solutions to new problems, based on what worked in the past.

Cronies– It can be difficult for new executives to assert themselves within an existing Serial Team. Even when an explicit effort is made to incorporate new talent into an adVenture’s executive staff, the institutionalization of the company’s approach to problem solving can make it difficult for a new executive to express their opinions without forcing them to sharpen their elbows and excessively raise their voice.

IP Risk – The closer the Serial Team’s new adVenture is to their prior successes, the greater the risk that they may be accused of infringing on their former company’s intellectual property (IP). Thus, care should be taken when crafting the band’s reunion tour to ensure they do not inadvertently run afoul of third-party IP rights.

Diapers – It can be difficult for junior members of Serial Teams to grow into positions of greater authority. This phenomenon is partially due to the fact that the senior members of the Serial Team, much like a parent, fail to realize that the younger team members have matured and are no longer as inexperienced as they were when they first joined the Serial Team.

Let The Lead Singer Go Solo

In highly successful bands, it is not uncommon for one of the more visible members of the band to abandon the rigors of touring and enter into a state of semi-retirement. In other cases, such frontmen leave the band and go solo.

The same phenomenon occurs in the startup world. In many instances, one or more of the senior members of the Serial Team generate enough personal wealth to take a permanent vacation from their careers as operators. As such, when a Serial Team reforms, it is often comprised of operational lieutenants, such as Vice Presidents and Senior Directors rather than C-level executives, (e.g., CEO, CFO, etc.). Ideally, the members of the Serial Team should be senior enough to effectively operate a fast-paced startup, yet are sufficiently financially hungry to deploy the requisite time and energy required to make their adVenture a success.

Be A Roadie

The factors that cause Serial Teams to be good investments for venture capitalists make them equally advantageous for young entrepreneurs. A team of proven winners that self-selects to work together again usually create a healthy environment in which to learn and grow. Serial Team mentors will make fewer mistakes than a comparable adVenture led by inexperienced people who are learning on the job. Thus, young entrepreneurs are well served to seek out the company of Serial Teams.

Hotel California

“Relax” said the night man, “we are programmed to receive.”

“You can check out any time you like, but you can never leave!”

The Eagles, Hotel California

As discussed in The Fringe, entrepreneurs are pathological. Most of them simply cannot help themselves and are thus repeatedly drawn back to the startup world. They often temporarily “check out” from the startup treadmill but many of them “never leave”. Savvy investors and young entrepreneurs take advantage of this phenomenon by joining Serial Teams and helping them leverage their past successes to achieve new startup victories.

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Talks: Jason Nazar on how to Persuade

2010-07-15T18:49:07Z

Below is a talk on Persuasion by the co-founder of Docstop, Jason Nazar.

Find out how getting he got his start-up funded using his knowledge of persuasion, sales, and even hypnotherapy:

Watch Jason Nazar’s talk on persuasion.

Full Bio:

Jason Nazar CEO and Co-Founder of Docstoc

Jason is the Co-Founder and CEO of Docstoc.com, the premier online community to find and share professional documents. Before starting Docstoc, he was a partner in a venture consulting firm in Los Angeles where he worked with dozens of startups. He holds have a BA from UCSB and his JD/MBA from Pepperdine University, where he was the Student Body President of both Universities.

TMP Talks: Michael Crandell on Cloud Computing

2010-05-12T00:18:36Z

Below is a talk on Cloud Computing from the University of California Santa Barbara’s Technology Management Program, by Michael Crandell.

I think you will be surprised by what the CEO of this industry-leading cloud computing has to say about the future of the Cloud.

Full Bio:

Michael Crandell, CEO and Founder of Right Scale

Michael Crandell is the CEO and a founder of RightScale, where he provides the vision and direction for the company as it pioneers innovative ways to bring the power of cloud computing to any organization. Crandell is a frequent speaker at cloud computing industry conferences, and he has played a major role in helping establish and promote openness and transparency in the cloud market. Prior to RightScale, he served as CEO at several Internet Software-as-a-Service (SAAS) companies and as executive vice president at eFax.com. Crandell received his B.A. from Stanford University and completed graduate studies at Harvard University.

