I was once being pitched by a very smart entrepreneur who, when he got to the slide about his companies financials, said "I made all of this up, but here you have it." On the one hand, it was an pretty flippant approach to a relatively crucial aspect of his business. On the other hand, he was saying what ever other early stage entrepreneur was thinking when describing to me the financial outlook for his or her extraordinarily risky and unpredictable business. So why bother with a slide on your financials when pitching a VC? It is well understood by entrepreneurs and VCs alike that the specific numbers an entrepreneur pitches when describing her early stage business are completely made up. Most early stage CEOs are lucky to have visibility into the next 6 months, let alone the next 3 year that are reflected in their financials (and the 5 year forecast is mere fortune telling). Nonetheless, there is a huge amount of information about a business, and about an entrepreneur, that is reflected in those financials. The key is not to focus on the numbers themselves but, rather, to focus on the assumptions in those projections and the points of leverage for that business. It is almost assuredly the case that a early stage company's projections are wrong. In the last decade I have only seen one company actually hit the numbers they pitched me on. The rest of the companies have missed by varying degrees of big time. But the real question when listening to a pitch isn't whether the company will actually hit the numbers they are projecting, but rather what those projections say about the entrepreneur and the business? Is the entrepreneur focusing on the right things? Do the financials make reasonable assumptions? If the assumptions are anywhere close to right, is there a big interesting business to be built? Smart investors will dig into your financials to get a better sense of how you are thinking about your business. Company financials are rife with assumptions. Entrepreneurs can easily gain or lose credibility based upon the assumptions that are embedded in their financials, their understanding of those assumptions, and their ability to justify them. How long will it take to hire the people you need? How much will you pay them? How much will it cost to acquire a customer? How many engineers will it take to build your product? What is your margin (are you selling software, hardware, a cloud service)? What is the length of your typical sales cycle? How long will it take for you to collect earned revenue? How much are you spending on marketing? What is the expected return by channel? If you are pursuing a freemium business model, what percent of your user base do you expect to pay? How much will it cost you to support the free members? How much money will your company make, if any, and when? How much more money will it realistically take before you get the Company cash-flow positive? What will you achieve with the money you are raising now? These are all incredibly important questions for any startup and how you are thinking about them will have a huge impact on the success or failure of your business. No one will have perfect answers but an entrepreneur's ability to be directionally right will often be the difference between success and failure. Not only will it be important to understand the assumptions built into your financial plan, it will also be crucial to appreciate the sensitivities of your model. There are often single variables that make the difference between a good business and a great business (or, more likely, between a viable business and a failed business). If the cost of acquisition is off by 50%, do you still have a viable business? If free customers only convert at 1%, can you support the 99% who will always be free? If the viral co-efficient of your service is 1.2 instead of 1.5, what does that do to growth? What if it takes 90 days to collect on billings rather than 30 days? These "what if" questions are critical to the understanding of your business. You should appreciate the places your business has leverage, and the places that your business has potential vulnerabilities, and be ready to engage in an honest conversation about those pivot points. I will be the first person to acknowledge that early stage financials are a work of fiction. But some fiction has the ring of truth, while other fiction is so outlandish that it is impossible to suspend disbelief. It is an entrepreneur's job when pitching her business to convince an investor to suspend disbelief. The better you understand the underlying assumptions in your plan, the more effectively you'll be able to do just that. So embrace the opportunity to build credibility. As an investor, I'm happy to buy into your fiction, I just want to avoid unbridled fantasy.
I totally agree with testing and uncovering the assumptions in the financials. The challenge is doing it if you actually have a real company up and running,and the metrics are incomplete. In this scenario, the entrepreneur who has NOTHING is actually better off than the entrepreneur who has actually gone off and generated revenue, albeit inconsistent.
The last week, Boston has been abuzz with the news that Mark Zuckerberg was coming back to "visit". In one of his various interviews, the founder of Facebook remarked that "if he could do it all over again, he'd have stayed in Boston".
Almost immediately, select members of the Boston technology community seized on that statement as proof of Boston's equivalent status to Silicon Valley. There was just one little problem that those people conveniently overlooked...
Rather, there were 2.3B problems those boosters overlooked. $2.3B worth of funding that Facebook has raised since leaving Boston; none of that from Boston angels, investors, hedge fund side pockets, asset managers, private equity or venture firms.
Instead of crowing about Zuckerberg's comments as some sort of self-serving justification of their own existence, I think that Zuck's visit should be viewed more in collective shame.
