Shifting Gears

Week 8 (Final week!) Reading for the Business of Entrepreneurship (LAWS 61702)

2008-05-14T08:28:00.000-07:00

Week 8 (May 19)

Topics: IPOs. Hypotheticals from the course material. Course wrap up. Improvements for next year.

Readings: Available for free on the web, with links to them here (remember to read the comments of the blog posts): http://del.icio.us/jrodkin/laws61702 :

“How IPOs Work” – short article at Briefing.com
“VC Cliché of the Week – Back Door IPO”– blog post by Fred Wilson, Union Square Ventures

Week 7 Reading for The Business of Entrepreneurship (LAWS 61702)

2008-05-07T21:27:00.000-07:00

Section 3 – Exiting a business

Week 7 (May 12)

Topics: Exiting through acquisition.

Readings: Available for free on the web, with links to them here (remember to read the comments of the blog posts): http://del.icio.us/jrodkin/laws61702 :

“No Exit: When Venture Capital Isn’t Right” – blog post by Tim Oren, Pacifica Fund.
“Merger and Acquisition Due Diligence – What to Expect” – blog post at Ask the VC (Brad Feld and Jason Mendelson)
“How Do You Plan for M&A?” – blog post at Ask the VC by Will Price, formerly of Hummer Winblad, now CEO of Widgetbox
“The Top Ten Commandments of Venture M&A” – blog post by Bill Burnham, Inductive Capital
Flyswat Summary of Transaction Terms
Flyswat LOI

Week 6 Reading for The Business of Entrepreneurship (LAWS 61702)

2008-04-29T21:22:00.000-07:00

Topics: Sales and marketing. Metrics in the business. Interacting with the board of directors.

Readings: Available for free on the web, with links to them here (remember to read the comments of the blog posts): http://del.icio.us/jrodkin/laws61702 :

“Boards that are not Bored” – blog post by Brad Feld, The Foundry Group
“The Art of the Board Meeting” – blog post by Guy Kawasaki, Garage Technology Ventures
“How and What to Measure” – blog post by Dick Costolo, Founder/CEO of Feedburner (acquired by Google)
“The World’s Shortest Marketing Plan” – blog post by Kelly Odell, Volvo
“Improve Sales with a Marketing Plan” – Article in Entrepreneur Magazine by Kim Gordon
“No Surprises” – blog post by Josh Kopelman, First Round Capital
“Using Scorecards with Your Board” – blog post by Matt McCall, Draper Fisher Jurvetson Portage Ventures
“Pipeline Management” - blog post by Matt McCall, Draper Fisher Jurvetson Portage Ventures

Week 5 reading for The Business of Entrepreneurship (LAWS 61702)

2008-04-21T12:10:00.000-07:00

Week 5 (April 28)

Topic: Representing startups as corporate counsel. Guest speaker: Peter Werner from Cooley Godward Kronish.

Readings:

Available for free on the web, with links to them (except the employee docs) here (remember to read the comments of the blog posts): http://del.icio.us/jrodkin/laws61702:

"BigCo Warning Letter"
"BigCo PIIA"
“How to Save Money Running a Startup" - blog post by Jason Calacanis
DGCL 141(b)
"409A Government Maximus Interruptus" - blog post by Brad Feld, The Foundry Group
409A Cooley Alert series

For reference (won't be discussed directly in class, but will be helpful for your practice)

NVCA docs link: http://www.nvca.org/model_documents/model_docs.html
Corporate counsel: http://www.thecorporatecounsel.net/home/
SLD: http://www.law.uc.edu/CCL/index.html
Potter Anderson's DGCL reference guide for handheld devices: http://www.potteranderson.com/edelaware.html

Week 4 reading for The Business of Entrepreneurship (LAWS 61702)

2008-04-16T20:13:00.000-07:00

Week 4 (April 21)

Topics: Personnel (and documents). Compensation. Intellectual Property (NDAs, PIIs, patents); Non-competes, non-solicitation, and non-disparagement.

Readings:

These are left over from week 3 and are under the week 3 tag at Del.icio.us

“Nine Questions to Ask a Startup” – blog post by Guy Kawasaki, Garage Technology Ventures
“The Truth about Venture Capitalists, Part 1” – blog post by Marc Andreessen, founder of Netscape, Opsware, and Ning
“The Truth about Venture Capitalists, Part 2” - blog post by Marc Andreessen, founder of Netscape, Opsware, and Ning
“Build your own Cap Table” – article at Venture Hacks. (If you need help with this one, watch the video walk through.)
“Cap Table Hygiene” – blog post by Will Price, CEO of WidgetBox, former VC

Available for free on the web, with links to them (except the employee docs) here (remember to read the comments of the blog posts): http://del.icio.us/jrodkin/laws61702:

Proprietary Info and Inventions Agreement
Sample MNDA
Offer letter template
“What are Typical Compensation Numbers” – blog post at Ask the VC
The Sales Commission Dilemma – Inc Magazine

Week 3 reading for The Business of Entrepreneurship (LAWS 61702)

2008-04-06T20:43:00.000-07:00

Week 3 (April 14)

Topics: Financing strategy and execution; Cap table.

Readings:

Available for free on the web, with links to them here (remember to read the comments of the blog posts): http://del.icio.us/jrodkin/laws61702

- “Nine Questions to Ask a Startup” – blog post by Guy Kawasaki, Garage Technology Ventures
- “The Valuation Trap” – blog post by Stu Phillips, Ridgelift Ventures
- “Venture Capital Deal Algebra” – blog post by Brad Feld, Foundry Group
- “The Truth about Venture Capitalists, Part 1” – blog post by Marc Andreessen, founder of Netscape, Opsware, and Ning
- “The Truth about Venture Capitalists, Part 2” - blog post by Marc Andreessen, founder of Netscape, Opsware, and Ning
- “Ten Pragmatic Steps to Raising Venture Capital” – blog post by Bill Burnham, hedge fund manager (Inductive Capital) and former VC
- “Build your own Cap Table” – article at Venture Hacks. (If you need help with this one, watch the video walk through.)
- “Create a Market for your Shares” – article at Venture Hacks
- “Cap Table Hygiene” – blog post by Will Price, CEO of WidgetBox, former VC
- “Liquidation Preferences” – blog post by Brad Feld, Foundry Group
- “To Participate or Not” – blog post by Brad Feld, Foundry Group

MIT track freshman record falls after 16 years

2008-03-09T20:22:00.001-07:00

With John Noland, Andrew Romain, and Ed Patron, I helped set the 3200m relay freshman record at MIT in 1992 at 8:05.13. We had broken the previous record, set the year before, by 17 seconds. Sadly, 16 years later, our own record has been broken by 8 seconds (and the same team has already broken their own record by 3 more seconds).