Making Revenue Sharing And Cost Savings Deals Work – Sharing Means Caring

2010-04-08T00:41:25Z

During the height of the dotbomb bubble, numerous companies struck Barney deals. These spurious partnerships had no substance and were initiated for the sole purpose of sending out a press release. They were dubbed Barney deals because the structure of such relationships was so lightweight that the underlying agreements merely affirmed the companies’ mutual affection, as articulated in Barney’s theme song, “I love you, you love me. We’re a great big family.”

Despite the pathetic nature of Barney deals, the big purple dinosaur offered sound business advice to entrepreneurs in a TV episode entitled, “Sharing means caring.” Barney realized that caring entails a willingness to share the risks and rewards associated with a mutually advantageous relationship. Leverage the purple dinosaur’s wisdom and seek business partnerships which are based upon sharing the results, as opposed to deals in which one party trades their money for promises.

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Hotcakes

Sharing changes the dynamic of the sales process. Instead of convincing someone that they should give you their money based upon your promises, sharing relationships directly align both parties’ interests. This congruence greatly reduces the friction of the sales process while strengthening the integrity of the relationship.

When you pitch a sharing relationship, it is not in your best interest to make promises that you cannot fulfill. A sharing relationship requires both parties to carefully vet the potential value of the partnership up-front. It allows them to avoid the opportunity costs of entering into an agreement that does not yield adequate revenue or cost savings to justify the time and resource investment.

When Sharing Works

“Trust, but verify” - Ronald Reagan, Former US President

The following characteristics are generally present in effective sharing relationships.

Measurable – If you cannot measure the results of your efforts, you will be unable to determine the appropriate amount of revenue or cost savings to be shared. Establishing mutually agreed upon and readily measurable metrics up-front are essential to creating viable sharing relationships.

Significant – In order to justify the opportunity costs associated with entering a sharing relationship, each deal must have the potential to make a material impact on both parties. If only one party is benefiting in a meaningful way, it is unlikely the relationship will be self-sustaining.

Joint Skin – Both parties must commit resources (e.g., personnel, money, management focus, etc.) to the partnership. If one party does not make a meaningful investment in the relationship, there is a risk that they will not apply the resources necessary to optimize the outcome.

Baseline – In most cases, a baseline must be established from which future improvements are measured. If you intend to grow an existing revenue stream or reduce existing cash outflows, a mutually agreed upon point from which the improvements can be measured is paramount. Obviously, if the incremental revenue is derived from an entirely new source, there is no need to establish a baseline.

Controllable – You must control the processes by which revenue will be generated or costs will be saved. If the results are primarily contingent on your partner’s performance, you should consider structuring a conventional, non-sharing relationship.

Trust – Companies which have a distrusting nature are generally poor candidates for sharing relationships. Even if you are able to convince the distrustful partner that sharing costs savings and/or incremental revenue makes sense, their distrusting nature will likely sabotage the relationship in the long term.

Creativity– Some Big Dumb Companies struggle with sharing relationships. The reporting requirements and unpredictability of such arrangements can overwhelm companies which lack creative thought. Rather than trying to shoehorn creatively-challenged companies into sharing deals, offer them a substantial flat fee. If they accept, you will be rewarded. If they reject a flat fee offer, then you are probably better off seeking sharing relationships with more inventive companies.

Revving Up Shared Revenue

At RevUpNet, an online marketing agency which I co-founded and at which I currently act as an Advisor, we partner with our clients and share the revenue which we help generate via affiliate network management, keyword search and performance-based ad purchases. We are closely in sync with our clients as both parties are rewarded based upon the results we jointly achieve.

As discussed in Beware The Consultant, startups cannot afford to trade their money for promises. If a consultant really believes that they can make a meaningful impact on your business, they should be willing to share in that impact, rather than requesting that you pay them, irrespective of their results.

Share The Pain And The Gain

Sharing relationships are not exclusive to sharing revenue. You can also establish highly lucrative, performance-based relationships by sharing costs savings as well. In some cases, you can share both the pain and the gain.

