At the time, I was really perplexed by the quote.  It seemed counterintuitive to a 9 year old that it would take time to make something shorter.  And why was it so important that they would print this quote in the back?  It was only a few years later that I realized that making something concise, descriptive and short takes time and effort.

I am reminded of this frequently when we get pitched a new business.  And it amazes me that well-trained and educated executives miss this.  Half an hour into the presentation they still have not explained what their business is about in a way that we can internalize and understand.  How important is this?  Critical to success!

As a startup entrepreneur, communicating the business opportunity in a way that others can understand is essential, not only for raising money, but also for recruiting employees, signing up partners, engaging customers, or exciting the press.  Keeping it simple is a big part of effective communication.  And like everything else it takes time and energy to get it right.

I understand that some business are more complicated than others, especially technology-driven businesses.  But all the good ideas are about solving a unique problem for a set of customers.  And that can be described in simple terms.  Getting this right is even more important when it comes to investor presentations.

Investor pitches need to quickly get the attention of investors.  If you have to spend half an hour to explain the outline of what you do, you have failed.  Think about it; a complicated explanation usually signals to us one of the following: (a) you don’t have a strong grasp on your business, (b) you haven’t invested the time to simplify the story in a way that investors can understand, or (c) you are making it more complicated than is necessary in order to prove that you are experienced, usually a sign of insecurity.  None of the above is a favorable statement.

So I can’t emphasize this hard enough.  Organize, practice and simplify.  Try it out with a friendly crowd.  Try the pitch on your spouse or mother-in-law.  In order to succeed, keep it simple!

1. Purchase Tesla.  We all need an iCar, right?  I was going to suggest GM or Chrysler, but even Steve’s magic wand can’t make the UAW disappear.
2. Buy Vizio.  Make their TVs into giant iPads running all the apps in the app store.  Your iPhone is the remote.  Effortless on-the-grid DVR integration.  Built-in High def video conferencing,  This will be a fall 2010 event.  You heard it here first.
3. Purchase all of the big music labels.  Why split revenue with them? And he can make all that DRM nonsense just go away.
4. Purchase the PS3 business from Sony.  The world needs an iConsole with iGames and a sexy iController.
5. Purchase Dell.  Turn all of those Dell machines into Hackintoshs.  Force all existing Dells to upgrade to Snow Leopard, sticking it to Redmond in the process.  At $16/share he could get Dell for $30 billion and have ~$10 billion left over to hire an army to protect Apple employees from a berserk Steve Ballmer.
6. Take over NASA.  The iShuttle, the iStation, and the iRover?  Irresistible.
7. Purchase Disney.  OK, he would have to borrow some money to do it, but then he would regain Pixar, take control of ESPN, and we could watch Apple content on all of our iThings.  Nirvanna.
8. Purchase Cannondale.  I would love an iCycle.
9. Purchase Jarden, the parent of SunBeam.  Then we can really have the iBlender, iToaster, iMicrowave that we all want so badly.
10. Purchase the NAV portfolio.  Some really cool companies in there.  I can say without even discussing it with all the other stakeholders that we would sell for $2 billion, and he would still have $38 billion left to play with.
    

Well, that was fun.  But not as fun as it will be to watch this unfold for real over the next few years.  Personally I am really looking forward to it.

As an entrepreneur-turned-VC, I am very sensitive to the advice I give in my role as a director.  The VC is not running the company.  The CEO is.  The VC’s advice is important, and should be weighed, but should not be blindly followed.  We will never know as much about your business as you will.

BUT, we will be able to bring a perspective on your company and your industry from the vantage point of everything else we see, daily, as a VC.  So do consider that perspective as you decide to heed or not  heed our advice.

VCs are busy.  We sit on many boards at once.  At New Atlantic Ventures, each partner is limited to six board seats.  But I have VC-friends who sit on more than a dozen boards.  So, as an entrepreneur, how do you get more than your fair share of my attention, and how do you get me to help you and your company when and where you need the help?

I have found that the best CEO-entrepreneurs do four things in managing their Board of Directors (which of course includes the VC.)