Congrats to Prevost, Welle, Conrad, and Kleinguetl!

***

The race recap:

The freshman 4x880 relay team of Richard Prevost, Paul Welle, Shawn Conrad and Kevin Kleinguetl wanted to go for the MIT freshman record of 8:05.13 set back in 1992, also at Harvard. Prevost, primarily a distance runner, led off with a fine 1:59.2 and handed the baton to Welle in third place. Even though the handoff was a bit sloppy, Welle got out well, took the lead halfway through and held on to first place, running an outstanding 1:57.6. Conrad held onto the lead for a while but could not stay with the top two runners in the final 200, handing off to Kleinguetl in a distant third despite running 2:01.5. Kleinguetl could not close the gap despite a 57.4 first 400 and finished with a 1:58.8 for a new freshman record of 7:57.23.

Are entrepreneurs crazy idiots?

2008-03-08T07:51:00.001-08:00

I recently enjoyed Nassim Taleb's books after reading Stu Phillips’s thoughts about them. Taleb describes himself as a "skeptical empiricist", which means, among other things, he recognizes many difficulties of using past data to predict the future. A lot can change quickly and completely unexpectedly. An analogy he uses a lot is a turkey that gets a full meal every day and begins to think that it will always be comfortable and well fed - then Thanksgiving arrives and the turkey’s head comes off. In the financial world (Taleb is an "applied statistician and derivatives trader-turned-philosopher"), these "Black Swans" have shown up recently in a big way the credit markets. If only the CEO of IndyMac had read some of Taleb! He wouldn't have had to blame the ratings agencies for systematic underestimation of mortgage credit risk – or he at least would have been better prepared.

At the same time, though, I’m an entrepreneur. Entrepreneurship is about jumping off the cliff into the unknown (when Leo and I started Clickshift, right before his first child was due and after I turned down some low-risk opportunities, we named our first network "Two Lemmings"). Every investor meeting I go to is filled with all the reasons why the company won't make it. Statistics show the investors are probably right, since most companies fail. There is always more chance of failing than succeeding and no matter what we do, we can’t accurately predict the future from the past - but I take the leap of faith anyway. I’m even enjoying it a lot more these days while working on far and away the riskiest company I’ve ever tried. WTF?

As I get ready for my entrepreneurship class, I’ve been thinking about whether entrepreneurs are crazy idiots. Is there a way to be Taleb-loving rational, skeptical empiricist (a perspective I think you need to have to be a good entrepreneur, even if luck ends up as a major determinant of "success"), and then still jump off the cliffs anyway? Should we all go be dentists or lawyers or accountants and earn a nice living without all the risk? Being crazy or ignorant is certainly one path – it’s easier to jump off the cliff and in some cases, you’d get lucky enough after jumping that everything would work out. You’d be “successful” even though you’re really just crazy or stupid (or both) and lucky. I think that’s the pessimistic view of entrepreneurship, that only the crazy or ignorant people jump and then it’s all luck. Not even Taleb goes that far. No question luck plays a big role in any outcome, but that’s a bit unsettling for someone who makes a career in entrepreneurship. We’d like to think that we can do something to influence the company trajectory along the way. We want to be entrepreneurs, not just gamblers.

At a high level, gambling for a living is much less crazy than entrepreneurship. You can calculate the odds in cards and get your money in the pot when you have the best expected value. Especially after reading Taleb, it seems impossible to be even remotely accurate in assessing your chances of success as an entrepreneur. You have to jump, and the risk adjusted right choice on your first attempt will almost always be not to jump. (If you’ve been successful, whether by luck or otherwise on the first attempt, it can make sense to do it again – your financing options and odds of success are very different your second time around.)

In a few cases, jumping off the cliff can be the rational choice. As a student, for instance, you can take big risks, and if they don’t pan out, you just finish your degree (even if you dropped out of school to start the company) and have a normal career. Students can jump for free. So can some people with cushy jobs who can start companies in their spare time. You can also plan to jump more than once (unless your first one is a wild success and you end up on a beach somewhere). Chances are, any individual jump into entrepreneurship will fail. But the payoff can be quite large for the jumps that don’t. So like a venture capitalist who makes a bunch of bets, where some go to zero and some generate fund-making returns, a sensible entrepreneur needs to plan to make a portfolio out of his or her career. Instead of thinking to yourself as you step off the cliff "if this one fails, I'll get a real job", think "if this one fails, I'll take what I learned and swing for the fences again." If you're only willing to try it once, you're just buying lottery tickets. That can be fun, but it’s not rational.

You don’t have to be a crazy idiot to be an entrepreneur, but if you’re focused only on the outcomes, it rarely makes sense to take the leap. Do it because you love it and because you enjoy the process. As Taleb says about irrational things, do it for the aesthetics. Don’t do it for the returns.

Technorati: entrepreneurship

Syllabus - LAWS 61702 (Entrepreneurship for lawyers)

2008-03-04T17:21:00.000-08:00

I'll be posting a bunch of stuff here for my class at Chicago. I'm hoping that by doing so, I'll enable a broader dialogue on the topics we're covering. At any rate, the syllabus is below. Class starts March 31st, and I'll post the teaching material and interesting discussion points as we go.

***

Syllabus – LAWS 61702
The Business of Entrepreneurship for Lawyers
John Rodkin

OVERVIEW: The course will focus on the legal and non-legal tactical details of entrepreneurial endeavors. The legal specifics of corporate formation, tax, contracts, etc, are well covered by a variety of other courses at the Law School. Students who are interested in either starting companies or working with startup founders as their legal counsel will solidify their foundations in this course. There will be no textbook – course materials will include Powerpoint slides, readings from various entrepreneur and venture capital blogs, sample business plans, and other sources.