In the mid-1990s, Imagitas approached the US Postal Service with a unique proposition. They offered to manage the printing and distribution of the change of address forms distributed by the Postal Service in exchange for including ads relevant to people in the process of relocating. Although it took years to convince the Post Office bureaucrats to enter into this novel arrangement, it ultimately saved the Postal Service millions in printing and distribution costs, while generating tens of millions of dollars in incremental revenue.

Love is NOT All You Need

As everyone who has ever consummated a meaningful, mutually advantageous relationship knows, it takes more than love to sustain the parties over the long term.

Use The Bro Factor to establish professionally intimate relationships with your partners. However, never allow your Bro-based sharing deals to become Barney deals. I may love you and you may love me, but we ain’t no family if we are not sharing the results of our collaboration.

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Maximize Your Exit By Not Selling Your Company

2010-03-16T21:16:19Z

In 1987, a representative of Michael Jackson approached the modest Sycamore Valley ranch house and knocked on the door. The owner of the ranch was shocked by the visitor’s message. He told the homeowner that he represented someone who wanted to purchase the ranch at a substantial premium over its current fair market value. He also indicated that the offer was non-negotiable and the home owner had to respond either “Yes” or “No” in a matter of hours.

Although this is a somewhat unusual real estate transaction, it reflects a surprisingly common scenario in the world of mergers and acquisitions, with one important distinction.

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My House Is Not For Sale

When someone knocks on your door and tells you they want to buy your house, it is not appropriate for them to then ask, “So how much do you want for it?” Even the eccentric King of Pop communicated the price he was willing to pay.

However, in many cases, acquiring companies behave in a less rational manner than Mr. Jackson. When we sold Expertcity to Citrix, we experienced this awkward, yet common situation. Citrix politely approached us, told us they had an interest in acquiring our company and then asked us, “How much?”

Our response was that there was no “price” as our company was not for sale. We were not rude nor indignant. We simply stated the truth. As we were not engaged in selling our company, a “price” was nonexistent. At the same time, we made it clear that we were flattered by their interest and that we were happy to continue our discussions and further explore if a reasonable deal could be crafted. We then turned Citrix’s question around by saying, “You knocked on our door with an intent to buy so you obviously have some idea of the price you are willing to pay. What is that price?”

I then had several discussions with my Board and fellow Senior Executives. We all agreed that we needed to fully explore all the viable alternatives available to us, in order to ensure that we maximized our liquidity event.

We realized that we had to define our Best Alternative to a Negotiated Agreement (BATNA). Fortunately, we had several alternatives available to us, including:

Access the public capital markets via an initial public offering (IPO)

Open up a “sales process” and solicit bids from multiple companies

Do nothing – continue to run our business “as is”

IPO

To bolster our negotiating position, we engaged an investment banking firm to explore the IPO market. Although this option was not attractive to the management team, it was a viable alternative circa 2005 and it would have allowed our institutional investors to liquidate their investments. However, due to the SEC’s onerous regulations, management’s liquidity would have been severely constrained. At public entities, insiders are effectively limited to selling their shares during the middle month of each calendar quarter (i.e., February, May, August and November). Most importantly, our ability to run the business in an autonomous manner would have been significantly compromised, as we would have been relegated to answering to Wall Street on a quarterly basis.

Auction

Establishing a sales process was the least attractive option, even though this approach might have resulted in a bidding war that could have driven up the purchase price. Senior management was more concerned with ensuring a cultural fit with our acquirer, rather than squeezing the last dollar out of the deal. Citrix promised to operate Expertcity as a separate division and maintain its offices in Santa Barbara and it was unclear if other potential acquirers would have been willing to make, and keep, similar commitments.

There is a well-worn adage in the M&A world that, “companies are not sold, they are bought.” In other words, the most attractive companies generate unsolicited buyers which can often lead to premium purchase prices. Companies that seek buyers are often viewed as “damaged goods” which cannot otherwise succeed as self-sustaining entities. Such companies, if they are able to complete a transaction, often sell at a discount. We avoided the risk of the deal becoming shopworn by not initiating a bidding process.