1. After every Board meeting, the CEO sends out a list of “action items” which came out of the conversations in the Board meeting.  These are things that the CEO and the Company have committed to do, as well as things that any board members have committed to do.
2. Start your next board meeting with the action action items from the prior meeting.  List them on one page.  What the item is, who was responsible, and the due date.  Go over each item to bring closure to the discussions from the prior meeting.
3. Give every board member “to do’s” in the board meeting and put them on the action item list.  Could be as simple as, “Make an introduction to Cisco.”  Or “Introduce company to XYZ VC fund for “B” round presentation.
4. Circulate the action item list , parsed by board member, 48 hours before the meeting.  Remind them what they agreed to do between board meetings. (This may be the moment in time that your VC pays attention to his action item!)

If you do this, your VC will work for you, doing what you want.  Maybe last minute – meaning the items will be done right before the board meeting.  But they will get done.  Because we don’t want to show up on the action item list as having not done our job.

Try it.  It really works!

Of course there is lots of buzz about Tablets now, several major brands have announced products, and numerous analyst reports project strong demand. You need to take analyst support with some salt, however, as analysts’ bread is buttered only if the markets on which they are expert become important, so they work hard to make that happen. As investors we have to make up our own minds about what is going happen.

Here is why we believe the tablet market will take off:

• The tablet is the next stage of the “personal media player” market development that has been ongoing for 50 years, since the debut of the transistor radio. Consumers inherently value the ability to enjoy media in more situations and in more customized ways. The transistor radio introduced portability.  The Walkman added choice of music. The original iPod brought much more music and more control. The 3G+ iPods added video media. The iPod Touch added games and better video. Already the Touch is killing the portable DVD player, even with its 3.5″ screen. Tablets bring much more media viewing capability with 7″ – 12″ screens.
• The tablet fulfills a need not satisfied by either laptops/netbooks or the living room TV. Tablets are personal and portable; televisions are not. Tablets are light and comfortable to hold like a book (designed for viewing media); laptops are not. Some describe this as the difference between the work-oriented lean-forward experience (laptop) and the leisure oriented lean-back experience (reading a book, or a Kindle).

• Tablets make the internet available in every room of the house. Wifi does this technically, but ironically appropriate terminal devices are scarce: weather stations, clocks that know the time, family calendars and to-do lists, remotely reloadable picture frames, internet radios. Laptops have the wrong form factor for this. Specialized products are emerging in some categories (eg, wifi picture frames). Tablets will sweep up much of this demand.

• The tablet user interface (basically the iPhone/iPod touch interface) is remarkably intuitive for users, and also quite capable. My acid test for this watching children: my 5 year old grand-daughter (picture above) has complete mastery of my iPhone, even though she has never been trained and is just learning to read. There are few barriers here.
• Last and most, there is a ton of content ready and eager for these devices – this is a big accelerator for adoption. Most of ~150,000 apps available in the Apple app store will run on the Apple iPad with modest changes; the SDK for this (iPhone OS 3.4) is out already. Ditto for Android. Hulu, NetFlix, and others already offer a rich selection of TV and Movie content for streaming to internet connected devices.  Apple’s iTunes and iPhoto already offer capability to stream music, video, and photo collections throughout the house.  Amazon has 400,000 books available for Kindle, or the iPhone OS Kindle app. Many magazine publishers are eager to offer magazines via tablet because they see an opportunity to make magazine content compelling in the on-line world: eg, Wired Magazine is promoting a mock-up of a multi-media edition designed for a table (see the video embedded below).

• And, at no extra cost, a (sixth) bonus reason:  Apple set an aggressive price point.  $500 has long been seen as the threshold price point for consumer mass markets.  Emerging research is showing that pre-release demand for iPad is greater than it was for iPhone. (Check out the link below.)

http://digitaldaily.allthingsd.com/20100223/initial-ipad-demand-greater-than-initial-iphone-demand/)

A wise man said, “It’s hard to make predictions, especially about the future”. Keeping that in mind, and also the isolated instances in which we have been wrong in the past – ;) – we’re bullish on the tablet.

“Between the idea and the reality.  Between the motion and the act.  Falls the shadow.” — T. S. Eliot

T. S. Eliot was not talking about venture capital when he wrote these words in 1925.  But I can think of no better advice today for entrepreneurs.