The class will meet Mondays, 4-6, in Room A through May 19th.

CREDITS: The course can be taken for either 2 or 3 credits at your option. Initially, all students are registered for the 2 credit option. If you’d like to take the course for 3 credits, you must let me know no later than April 11, 2008. Once the registrar changes your registration, you will be unable to later opt back in to the 2 credit option.

GRADING: Grading will differ depending on the number of credits you choose:

· 2 credit option: There will be a 3-hour open book exam on 5/28.

· 3 credit option: You will be required to present a business plan to a panel of me and a group of 2-3 others (which may include classmates). The presentation, including Q&A, should be approximately 60 minutes. In addition to the oral presentation (with accompanying slides), you’ll need to turn in a written mini-plan (executive summary, lead generation, sales, and marketing) (no more than 5 pages), a capitalization table (current and after at least two more future rounds of financing, all the way through an IPO), a long term financing plan with corresponding milestones for each round of investment, and written follow-up for any unanswered questions during the presentation. The business can be entirely made up and infeasible (e.g. a franchised dry cleaner that uses robots to wash, fold, and iron), but the market analysis must be real and the other documents must be internally consistent. You can do the 3 credit option in groups of 2, but you are not required to work in a team. Both members of the team will receive the same grade, and teams will be expected to be a bit more thorough than individuals.

Deadlines for the business plan presentation (you can schedule me for anytime between 5/28 and the deadline):

Graduating students: Monday, June 2nd.

Non-graduating students: Monday, June 23rd.

For both grading options, students who are particularly and consistently thoughtful during class discussions will receive 1 extra point on their grade. (Note: I’ve been in classes where participation was a major part of the grade. We’d like to avoid some of those side effects here, if possible.)

ATTENDANCE: The standard Law School policy is that you should miss no more than 1 seminar period. I doubt you’ll want to miss any sessions of this class since we’ll be having fun, but if something comes up and you need to, please let me know in advance. Except in special circumstances, you’ll lose 1 grade point for every absence after your second.

COURSE MATERIAL: The material for this course will primarily be web-based. I will disseminate the next week’s readings a week in advance and post my slides within 48 hours after class. I’ll endeavor to use Chalk, but I also maintain a blog (blog.rodkin.com) on which I’ll post the material, and I’ll tag the web readings with del.icio.us as well. (For instance, to find week 2 web assignments, go here: http://del.icio.us/jrodkin/laws61702, and click on the “week 2” related tag or go to http://del.icio.us/jrodkin/week2 and make sure it’s for this class.). Where blog posts are the required reading, please read the comments as well – a lot of the meat ends up in those.

In addition to the weekly readings, please read Nassim Taleb’s Fooled by Randomness. (http://www.amazon.com/Fooled-Randomness-Hidden-Chance-Markets/dp/0812975219) We won’t discuss the book directly, but its concepts will add a useful perspective to our discussions. At least one substantial exam question will be drawn from the book, and the perspective will help those presenting a business plan.

Finally, I’d recommend subscribing to PE Week Wire if you want to work in or around startups or private equity firms. (http://www.pewnews.com/hybrid.asp?typeCode=82&pubCode=3). This is a daily newsletter describing a variety of hot VC/PE topics, recent deals, personnel changes, and occasional industry drama.

PREPARATION: I realize that it’s Spring Quarter and you’re almost out of here. The workload for this class is not high. It will be less fun for all of us if you have to listen to a monotone lecture instead of a vibrant discussion, so please come to class prepared. I will begin each class by randomly asking a different student to summarize each reading. Since there are likely to be 8-10 readings and less than 20 of you, your odds of getting asked to summarize a reading almost every week are quite high. The second time you are unable to summarize, I’ll count it as a missed class (likewise for any difficulties after the second). See the “Attendance” section above.

MY CONTACT INFO: You can reach me at XX. My cell phone is YY. (Please remember, I live in California, so try not to call when you roll out of bed in Chicago). If you have any questions about the readings, class, entrepreneurship in general, please let me know. I travel frequently, so I may need 48 hours to respond to some questions, but I’ll usually be much faster.

Section 1 - Forming a business

Week 1 (March 31)

Topics: Should you or shouldn’t you? The founding team.

Readings:

Available for free on the web, with links to them here (remember to read the comments of the blog posts and to read both pages of the del.icio.us links):

The Pmarca Guide to Startups, Parts 1-7 (Pmarca is Marc Andreessen, founder of two multi-billion dollar companies).
“Why Early Stage Venture Investments Fail” – blog post by Fred Wilson, Union Square Ventures
“No Exit” – blog post by Dick Costolo, founder of Feedburner (acquired by Google for $100M)
“In Search of Inexperience” – blog post by Guy Kawasaki, Garage Technology Ventures
“Founders and Management” – blog post at Union Square Ventures

Available at Harvard Business Online (Go here and search for the titles. There is a cost to download these articles. If you can't find them, let me know before class):

The Founder’s Dilemma – by Noam Wasserman, Harvard Business Review article
Natural Born Entrepreneur – by Dan Bricklin (founder of VisiCalc, the first spreadsheet), Harvard Business Review article

Week 2 (April 7)

Topics: Initial employee documents; Business plan / slides

Readings:

Available for free on the web, with links to them here (remember to read the comments of the blog posts):

F2 Restricted Stock Purchase Agreement
F2 Stock Option Grant Notice
“The 10/20/30 Rule of PowerPoint” – blog post by Guy Kawasaki, Garage Technology Ventures
“The Pitch Deck” – blog post by Stu Phillips, Ridgelift Ventures
“A Pitch Deck Does Not Stand Alone” – blog post by Stu Phillips, Ridgelift Ventures
“The Zen of Business Plans” – blog post by Guy Kawasaki, Garage Technology Ventures
“How NOT to write a business plan” – blog post by David Cowan, Bessemer Ventures
“Should you hire someone to write your business plan?” – blog post at Ask the VC.

Week 3 (April 14) – Financing strategy and execution; Cap table.