Shame on Boston for letting him get away. Shame on the local angel investor community for not getting into the deal. Shame on the VC community for not only missing the early stage rounds, but with the exception of Greylock's west coast office, not being a part of ANY successive round. Shame on the Hedge Fund and PE communities for not getting into the deal via side pocket funds in later rounds.
Download Who-owns-facebook.jpg (JPEG Image, 600x446 pixels)
For a city that is one of the major money centers in the US, this is a major failure. This was never a matter of lack of capital. This was all about lack of will, lack of vision.
As it turns out, Zuck's trip to Boston wasn't just a simple visit, but a recruiting trip. Hundreds of the best and brightest students of MIT and Harvard were pre-selected for interviews with Facebook. I look at this as the biggest talent suck in Boston seen in recent years. Some of the best talent coming out of Boston universities was just drained away to the west coast.
I would hope that this visit, and the fact that Facebook is now valued at ~$50B would serve as a teaching moment, and an opportunity for reflection. I fear that lesson will be lost in the rush to claim some hollow victory in Zuck's initial comments.
How to avoid the next one? How to keep the next Zuck from leaving? Here are my thoughts:
Last, no one gets fired in VC for missing a deal. In the operational world of high tech, a sales rep missing the big deal in their territory would be fired. Not in VC. Somehow that lack of accountability needs to change.
In the furor over race in Silicon Valley, I had a few ideas on how to improve the situation:
- Expand recruiting beyond Stanford, Cal, CMU, MIT. Georgia Tech is the #4 engineering school and one of the most diverse engineering student bodies around. One of the things that's always pissed me off is SV hiring managers not taking the 4 hour flight to recruit in the US from a major public school, vs. bitching about not being able to find diverse candidates.
- Be transparent about your workforce diversity. Mike Swift of the SJ Mercury news tried to cover the hiring practices of a number of major Valley companies (who shall go nameless) and they slapped an injunction on him, stating this was competitive information. My understanding is that the data showed that these "select" companies were far more likely to hire overseas nationals than US minorities, even when the overseas nationals didn't go to the sacred 4-5 schools.
- Also look at the better ranked HBCU's, Tribal Colleges, etc, several of which have joint degree programs with the top schools. For example, one can attend Morehouse and get a joint MS in Engineering, Physics, etc. from Georgia Tech. Wellesley has a joint deal with MIT as well. The NSF is a great resource for other schools for recruitment.
- Kill the STEM education in high schools, etc. canard. It's always used to justify the lack of brown faces in SV companies. There are plenty of minorities in engineering fields, though from my perspective clearly not enough. The issue is that SV companies/VC's have to stop being so lazy and recruiting at the same 4-5 schools. I also wonder how many SV companies even bother to check the NSBE/SWE/SHPE memberships on the top 4-5 campuses?
- Not everyone needs to be a BS/MS/PHD in Engineering/Computer Science to work in High Tech..How many Sales/Marketing people are PHD's in Electrical Engineering from Stanford? As a point of comparison, look at the relative diversity of Pharma sales forces; most of those people don't have life sciences masters or PHD's. Same thing with big Telco. Far more diverse in sales/marketing than High Tech w/o the necessity for advanced degrees from a select group of schools.
- Increase diversity of the VC GP pool. I think there are less than 50 GPs of color in VC firms nationwide. I'm a strong advocate of bringing back the SBIC program for Equity Investment firms, and creating a new generation of more diverse VC firms, by composition, strategy, etc. That will also create more competition with the incumbents.
- Public retirement LP's of venture firms have to start scorecards for VC's. Little known secret is that VC's only need to put in 1% of the Fund from their own pockets as per NVCA rules. That means the other 99% is OPM (Other People's Money). Much of that is from public LP's(Calpers, Calstrs, Utimco, etc). So, retirement fund money from a diverse population(50%+ in California) goes to VC funds who then overwhelmingly invest in startups led by white men (87% according to CB Insights http://bit.ly/aiQ50C ). Over a 10 year basis, most VC firms have barely tracked the S&P, so you can't say that this strategy is yielding higher performance. I think this is one of the roots of the problem; change the funding behavior and the trickle down effect of having a more diverse leadership group in funded companies will naturally create a more diverse pool of employees.
That's all I got. Now, gotta get back to running my company and being a statistical anomaly...;o)
Will write a longer post on this, but TBJ Investments just led a $1.1M Series A in Buzzient!
Buzzient has had a great opportunity to present during the general session at Oracle CrossTalk 2010, Oracle's Retail industry conference. We've met with top retail executives from all over the world.Social media is clearly emerging as a new channel for multichannel retailers; Buzzient's ability to integrate social media data with Oracle applications gives these retailers tremendous competitive advantage.