Raise money at the idea stage.  Raise money when you have a real business.  But don’t try to raise money in between.

Moment #1:  Napkin Stage.  Unless you are a proven entrepreneur, with a track record, an obviously good idea, and existing connections to investors, this moment is VERY HARD to raise money.  Keep your day job.  Work on your business in your off hours.  Use your savings.  Borrow from friends and family.  But by all means, move your business beyond the napkin stage before you ask someone you don’t know for money.  For an internet business, with cloud computing and storage, ruby and rails, there is no excuse for not at least having a live prototype of your business before you seek outside money.  And by all means, please don’t approach investors at this stage and tell them that you will leave your high paying job and pursue this new business IF the investors will fund you.  We want you to take some risk in starting the business!

Moment #2:  Working Product Stage.  This comes after the napkin stage.  Now, you have built your product and it works, although it is probably quirky, incomplete and not quite perfect.  You have some people who are using the product, but who are probably not paying for it.  It is a new idea.  Perhaps a revolutionary idea.  No one else is doing it.  And it works.  This moment in time, with great enthusiasm from you, is a great time to raise money.  Your expenses are low so you don’t have a big burn to cover.  You don’t need the money to cover big expenses.  But you want the money to grow your business.  You are selling a vision.  Hope.  A big idea.  All based on good early traction.  We get most excited about deals here, at this stage, when the market opportunity looks unbounded, the product works, and there is early customer traction in the market.  Even in the dark investing days of 2009, we lost out on several deals that looked like this, which had competing term sheets, when we backed out of an auction-like process.  This is a great moment in time for entrepreneurs to raise money, whether as a seed round or an “A” round, from Angels or VCs.

Moment #3:  You have a Business Stage.  At this moment in time, your product has probably been live for 6, 12 or 18 months.  You have raised your angel money or “A” round money.  You have assembled a team.  And you have results.  At this moment, your ease of raising money is Dickensian – as in A Tale of Two Cities.  “It was the best of times, it was the worst of times.”  If your business is developing better than you expected – growing customer base, increasing revenue, decreasing net monthly burn – then your fundraising task is an easy one.  Everyone want to invest in a perceived winner.  As an entrepreneur, you have the power here, and can often negotiate very favorable investment terms.  One simple piece of advice.  If you have TWO offers of financing, the terms you end up with will be MUCH better than if you take the first offer, or only have one offer.

However.  If your business is doing “OK,” but not hitting on all cylinders, (and most businesses end up in this category) then this is the hardest time to raise money.  I call it the “valley of disillusionment.”  You have built up a team so your cash burn has increased.  You have a product that works.  But odds are that you don’t have as many customers as you had hoped.  Or they are not engaged with your product as you had hoped.  Or they are not paying you what you had hoped.  While this is a normal stage in most companies, from an investor’s perspective, you have a troubled situation.  Things aren’t quite working right.  And we don’t want to invest in a company that is struggling.  At this point, your best financing option is asking your current investors for more money.

Moment #4:  Revenue, Earnings & Growth.  Congratulations.  You have made it to the point where you have a real business.  That is the good news.  You can raise money pretty easily to grow a profitable business.  There is one downside though.  And that is valuation.  Now, your business is less likely to be valued on its unbounded potential.  Instead, you will be valued on traditional financial metrics.  P/E ratios.  EBITDA multiples.  Revenue growth rates.

Raising money is hard.  Don’t make it harder.  Raise money when you can, not when you have to!

What I mean is that carriers will increasingly become value added internet service providers.  They are currently the old AOL.  Providing access to the internet but also providing a highly controlled and managed service experience where they decide what services become available and under what conditions.  That model didn’t last long in the desktop internet.  People decided that they wanted a fast internet access, but they wanted to control what service to use for email, where to find content, information and entertainment and so on.