Section 2 – Running a business

Week 4 (April 21) – Personnel (and documents). Compensation. Intellectual Property (NDAs, PIIs, patents); Non-competes, non-solicitation, and non-disparagement.

Week 5 (April 28) – “Working as the legal counsel for a startup” – Guest Speaker (Peter Werner from Cooley Godward Kronish)

Week 6 (May 5) – Marketing and sales plans. Board meetings and interaction

Section 3 – Exiting a business

Week 7 (May 12) – Acquisitions

Week 8 (May 19) – IPO (if there’s time, guest lecturer)

The business of entrepreneurship for lawyers

2008-02-21T16:08:00.000-08:00

I'll be teaching a class at University of Chicago Law in the spring quarter. Entrepreneurship as a title was taken, so I had to go with the longer and more confusing "The business of entrepreneurship for lawyers". I'm excited, but also scared out of my head. Nothing helps you understand how little you know like trying to teach it to someone else.

The goal is to teach law students that they have plenty of training to be entrepreneurs themselves. If it's not in them, the secondary goal is to help them understand how they can be good legal partners for entrepreneurs they eventually represent. My first draft of the syllabus is online, and I'll post the material as it develops. If the school lets me, I'll use my blog for the course discussions and del.icio.us for identifying the material. I think the best way to get feedback on my first attempt will be to distribute the info widely and open it up to all sorts of viewpoints.

How to win in the market

2008-02-09T17:52:00.001-08:00

Scott Adams says it best.

The losers in MSFT/YHOO - employees of small web companies

2008-02-07T12:36:00.000-08:00

Assuming the Microsoft takeover of Yahoo goes through, it's a really bad time to be at a small web advertising startup. As Jeff Bussgang from IDG points out, the number of possible exit paths has shrunk by one, and the two remaining primary acquirers (Microsoft and Google) are both going to be busy digesting their other deals (Yahoo/aQuantive and Doubleclick) for awhile.

In addition, Microsoft sees $1B in synergy. Not all of that will be in people, but it probably means at least a few thousand job cuts (on top of the previously announced Yahoo job cuts). Those cuts will be in a bunch of overlapping businesses (many of which are funded by advertising), so you’ll have talented people in the market looking for jobs or starting companies at the same time you reduce the number of exit paths. It’s not a great time to be a small, independent web advertising business model. With some heft, exit via IPO or large acquisition will still be possible, but I’d be wary of ad companies with tens of employees and dozens of customers.

(Added later in the day, after I got out of the airport): Marc Andressen has a somewhat contrary view. It's a compelling post in its own right, but given he started two >$1B companies, it's especially compelling. I agree that any "hugh quality" startup is unaffected by the MSFT/YHOO merger. I don't think small, web ad startups necessarily meet that qualifier. Those that can get to scale while independent (essentially building real businesses) will do fine. The quick flip small web ad startup, never a good place to be anyway, is looking even less attractive.

Management and company culture

2008-02-05T15:23:00.000-08:00

I recently had the opportunity to take an interim turnaround role at WebTrends and learn from the mistakes of the previous executive team (had there been no major mistakes, there also would have been no turnaround team!). The most powerful lesson I took away was how profound a role the corporate culture can play in the success of a company, and at the same time, how quickly that culture can diverge from whatever controlled messaging comes from the top. Culture is a productivity multiplier for every employee – and a bad culture sets a fractional multiplier that makes the entire company less productive.

At the old WebTrends, management attempted to control internal messaging more than any group I’d ever seen. Several man months of preparation for every board meeting (despite being a private company with no outsiders on the board), countless iterations of non-customer-facing slide decks and emails, and lots of rehearsal time for the smallest internal meetings. Internal messaging was polished and re-polished until it sparkled. Unfortunately, this led to two major problems: (1) because the rest of the employees weren’t idiots, management credibility shrank and shrank as the spin got further and further away from what employees saw on the front lines every day. You might be able to convince them your view is true for awhile, but in the face of overwhelming evidence, they catch on; and (2) the culture that took hold came from the behavior, not the messaging, of management (much to their chagrin). It turns out people really do learn by example, no matter how many times we scream “Do what I say, not what I do!” Publishing “meeting guidelines” to the rank and file employees is actually much less effective at getting them to have efficient meetings than having them attend efficient meetings run by management (and running inefficient management meetings while simultaneously publishing efficient meeting guidelines is the worst of all worlds!)

The culture became a fractional multiplier. Because management was more concerned with internal spin than with their own results, employees learned that their output should be directed at spinning, not doing. Because management would frequently shoot the messenger when bad news got in their way, people learned never to raise their hands when there was a problem. Because management abused anyone who questioned them, plenty of good people left and the ones who stayed learned to lay low. This led to a toxic culture that hampered every employee’s output – even though the management messaging was always upbeat and well polished, employees didn’t feel that way and it showed in their work. Of course, that just led to the management view that they needed better employees. (That view was right in the end, just that the people who needed to be replaced were different than the previous management thought!)

After the turnaround, the culture is much better (so is productivity). But what could management have done to prevent the culture from running off the rails in the first place?

1. Management needs to care about employee welfare. Telling employees you care and actually caring are very different. Lipservice is easy to detect. Management should care because it's the right human thing to do, not because it makes the rank and file better workers (even though it does.)

2. Management shouldn't make every corporate decision at executive staff. Instead, the executive staff should focus on setting the right decision-making context and the right process and then empowering every other manager to make decisions within that context. That gives leverage not only directly (since you then have managers making decisions similar to what you would make) but also indirectly, since empowered managers are more engaged and more productive. There's a multiplier here if they follow the management example and lead their teams this way as well (and a double fraction if they follow the non-empowerment path instead). A healthy culture is one where most decisions are made on the front lines (even if some of them are wrong), and only the major, company-killing issues get pushed up the chain.

3. Management should never work to build a distinction between themselves and front-line employees; instead, management should do everything it can to eliminate that distinction. If management has incentives aligned with the success of the overall company, then their reward be the success of the corporation. If what motivates the management team is power and authority and a separation from the rank and file, then the corporate culture is guaranteed to be terrible. Management isn't better and smarter than the rank and file employees - usually just older or luckier.