Do Nothing

Doing nothing was the most realistic and potent competition faced by Citrix. Both parties knew that due to the rate of our revenue growth, Expertcity would become too expensive for Citrix, if an acquisition did not occur in the relative near-term. Doing nothing became our BATNA.

We eventually sold Expertcity to Citrix for $230M. I am proud to say that Citrix lived up to all of its commitments and Expertcity, renamed Citrix Online, went on to become one of the largest employers in Santa Barbara county.

Get Out Of The Zone

As shown above, every negotiation entails a buyer and seller comfort zone. In order for a deal to be consummated, an intersection of these zones must exist. In this example, agreement is achievable between $145M and $185M. In general, an agreement cannot occur outside of this range, unless new data, coupled with a persuasive argument, are introduced in order to drive the buyer or seller outside of their initial comfort zone.

Brian Epstein Had No Clue, Let Alone A BATNA

The Beatles’ Manager, Brian Epstein, was a 30-yr old, former furniture salesman when Beatlemania hit America in 1964. When he was approached by savvy New York businessmen to license the Beatles’ name and likeness for various novelty products and toys, he firmly stated that he would not accept a penny less than 10%. The businessmen had a difficult time hiding their surprise, as the expected range for such licenses was between 20% to 40% of the product’s price, as shown below.

Speaking from ignorance, Mr. Epstein effectively moved the negotiations outside of the expected shared comfort zone, costing the Beatles tens of millions of dollars in the process.

If you attempt to assess the value of your company within that of a larger organization, you too will be speaking from a position of ignorance. While ignorance may be bliss, it is a bloody awful foundation upon which to negotiate. When in doubt, keep your mouth shut and allow the other party to establish one of the boundaries of the shared comfort zone. If you are unsure of the fairness of their initial proposal, you can then seek additional information to determine where it falls within the expected range.

If a seller names a price at the outset of a negotiation, they effectively establish the upper bound of the negotiations. Once a sale price is communicated, the buyer is then incentivized to negotiate your initial proposal downward.

If you name an outrageously high price, you may scare away the would-be buyer, as they may feel that you do not have a realistic opinion of your adVenture’s value. If you set an initial price that is too low, you effectively shift the comfort zone in an unfavorable manner.

RedMojo Alternative

When I assisted the CEO of RedMojo in the sale of his company to Novell, our BATNA was to accept funding from venture capitalists.

This alternative would have precluded an acquisition for several years, as most institutional investors are not interested in a small, short-term returns in lieu of a larger, longer-term exits. At the same time, RedMojo’s management was not inclined to accept venture funding, as it would have required the team to work several additional years to generate a return sufficient to warrant the dilution caused by an institutional investment.

Fortunately, there were multiple companies interested in acquiring the company, which negated the need to establish a sales process and risk the deal becoming shopworn. The combination of multiple bidders and the legitimate BATNA of venture funding allowed us to maximize the price we obtained for the company’s assets.

Who’s There?

It is impossible for you to fully understand the potential strategic value of your adventure once it is part of an acquiring company’s organization. A fair response to the question, “How much do you want for your company?” is, “What would our assets be worth as part of your organization?”

Once the potential buyer states the expected value of your assets within their organization, you can then focus your arguments on the combined value the two organizations can jointly create, rather than allowing the acquirer to drive down the standalone value of your company via comparisons with other companies or by assigning a multiple to either your revenue or net income. Attempting to determine the combined value of the entities is a worthwhile exercise because it forces both parties to think through the acquisition and contemplate how the combined company would work together.

When someone knocks on your door and asks how much you want for your house, your response should be, “Thank you, I am very flattered that you like my house. I like it too. However, as there is no For Sale sign in my yard, I have no price in mind. I know what it is worth to me, but the important question is ‘What is it worth to you?’” If they want your house as much as Michael Jackson wanted the Sycamore Valley ranch, they may be willing to pay you a very, pretty penny indeed. But the only way to find out is to get them to make you an offer and define the low-end of their purchase price comfort zone.

Coda

After Michael Jackson’s financial and personal demise, Neverland Ranch was “sold” not “bought”. After it had languished on the market for years, it was finally acquired, at a below market price.

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