I remember 7 or 8 years ago listening to an analyst describe how the wireless carrier industry was a different animal.  That wireless carriers controlled their infrastructure all the way to the phone that the consumer was using and that they could therefore avoid being bypassed and commoditized.  While I don’t think that it is an issue of commoditization, I think that comment was a little shortsighted.  What the carriers control is important, but another key and important factor is what consumers want and desire.  When there is strong demand for open and innovative services, someone in the industry will step up and try to offer them.  Because that is a way for them to get ahead of the competition.  This is exactly what happened with Verizon.  They had shocked the world a year or so ago when they announced that they would abandon their “walled garden” approach more in favor of an open internet environment.  This week they move a step closer with the deal with Skype, a company whose services undercuts their voice revenue.  Verizon realized that the growth potential in data revenues and competitive marketing advantage outstrips their potential cannibalization of already declining voice revenues per consumer.  It’s unclear whether Skype had to kick any share of its revenues back to Verizon for this deal.  No matter what, it signals a new wave of thinking among the carriers.

Off course this all started with Apple and its deal with AT&T.  The iPhone’s app strategy allowed the collective innovation of the app development community to show consumers what they can suddenly do with their phone.  And consumers loved it and now want more.  (While Apple opened up the carrier “walled garden” it now became the gatekeeper of what consumers can access, a more benevolent gatekeeper but still a controlling force, but that’s another story).  Follow some of the debate here, from a panel at the Mobile World Congress:  Telstra’s CTO get it; the GSM Association’s marketing chief doesn’t.  The die is cast and the only way to move forward is to give consumers more of what they want.  Access to more innovative services on their phone.

This is exciting for consumers.  Imagine a world where you can sign up for carrier internet access, but then choose the way you want voice services are delivered. It’s coming.  Innovative companies like Skype and services like Google Voice have shown us what is possible.

This is not neccessarily bad for the carriers.  Being the access point to a fast internet is important and requires capital and operational excellence that needs to be rewarded.  It also gives them the obvious first entry point in order to sell additional services to consumers.  But if they want to win those consumers over, they need to innovate or partner with nimble smaller companies (By the way the answer for carriers does not lie in the recent announcement of a wholesale app store, which is simply a pipe dream).  Consumer demand it and are willing to pay for it.  Carriers can also benefit from additional revenue sharing from companies like Google that know how to monetize search and can kick some of that revenue back to carriers (that’s a nice enticement to work with Android).  Or they may decided to spread their bets on multiple ecosystems because Google is already too dominant.

Finally, this trend is promising for innovative young companies.  We funded a couple of mobile companies in the past that had to sell through the carriers.  One, Mobile365, was very successful and is now a large division of Sybase, who bought it.  But at any point in time, its future was highly dependant on the whims of the carriers doing business with it.  An open mobile network levels the playing field and allows the best companies to win because they are chosen but consumers directly.  I think Skype is an exciting company to watch.  They have a chance of becoming the global voice services provider, a sort of 21st century global Ma Bell.

• Will the investment in outside help pay off?
• Will investors see paying for help as a negative factor?

There are different kinds of fund-raising help. The main ones are: “investment bankers”, agents, and finders who help you find and engage investors, and fund-raising venues (conferences and the like) where entrepreneurs pay to attend in order to meet investors.

Bankers can be helpful. They can refine your story and materials, and they often have current information on which investors are active and what they like to invest in. Then know many investors and provide introductions with varying degrees of warmth. They are often good at managing the process with multiple investors (which can be a big drain for executives) to get them to the finish line close to the same time and maximize perceived competition for the investment.

The banker value add is biggest for a later stage company trying to raise a large amount of money from multiple investors including strategic investors. For a small, early-stage raise the banker value add is less, however, some bankers specialize in this market and add value as coaches and match-makers.

What about the stigma of working with a banker? One of my investor friends likes to say that “the best and worst deals have bankers attached”. He means that the best later-stage companies use bankers to create an auction, and desperate companies hire bankers out of hope that they will help.

There’s a grain of truth here, and some bankers behave differently than others. The best bankers are selective in whom they choose to represent and which investors they approach. Most of their compensation comes from success fees. So their involvement indicates to investors who know them that they believe the deal is fundable and appropriate for the investor. Other bankers SPAM inappropriate investors with formulaic PPMs, and one can guess that their minimum fee is high enough that it motivates them to go through the motions even if they prove ineffective.

So if you decide to use a banker, choose one with a reputation for focus, value added, investor relationships, and determination to get the deal done, and keep the minimum fee down so incentives are aligned. While investors are dismissive of bankers, most investors pay attention to deals that some bankers bring.