4. Be optimistic, but honestly connect to the reality on the ground. Management always needs to stay upbeat, obviously, but there needs to be a careful line between optimism and delusion. Employees can get motivated by optimistic realism, and they won't shy away from hard work if motivated well. Management delusion makes them look for jobs instead.

5. People in management should be strong, confident leaders. They should care about ideas (regardless of who has them), be their own biggest critics and their teams' biggest supporters (instead of the other way around), and be able to convince people to follow without resorting to intimidation or directive (except in very rare cases). Threats to fire people, non-disparagement agreements, email filters - these stem from paranoia, not confidence, and will always lead to a toxic, unproductive culture. The old WebTrends team used to say "leadership requires followership". That's a bunch of (*!@&. Leadership requires leaders. (Unless they meant leadership requires connecting to the people around you and then following their lead as to what they need - but I don't think that was the intended context...)

After the turnaround experience, I have become convinced that good culture is a key to building a successful company. By itself, the best culture won't generate any success (you still need a market and customers!), but by itself, a bad culture can lead to failure - or to a turnaround team.

Technorati: entrepreneurship, WebTrends, management, corporate culture

The next debacle - taxes after the mortgage mess

2008-01-31T14:04:00.000-08:00

60 Minutes had an interesting piece (below) on the low-end of the mortgage crisis - (1) borrowers bought houses with no money down (and often with cash back), (2) lenders, brokers and everyone else pushed them to do it because commissions were based on the close of the transaction, and now that home prices are falling (down 21% YoY in the Bay Area for the bottom third of home values), and (3) buyers, unable to sell or refinance since they now owe more than their home is worth, are defaulting (with >$1B of homes in foreclosure just in Stockton, CA). All the losses get triggered on the banks' books because the debt gets downgraded, so the value of the CDOs (collateralized debt obligations = pools of mortgages) they carry plummets and they take those losses now.

S&P estimates more than $265B of total losses from the CDO write downs. That's a huge mess.

The next mess is how all of that wreaks havoc on the tax system:

1. People who short sell (sell for less than their mortgage(s)) or have their homes foreclosed owe money to the IRS (and their state) in two ways - (1) they may have gain on their house. Even if they get foreclosed and they owe more than the house is worth (because of home equity lines or refinancing), they could still be "selling" for more than they paid. That's capital gain, but on a primary residence most people (in these circumstances) can exclude it for tax purposes; (2) if the mortgage company doesn't collect all of the loan, the part they "forgive" counts as income. So a $300K mortgage on a house that's short sold for $200K, generates $100K of taxable income for someone who's in the $50K range on annual salary (even worse, it puts them in a higher tax bracket) - so they might owe $35K of tax on the loan forgivenes, even though they have no money to pay. The tax liability gets forgiven if they go bankrupt or insolvent. (So maybe the "best" plan is to run up tons of other debt and make sure the tax liability pushes you into insolvency!) In most cases, the IRS will never be able to collect, but they're going to try and it's going to give a lot of people heartburn. It's a good time to be a low-end tax attorney. This is a major personal tax problem for the people in the 60 minutes segment who can pay but just think paying doesn't make sense - the IRS will collect in that case. (Maybe they prefer to give their money to the government than to the bank.) It's not much of a federal tax problem by not collecting, since the government never anticipated that money as income (except for point 2 below). Of course, if the government just bails people out of it by waiving the cancellation of indebtedness provisions, most of us will never work for salary again - we'll just have our companies loan us money and forgive it later. It's definitely income (the 60 Minutes segment describes people who have spent proceeds from the forgived loan, just like they would spend any other income), so it seems fair to tax it.

2. The Federal government loses on the tax writeoffs that the banks with $265B in losses are taking. At the corporate tax rate, that's about $70B in lost taxes to the feds (some of it's foreign held, etc, but putting tha aside...). This is why the forgiveness in point 1 gets taxed - because the act of forgiveness is a writeoff for the person doing the forgiving. They could just not allow it to be a writeoff anymore so that the banks pay, but then you can bet the banks will then work harder to collect on short sales. Credit would also get a lot tighter. There's no easy fix, so here's $70B (minus whatever they collect in tax revenue from individuals in point 1) lost to the federal government.

3. The states are the big losers. They lose a lot of property tax revenue - not just 1% * $265B per year because most home values are falling - so people can get their homes re-assessed whatever their financial status. It doesn't matter whether they move, get foreclosed, stay put, whatever. This is an annual shortfall, and it may be quite awhile before home values get back to where they were - so states will have less money for quite awhile. Of course, when they budget, they don't plan for that, so there will be a bunch of state budget crises for the next several years because of the mortgage mess. Cleveland and Baltimore are even suing over the lost tax revenue. (They're not giving back the excess tax revenue they earned from builder taxes, payroll taxes, or proerty taxes while the "defective loans" were being made, so I'm not sure their suit is exactly symmetric, but they have interesting arguments.)

Although it's painful, and unfair if there was predatory lending involved, I think it does "make sense" that they have to pay their mortgage even though their house declined in value. It is what they agreed to do (if they can't then bankruptcy is an alternative, but they say they can.)

Banks are going to raise borrowing costs for people who walk away (and probably for everyone else), so we'll all be forced to live within our means. Not necessarily a bad thing, but it sure doesn't bode well for consumer spending! (HELOCs are already getting shut down.) The tax issues are going to clamp down state spending, and the federal government is already in deficits.

From basic macro, GDP = consumption + investments + government spending + net exports.

GDP and government spending are headed down. Time to find something recession proof to do.

Technorati: mortgages, subprime, recession, taxes

Search is NOT recession proof

2008-01-25T07:56:00.000-08:00

I read a MediaPost summary of a JP Morgan hosted call with DidIt where the question of whether search is recession proof came up. It's not. The common argument (and the point DidIt made) of "the ROI is there and our clients are self funded above certain ROI levels" misses the boat. Henry Blodget points out that query volume declines during a recession, so even if the ROI is constant in a campaign, the search spend declines (since there are fewer searches to spend it on). I disagree slightly - with fewer searches, the initial impact will be lower ROI since the same number of bids happen across a reduced supply of searches will make bid prices go up. This will eventually also lead to lower search spend as companies cut budgets to keep ROI constant (getting to the same place that Blodget points out.)