I'm attaching my presentation here: http://slidesha.re/aGUIIn
Having a great time at Oracle #CrossTalk 2010 conference!
Buzzient got a GREAT writeup at BostInnovation:
http://bostinnovation.com/2010/04/24/buzzient-social-media-analytics-with-enterprise-solutions/
A lot has been going on at Buzzient, the company we started out of research Andreas Goeldi and I conducted at MIT. www.buzzient.com
We've seen a dramatic pick up in customer activity in Q42009 and into 2010. Basically, a number of companies that were experimenting with social media decided to put a stake in the ground and get going. These customers are in a variety of vertical industries:
Financial Services: Credit Suisse, Motley Fool
Life Sciences: Perkin Elmer
IT: Xerox
Higher Ed: Pace University
We also developed a relationship with a leading applications developer for online social networks. Without saying who the customer is, I can attest to the fact that we're playing a much larger scale than any other application in this vertical industry.
So, all in all, a real positive shift in the winds and a lot of velocity in 2010!
SAP CEO resignation is an interesting bit of news. Not sure what it means for SAP's cloud or social media directions.
It's a Friday. July 3. The official holiday is tomorrow. Kendall square is practically empty; just a few straggler tourists looking for the Duck boats, MIT PHD/SDM students wolfing down lunch, and probably about 10-20% of the normal Kendall SQ.- located workforce is around. The Cambridge Innovation Center, where the Buzzient offices are located, has locked doors and relatively empty halls. My cofounder and I can actually get an elevator within a minute of hitting the button.
The first thing that popped into my mind was "THIS is the difference between Silicon Valley and Boston". Like it or not, but in a bunch of places in the Valley, this would seem like a normal workday, not as if the neutron bomb hit. I've been in offices on a major holiday where half the management team has shown up, to "get caught up on email, paperwork, whatever low-value stuff I can do on a holiday so I can optimize high-value stuff during the workweek".
When I lived in South of Market and launched Eba Systems from my basement, I would often wander out in the streets on holidays not even knowing what day it was, let alone think of taking it off. We're in the supposed "epicenter" of Boston innovation and it's pretty vacant. Oh, wait, the CEO of LiquidBits is here. Hell, he's ALWAYS here; nights, weekends, you name it. Old school entrepreneurship at its best.
I'm all for work/life balance; heck I rowed an extra few miles today and came in late. However, I still came in. Seems like in trying to catch up to the Valley, a lot of local folks want to make sure they don't impinge on their Nantucket beach house time.
I'd love to be at the beach myself; in fact there are numerous striped bass and bluefish that are missing a shot at one of my elegantly (I wish) lofted flies, and my unique line-stripping style that's far too influenced by having watched so many bass fishing shows as a child (are you supposed to say "Booyah! as a fly fisherman?) . Alas, not to be. Innovation (smirk) calls...
So, my cofounder and I pound away at all the "other stuff" that needs to get done in a startup; accounting, company blog posts, etc. Wish we weren't so lonely here in the epicenter...
I've had some time now to reflect on what we saw here at Buzzient with the recent Iranian election.
First of all, I was amazed at how quickly the social media community jumped on this issue and instead of being passive, became very active.
Second, I observed that the "digital resistance" organized very quickly, into self-managed and led groups. These folks put together proxy server lists, changed their posting locations to Tehran, whatever it took to add themselves to the legion of those wanting the results challenged. This resistance also took it a bit far with DDOS attacks and otherwise, but it was fascinating to see how quickly the partizans formed.
Last, I have to admit I felt proud that Buzzient's product, Buzzient Enterprise, was able to monitor Twitter in real time and create a social network of who was posting about the election. We've subsequently had more than a few requests to share the data, but we're going to err on the side of extreme caution here, as we don't want to endanger any of the people involved. That being said, it is remarkable to see how technology can enable both the resistance to political impropriety(suspected, not confirmed) as well as inform the casual observer.
After a long, self-imposed hiatus, I'm back posting. I've been deeply involved with the formation and launch of Buzzient. Buzzient is the result of work my cofounder Andreas Goeldi and I started at MIT in looking at cloud based applications. We realized that there was a huge opportunity not only in running an app in the cloud, but in helping enterprises understand the wealth of data growing in the ether.
Long story short, over the last 2 years we've built an application that harvests, analyzes, and quantifies what people are saying in social media. We've linked that to applications such as Salesforce.com and SugarCRM, and will expand the set of applications dramatically over the next two quarters. Thus, we're able to not only provide insights into social media, but can make social media actionable by connecting it to application workflows.
That's it for now. Check out www.buzzient.com or our crunchbase entry: Buzzient on Crunchbase for more on the company.