I think investment conferences are more useful for networking and PR than targeted fund-raising. I know of a few investments that started with a meeting at a conference, but it’s a small percentage of the total. Most investments result from introductions of one kind or another. Investors like to think they find companies with special, unrecognized value; finding a company via a pitch to a large group of investors at a conference does not fit that image.

Like bankers, conferences vary a lot. Some charge modest fees to entrepreneurs and are attended by lots of investors; meetings of the regional venture capital associations often fit this model. The investors are there to network and will attend a good number of pitches. In other cases the entrepreneur fees are high, and the investors pop in and out for panel appearances that advance their own PR agendas. So caveat emptor here.

And likewise beware of the “top companies” lists that conference organizers create. If the conference is sponsored by a publication that has brand value, inclusion could have some value. Mostly, however, investors don’t take these rankings seriously, especially if it’s known/suspected that the conference organizer is getting paid for the listing.

So, how do you get meetings with investors? My suggestions (not comprehensive) are:

• Read their web sites. Decide if you like what you see. Learn what they will invest in. Look for recent new portfolio company investments to verify that they are active. Choose the ones who offer the best fit.

• Look for referrals to members of the team from a former portfolio company executive, lawyer, accountant, or other investor: like any other selling situation, a personal recommendation makes a big difference.

• Consider working with an intermediary that has credibility with investors because they do a good job of selecting fundable deals and matching them to investors likely to have appetite.

• Write a good first meeting presentation or 2-pager (see my earlier post on how to do that) and send it, preferably to the person to whom you have an introduction. If you have no introduction, look at the web site; it will tell you how to submit a plan.

• If you can’t afford a trip to Boston or San Francisco, do a first meeting via video-conference; Skype is surprisingly good (and free).

• Follow up with energy and courtesy if you don’t hear back within two weeks.

And good luck!

In my view, the important consumer-facing companies on the web today are:

- Google, where you look for new things, and

- Facebook where you interact with who/what you have invited into your life.

- Amazon/Ebay, where you buy the things you find on Google

- Expedia/Trip Advisor, where you discover & arrange to travel to places you find on Google

- Match/eHarmony, where you search for romance/relationships

- Monster, where you search for a job

- MSN/Yahoo/Google where you read news

- Wikipedia, where you learn facts about whatever you find on Google

These are the companies that solve everyday problems for real people.  As the web’s primary launch point, Google is important to every company on this list…except for Facebook.  So Google can extract a chunk of value from everyone on this list…except for Facebook.  Understandably, this gets those Google competitive juices flowing.  And they will continue to invest in capturing a bigger slice of the social media pie until they get somewhere.  But that feels a bit forced to me, as when Microsoft tried to go after Yahoo! and Google with me-too offerings.  Google wants to be social, feels they have the might to make it so, while consumers, who have their needs met quite well already, just shrug.  I don’t see it working.

Noticeably absent from the above list is Twitter.  What about Twitter?  Is this “invented for feature phones” lightweight service obsolete?  It feels that way to me.  In the age of the iPhone, Twitter is really feeling more like a feature than a product.  The brand is valuable, the user base is valuable, and those are real assets.  But my sense is they are at a value peak right now and if I were an investor, I would be seeking to partner with a media company to expand the offering.  Will we see a Skype-esque Twitter exit in 2010?  Unlikely – as the Twitter Board probably (and in my view mistakenly) feels they have a lot more company building to do and won’t seek to be acquired.

As for who is vulnerable on this list?  Match and eHarmony are being attacked by just-as-good free offerings.  The rest feel relatively unassailable to me.  But that’s how I felt about Dell once upon a time.

Source: Capital Advisers Group (quoted in The Wall Street Journal)

A big expansion of venture debt occurred along with the credit bubble of the “noughts”.  For a while it was common, if you raised $10m of venture equity, to put a couple million of venture debt on top.  The debt represented extra runway:  “recap insurance”, and much less dilution than equal dollars of equity.  Entrepreneurs and VCs were confident that they would be able to raise new money at much higher valuation before the debt would have to be repaid.  Do you hear the echo?