There are plenty of other reasons search isn't recession proof: (1) Conversion rates will go down, as more people window shop. This will directly impact ROI, and again, lead to lower search spend. (2) Not every search advertiser is ROI-savvy, but in a recession, more of them will be forced to scrutinize ROI. (3) Plenty of small businesses (the long tail of advertisers) will fail in a recession and be unable to spend on search. (4) For websites that make money on leads or advertising, the value of those leads and advertising pages will decline (as their customers cut back because leads and ads aren't converting), so their ROI will decline unless they cut spend (since their top line will go down).

Search is definitely NOT recession proof. Maybe Google the stock (GOOG) is recession proof because (a) they can continue to gain share faster than spending declines, (b) they may have other businesses that are growing faster than spend will decline, or (c) spend is still pouring on to the web faster than the decline in the spend that's already there. (Although even these would still mean slower growth for Google during a recession than they'd otherwise have.) I have no idea whether the stock is recession proof, but the search business certainly isn't. If I were still in it, I'd be planning accordingly. Not hoping that it's unlike other businesses - that feels eerily reminiscent of the "new economy" chatter from 1999-2000.

Technorati: Google, search, recession

Cheap mobile office setup - updated

2008-01-23T12:00:00.000-08:00

In September, I set up a mobile office for $1K. Emoze, the software I used to simulate push email on my WM6 device (a Tmobile Dash), was ok, but it wasn't great. It had to be running on both my laptop and my phone (neither of which has a ton of memory), if my laptop hibernated it would take down my email link, and when I moved items around on my calendar, Emoze didn't always keep up. I only had to go to the wrong place at the wrong time for a meeting once to start looking around for an updated setup.

At first, I shifted to Hotmail. Hotmail is really well integrated with WM6 - on the surface. It pushes email, syncs the device to the web, is easy to set up. Unfortunately, it has a few quirks: (1) When you send an email from the WM6 device, no "to" field shows up on the Hotmail website. So the email goes through fine, but you can't easily find it in Hotmail by sorting later; (2) When you send an email from WM6, it doesn't adhere to the "from" field you set up at Hotmail.com. I didn't want people to use my hotmail address, since I wasn't sure I'd stay, so I set up to show the "from" line using my alumni account. That worked fine from Hotmail, but strangely, not from the mobile phone (which is supposed to be synced with Hotmail). I could have lived with those, I think, but the TrueSwitch service, provided by a third party through a deal with Hotmail, was absolutely terrible. TrueSwitch was supposed to transfer my Gmail in a nice organized way to Hotmail. Instead, it forwarded 50,000 messages to my Hotmail inbox, didn't organize any of them, ad then just stopped (so not even all of my messages made it over). After a few emails to tech support (where they promised a 36 hour resolution), I got a response saying they didn't know what happened and would have to send it to engineering. Nice customer service. Nice partner you've chosen, Microsoft!

I went back to Gmail and set it up for IMAP access that is native on the WM6 phone. It's not quite push, but it checks frequently enough that it might as well be (that hurts my battery life a bit, but it's livable). Unfortunately, I also have to use the Gmail Java WM6 application to see some emails, because there's a known bug in Gmail IMAP that prevents HTML messages from showing on WM6. At least I can see the header on something like a push basis and switch to the Java app if necessary. The integration of Gmail IMAP and Outlook isn't great - items deleted from my phone go to a deleted items folder, but not items deleted from Outlook, for instance - but at least I have the Dash, the web, and the laptop all synced on email. When Google fixes the HTML email problem, this should be a pretty solid setup, without the extra overhead of Emoze. Without Emoze, I don't have my calendar synced to Outlook wirelessly, but I'm working on that - no sync is better than faulty sync.

During this switchover, I was struck by Microsoft's squandered opportunity. Here I am ready to switch from using Gmail, which is not meeting my needs, to Hotmail. I use a Windows PC, I'm addicted to Outlook, and I have a Windows Mobile cell phone. If I switch, I'm locked in to all Microsoft all the time. But their integration is so clunky - need the Outlook Connector to get Outlook connected to Hotmail, inconsistent use of the "from" and "to" fields across the three platforms, no free calendar sync, and the partnership with Trueswitch that made my Hotmail account unusable - that I had to go back to using Gmail, even though it has some quirks too. Google will have its own devices soon and will likely make the integrations smoother, so if MSFT doesn't take advantage of opportunities to capture users like this now, they may be too late.

Technorati: cheap mobile office, Trueswitch, Gmail, Hotmail, Microsoft, Google

Audi introduces the PRUGO5

2008-01-21T10:30:00.000-08:00

(DETROIT) Today at the North American International Auto Show, Audi announced immediate availability of the PRUGO5. The PRUGO5 beats the comparably equipped BMW M5 in 0-60 and quarter mile performance, improves on the industry-leading fuel economy of the Toyota Prius, and comes fully loaded for about half the price of an old Yugo. The car won't work for everyone - towing capacity is limited and it only seats 5 adults comfortably - but nearly all customers polled are excited about the feature set. Audi expects to sell 6M units in the first year, breaking every previous sales record, and quintupling their market share. ...

The PRUGO5 would be highly differentiated in the marketplace. It's tough to imagine a salesperson struggling to sell it to anyone. It's also equally tough to build, and even tougher to build cheaply enough that it sells for a profit. Unfortunately, many product specs, guided by salespeople who want to make their jobs easier and their commissions larger, end up looking a lot like the PRUGO5. Rather than make tough decisions, product management just asks for the product to do everything. This leads quickly to a major breakdown between product and engineering, with product (and sales) blaming engineering for being unable to build stuff and engineering blaming product (and sales) for pie-in-the-sky requirements.

Product management is the central nervous system of a (product-driven) company. Product managers need to understand not just the market requirements but also the tradeoffs in those requirements, the willingness to pay of customers in each segment, and the complexities inherent in building solutions for each segment. Getting those answers is tough - even impossible in many cases of brand new products where there is no market data - and even when answered, salespeople will constantly push for feature creep anyway. But the difficulty of getting those answers is also why product management can be so rewarding and can have so much influence over the direction of the company.