I'm in Sweden and Holland for a week, but couldn't help but write about wireless and mobility on this side of the pond. I'm continually astonished at how mobile technology is embedded in Scandinavian society; on a trip out to Sandham in the Swedish Archipelago, we had top notch coverage on mobile devices and were able to download ringtones and songs on our way into the Baltic.
Contrast that with Sand Hill Road, where I ALWAYS lose a connection at the junction with Highway 280...Hmm....
I hadn't gotten around to posting this earlier, but this is the list of 2007 Semi-finalists for MIT $100k. I'm unfortunately going to be either in NYC at the Enterprise Search Summit, or on a plane to China, so I'll miss this year's presentation. That being said, the trick with $100k is not to find the winner, but the first or second runner up(those are the companies who end up being good investments, e.g. Akamai).
I just found a great piece of additional validation of the Enterprise 2.0 theme. The Economist Intelligence Unit(EIU) just published a great survey of why companies have begun to use Web 2.0 technologies for business use. All of the major cost drivers previously mentioned are there, but it's also quite significant that a big reason is the ability to extend channel relationships and customer intimacy via these platforms.
The impending disruption for enterprise software, applications, and infrastructure companies will, IMHO be huge.
A friend of mine sent me a link to an old article from the Duke Alumni Magazine. It's about the time I spent at the "Biotech for Business" course at Duke. Duke Biotech for Business Certificate Program
I HIGHLY recommend this for people trying to get an overall grasp of biotech as an industry, and the key processes and technologies.
Actually, I'm tempted to attend again, since there's been so much change in just the last few years...
Well, sometimes an idea is so good that you can't be alone in thinking it. Basically, since December I've been trying to put together a way to acquire the Retrievalware product from Convera. Enterprise Search is going to be one of the key battlegrounds for Enteprise 2.0; Oracle, Google, Endeca, Microsoft, IBM/Yahoo and others are already battling it out to become the dominant provider of Inside the Firewall(IFW) search. Even though Google is the winner Outside the Firewall(OFW), they see the need to create recurring revenue streams from corporate customers.
Without going into details, I wasn't able to get private equity backing in time for a deal. Last week, FAST, the Norwegian enterprise search company did pretty much the exact deal I proposed, for $5M less than I thought possible($23M). With this deal, they're buying a franchise of enterprise search customers in the government/security area, plus the ability to expand into adjacent markets. Details of FAST purchase of Retrievalware
Oh, well, it's like flyfishing. There's always a bigger fish out there somewhere...Download enteprise_2.0 Business Launch Proposal_Feb107.pps
Well, it's taken a few years, but my original thesis of web technology replacing existing enterprise software infrastructure appears to be taking hold. Enterprise 2.0 is fundamentally about professional consumers, or "prosumers" bringing web 2.0 technology to work with them to build now classes of applications. We've seen the same thing happen in the past with Microcomputer applications(Lotus 1-2-3), with Client Server applications, and with intranet applications running against web servers. Now, the next generation has arrived. Blogs, enterprise search tools, wikis, are all going to supplant/augment/replace more expensive applications.
I detail some of my thoughts here...Download enterprise_2.0_General Overview.pps
Recently, a lot of buzz has being created around a new optical semiconductor approach out of MIT. Erich Ippen and Fraz Kaertner in the EECS department have developed a new means of dealing with polarization problems in photonic circuits. A few of my colleagues and I are starting to look at this, and will try to determine how much real opportunity there is here.
Sometimes truth is stranger than fiction. For the last several years I've been talking about pine tree property in Georgia, in the area where my parents where born. Because of the boom in construction, and exports of hardwoods to china, the market for timber has boomed. More recently, the desire to create additonal high-yield sources of ethanol from other than food crops has caused energy investors to look towards pine trees. Recently, Vinod Khosla committed to invest over $200M with Range Fuels in Soperton Georgia, the same area I've been looking at for a while. Right now, my email is filling up with notes from people trying to jump into this "treethanol" boom in Georgia. Hopefully, this is a sustainable alternative to using corn or sugar cane for ethanol production.
Well, after a long winter break(I'd forgotten how long MIT breaks and how discontinuous it is...)I'm back. I've also had a nasty run in with one of the new superbugs, which I caught after rowing(Norovirus). Not only did it spread like wildfire through my rowing team, but also through my Sloan Fellows cohort. It's clear that there are a new class of bugs that are pretty resistant to existing treatment. Bill Ericson of MDV was interviewed a while back about how certain bugs are emerging in hospitals, and are resitant to antibiotics. I could see with demographic trends, greater reliance on health care, and more globalisation, that this problem only gets worse.