Those of us who did this (me included, a couple of times), forgot some key things:

• Both VCs and entrepreneurs are optimists by nature.  We buy into the vision and the upside.  But, it’s really rare that things go as planned.  My rough rule of thumb is that only about 10% of venture-backed companies actually make plan in a given year.  Those that get above 70% of plan are in the top half of the class.  It goes down from there.
• Markets change.  The credit bubble was followed by the credit bust.  The hedge fund industry (which supplied a good part of the venture debt capital) has shrunk dramatically.  Major banks were another big, underlying source of funds to this sector, and they have cut far back.  Lenders’ prudence is mounted at the end of a long pendulum.
• To paraphrase F. Scott Fitzgerald:  venture lenders are not like the rest of us [VCs], they really expect to be paid back.  VCs tend to assume that everyone invested in a company is in the same boat, everyone will have to take a haircut when things get tough, and everything is negotiable.  Lenders don’t think that way.  They are not as concerned about maintaining relationships as VCs, their business model tolerates very little credit loss, they usually do what they have to do to get paid back, and they can have a lot of leverage to accomplish that.

A company I know raised a big equity round in 2005 and put a thick slice of venture debt on top of it.  They believed this would be the last round, but it was not, by a long way.  They raised an even bigger equity round in 2007, and the venture debt guys agreed to extend payback, but there was a price:  tougher terms, including “account control” which gave the lenders the right to take the company’s cash if they believed a default had occurred.  Two years later the company needed cash again, and while a raise was in process, the lenders declared an [arguable] default and took all the cash, a week before Christmas, forcing employees to be furloughed/laid-off, and triggering a recap that wiped out all prior equity value.

Lots of heat came off this fire, but realistically the lenders were doing their job.  My point is simple:  debt is dangerous.

When would I use debt again:

• To finance receivable growth or provide a buffer against cash fluctuation for a company that is profitable.
• To finance equipment that has collateral value that can pay off the loan.

What am I determined to not do:

• Take on debt to “extend the runway”.  This is just too risky, particularly because if you do have to raise equity again, it’s twice as hard.  The interest-only period will be over and debt amortization will be a major cash drain.  The equity round needs to be much larger to fund this cash need, and equity investors will be less eager because they hate putting in money that is immediately paid out to another investor.  So valuation will be lower, if the round can be raised at all.
• Use debt that was raised to fund receivables growth to fund operating losses instead.

Debt is seductive, especially when mixed with optimism and momentum.  But putting more risk in the funding strategy seldom makes sense.  Let’s focus on the basics.  Success in VC is mostly about picking the right companies, teams, and business models.

1) The App Store is censored by Apple.  If you create an App they deem unworthy, either for impropriety or competitiveness, then it won’t make it to the App Store.

2) The only way to get an App on the iPhone is through the App store. I want to buy Apps everywhere, from anyone, anytime I choose.  From Amazon, from a random website, from within another app.  Apple has no intention of unlocking their devices to enable this.  This is a big enough hole in their strategy to drive a truck through, and one of our companies, TapNTap, is helping that happen by putting a nice windowed interface on top of Android for tablets.

3) They keep changing the @#$# cables & power cords, and charge a fortune for them, and DON”T EVEN APOLOGIZE.  Here is a picture I took of an Apple connector basket in a conference room a few days ago.  Why add needlessly to the already high Apple Tax.

So, I have a long list of things I love about the iPhone, but I didn’t pick Apple as my content filtering company, I picked them as my product design and user experience company, and they need to take a hard look at their history of creating markets and handing them over to standards-based competitors and choose the enlightened path this time.  I sold my AAPL.  We shall see if that was wise.  Problem is, I have no good place to put the cash now.  Maybe TSMC.

BTW, Apple, while you are at it, please buy a Blackberry, see how they make it easy to add a calendar event, and take careful notes.  One of my CEOs said yesterday “I never add an event on the iPhone.  I send myself an email to do it at my desk later.”  I really can’t believe smart people didn’t realize tapping on the calendar time of day should create an event that STARTS AT THAT TIME, and that a multi-window, multi-”done” button, randomly chosen start time experience might not be optimal.  There.  Rant complete.