There are plenty of tools to understand market tradeoffs and willingness to pay across segments - conjoint analysis, regressions, observations of changed usage across small variations of the product, etc. Even trial and error work fine - start with a hypothesis, figure out a fast way to test it (e.g. put screenshots and sample prices in front of customers), and then keep going.

In finding these tradeoffs, I've seen product management struggle in two major ways: (1) Asking customers "do you want this?", and (2) Asking customers "what do you want"? The problem with (1) is that there's no cost for the customer to say yes - who doesn't want the PRUGO5? Much better to ask a bunch of "would you prefer (a) or (b)?" questions (a conjoint) with lots of followup about how they'd use each potential product. The problem with (2) is that it allows the customer to stay bounded by their current experience - so you can make gradual, incremental product improvements but can't ever have a discontinuous innovation. If you can suggest something discontinuous, maybe even show how the customer would interact with it, and then ask followup questions, the data you get back on new products is much more useful.

Understanding the market requirement tradeoffs is just the first step for product people - reducing all of that to a profitable line of business, also a responsibility of a good product manager, involves several more steps (and more blog posts). Without having the tradeoffs understood, though, the rest of product management is mostly irrelevant.

(Thanks to Shawn Gradek, one of the nicest guys and best salespeople I know, for the name of the car.)

Technorati: product management, entrepreneurship

Many lessons (partially) learned

2008-01-21T09:27:00.000-08:00

I've had a crazy run during the last 18 months - from CEO of a venture-backed startup just beginning the sales process, to completely unempowered GM of a group after the company got acquired, to CEO of another venture backed company in a completely different field, with a two month stint as an interim turnaround executive at the company that acquired mine thrown in for good measure. The jumble of experiences has shaped (warped) my perspective a bit, and writing down my thoughts as my perspective changes helps me reflect and learn. I'm sure that after the next group of intense experiences, many of my "lessons" will morph again, but for now, this is where I stand. As I reflect on various topics, I'll add hyperlinks to the posts below.

I'll start with Product Management (Audi introduces the PRUGO5!)

[Added 2/5/08] - Management's role in building a good culture.

Technorati: entrepreneurship, venture capital

RevCube is going under - my prediction from LinkedIn

2008-01-09T15:30:00.001-08:00

RevCube Media is going under - maybe not immediately, but sometime this year. RevCube works to optimize many pieces of online advertising across multiple channels - a similar goal to ClickShift (now WebTrends Dynamic Search), which I started at about the same time. I was introduced to the founder of Revcube (started as AdaptAds, but forced to change its name by Adapt SEM, another company entering the same space at about the same time) in mid-2005, just as I was starting ClickShift. In a "Silicon Valley is a very small world" story - the co-founder of my current company, who was in my wedding, made the introduction at his wedding.

While updating my profile on LinkedIn and seeing who my friends had recommended, I noticed a flurry of "recommendations" for a RevCube exec in the last few weeks. Clearly, the request for references was sent while still at the company. That means a departure is imminent. But since the references were from other Revcube people, leaving is no secret - so execs at RevCube know that other execs are looking for work and are proactively helping them find it. The company must be in trouble. If it weren't, it would be difficult for an exec to leave with the proactive help of the CEO. The investors aren't known for being "entrepreneur friendly", so I don't think they'll provide much support in the hard times. The company will go under this year. If I were thinking about becoming a customer, I'd want to see some financial statements at the very least.

The best competitive situation is when several of the startups in the space thrive - means you picked a good market - so I don't enjoy watching RevCube go. But I'm pretty sure they're on the way out.

Technorati Tags:revcube, linkedin

Worst venture firm name ever

2008-01-09T13:53:00.000-08:00

I noticed this in PE Week Wire today:

"Confirma Inc., a Bellevue, Wash.-based provider of computer-aided detection for MRI , has raised $17.5 million in Series C funding. Telegraph Hill Partners led the deal, and was joined by Fluke Venture Partners and return backers Northwest Venture Associates, Prism Ventureworks and Versant Ventures. The company previously had raised around $18 million since 1998. "

I realize it's a family investment fund and that it's had good success, but "Fluke"? It seems like the family would have been more willing to go for an uplifting name, like Ridgelift, Redpoint, Foundation, Sequoia. Anything would suggest more success and stability than "fluke".

WebTrends settles with NetRatings!

2008-01-04T10:28:00.000-08:00

Webtrends announced on December 31st that they settled their patent litigation with Netratings. Omniture (OMTR), Visual Sciences (VSCN), and Coremetrics have already settled. Congratulations to James McDermott (the WebTrends GC) who has been working hard on this for a long time!

Netratings is a bit of a patent troll, and the patent system could use some reform for both prosecution and litigation, but this seems like a nice outcome for everybody.

Technorati Tags: Webtrends, Netratings, patents

It has been a crazy two months!

2008-01-04T08:56:00.000-08:00

Just when I had resumed blogging again, I stopped to return to WebTrends on an interim basis to help with the management transition. It was a phenomenal experience - the people there are great, everyone was supportive, the company has a huge amount of untapped potential, and seeing the repercussions of previous bad management decisions is about the best way to learn how to manage effectively. I hope the people at WebTrends got even a tenth as much out of my return as I did. I think 2008 is going to be a good year for the orange team. (But for my investing rules, I'd even contemplating going short OMTR - with an effective management team now in place, WebTrends will be a formidable competitor).

I hope to blog soon about the various lessons I learned in my short stint as an interim executive. Meanwhile, my new insurance company is up and running - the venture financing closes Tuesday, and we've had a positive initial meeting with the regulators who need to be involved. I had hoped to take it slightly easy for a few weeks, but it looks like it might move a bit faster than planned.

Bought a house!

2007-11-04T19:47:00.001-08:00

A lot's going on these days. Some of which I hope to write much more about soon.

I finally bought a house on Saturday.

I've also realized buying Building Materials (BLG) was a terrible investment. Probably one of my worst ever - need to sell it as soon as I have some time. I'm thinking about buying Citigroup (C) as soon as I have some free time to investigate.

Posts like this are a good reason to use Tumblr.

Alibaba.com IPO is good for Yahoo

2007-10-27T07:48:00.000-07:00

Alibaba.com is set to raise $1.5B in its IPO by selling 17% of the company - that's an $8.8B market cap. Not quite as good as Facebook's $15B, but still pretty good. Yahoo (YHOO) owns 39% of Alibaba Group, the parent of Alibaba.com. So Yahoo's sake in Alibaba is worth at least $8.8B * 83% (Alibaba Group's ownership of Alibaba.com) * 39% (Yahoo's ownership of Alibaba Group)= $2.8B. The IPO is WAY oversubscribed, so the stock is likely to go up initially. Let's call Yahoo's stake at least $4B 2 weeks after the IPO.

Yahoo is carrying this on their books at $1.4B. (A piece of their 10Q is copied below). So they have a net gain in their assets of $2.6B - which is $2 for each of their 1.3B shares outstanding. Of course, unless they sell their stake there's no telling what the final value is - Alibaba Group could waste all the money and Yahoo could end up with nothing, or, by anoter account, they could end up with $13-$15 / share.

At any rate, my investment strategy won't let me buy Yahoo anyway, but if it did, I'd do some serious analysis based on this IPO. It might already be priced in or maybe Yahoo is overvalued, but if not, it's worth checking out.

The 10Q says:

Note 4

INVESTMENTS IN EQUITY INTERESTS

Equity Investment in Alibaba. On October 23, 2005, the Company acquired approximately 46 percent of the outstanding common stock of Alibaba, which represented approximately 40 percent on a fully diluted basis, in exchange for $1.0 billion in cash, the contribution of the Company’s China based businesses, including 3721 Network Software Company Limited (“Yahoo! China”) and direct transaction costs of $8 million. Pursuant to the terms of a shareholder agreement, the Company has an approximate 35 percent voting interest in Alibaba, with the remainder of its voting rights subject to a voting agreement with Alibaba management. Other investors in Alibaba include SOFTBANK Corp. (“SOFTBANK”). The investment in Alibaba is being accounted for using the equity method, and the total investment, including net tangible assets, identifiable intangible assets and goodwill, is classified as part of Investments in equity interests on the Company’s condensed consolidated balance sheets. The Company records its share of the results of Alibaba and any related amortization expense, one quarter in arrears, within earnings in equity interests on the condensed consolidated statements of income.

Through this transaction, the Company has combined its leading search capabilities with Alibaba’s leading online marketplace and online payment system and Alibaba’s strong local presence, expertise and vision in the China market. These factors contributed to a purchase price in excess of the Company’s share of the fair value of Alibaba’s net tangible and intangible assets acquired resulting in goodwill.

The purchase price was based on acquiring a 40 percent equity interest in Alibaba on a fully diluted basis. As of June 30, 2007, the Company’s ownership interest in Alibaba was 44 percent, an approximate 2 percent decrease from the initial investment, primarily as a result of the conversion of Alibaba’s outstanding convertible debt in April 2006. The Company’s ownership interest in Alibaba may now be further diluted to 39 percent upon exercise of Alibaba’s employee stock options. The Company will recognize non-cash gains if and when such further dilution to its ownership interest in Alibaba occurs, as such reduction in interest results in an incremental sale of Yahoo! China. In allocating the excess of the carrying value of its investment in Alibaba over its proportionate share of the net assets of Alibaba, the Company allocated a portion of the excess to goodwill to account for the estimated reductions in the carrying value of the investment in Alibaba that may occur as the Company’s equity interest is diluted to 40 percent.

As of June 30, 2007, the difference between the Company’s carrying value of its investment in Alibaba and its proportionate share of the net assets of Alibaba is summarized as follows (in thousands):

Carrying value of investment in Alibaba $ 1,414,801

[...]

I need to learn how to put tables in Blogger.

Technorati: Yahoo, investing, YHOO, Alibaba

OMTR buys VSCN - a great deal!

2007-10-25T14:26:00.000-07:00

Omniture (OMTR), the gorilla in online enterprise analytics and the related products and services, just bought Visual Sciences (VSCN, formerly Websidestory) - depending on who you ask, they're either #2 or #3 in the space (with WebTrends being the other player in the top 3). Visual Scences has a current reputation for wandering a bit - having done a bunch of acquisitions of its own and then failing to integrate them very well.

Omniture has been on a buying binge (Instadia, Offermatica, Touch Clarity, and now Visual Sciences). A lot of those paths end badly, but their stock has been going straight up the whole time. They also just hired a new HR executive specifically to help integrate acquisitions. They've realized they have a valuable currency, and they seem to be systematically using it to extend their reach into their customers and now, defend their flanks against encroachment from other companies. Visual Sciences wasn't executing great (they had a revenue multiple of 4.77 while Omnitures was 17.30 before the deal), but who cares? At these multiples, Omniture's market cap increases by $1.2B for paying $394M for Visual Sciences (the multiple will compress some, but still a several hundred million dollar market cap net gain for this deal), the deal is immediately accretive to their profits, and they've eliminated a competitor who puts price pressure on their individual deals. Omniture can keep some small pieces of the Visual Sciences platform that are interesting, cut a bunch of people, and migrate all of the customers to the combined entity over time. The migration will be painful for customers, and some will flee to WebTrends and Coremetrics, but their options for enerprise-class analytics are pretty limited.

If not for my investing rules, I'd look into buying OMTR now. A great deal that helps them lock up the space, is immediately accretive, reduces price pressure in their sales process, and has a huge net impact on their market cap given their multiple. They don't even have to integrate Visual Sciences at all if they don't want to - they could just sunset it entirely, and it would still be a good deal. Their major risk now is if someone bigger picks up WebTrends and/or Coremetrics and launches a price war in enterprise analytics. Maybe OMTR should buy both of those also - the multiple math might still work, although neither of those companies is public, so it's hard to say. If they keep rolling up the space, they'll also add a bunch of zeroes to the rumors of their own acquisition by Microsoft (MSFT) or Google (GOOG).

Technorati: Visual Sciences, Omniture, Webtrends, Coremetrics, investing, web analytics