Nesheim Online

STARTUP VALUATIONS CONTINUE HOT: What should you expect for your new enterprise in this market for money?

If you have what is hot, you are hot, at least in today's money market for venture capital.

When a founder understands the numbers VCs are seeking, better deals can be negotiated.

HOT RACE

The VCs are in an intense race: they desperately seek the next Billion Dollar Valuation Startup. To miss the next Google, Facebook, or GroupOn is death to them. One miss of the next Gorilla will drop the ROI on a venture portfolio to bank deposit rates. Such a mistake will slide their fund down into the ranks of The Other VCs, to be forgotten by all but a few. When they try to raise fresh cash to invest, the institutions with the big money "will pass" on investing via their new venture fund. Thus the race is one of desperation for VCs.

Entrepreneurs can take advantage of that, negotiating more favorable terms (price, liquidation preferences, stock option pool, etc.), getting deals done swifter with the venture partners of choice.

But there is danger in all of this, the danger of over-reaching, of "too much greed". Critical observers are frequently objecting to the high valuations of private rounds of "the hot startup deals". Their concern is valid, namely that the basic business may not be able in the future to generate the revenue and profit that supports billion dollar valuations today. For instance, take a look at today's blog from TechCrunch on this issue.

DEALMAKING

So how aggressive should a founder be in when cutting a deal this market?

I suggest this market for hot VC money is looking for deals that can get a return on capital of 100 times each dollar invested. Those numbers correspond to data I've been looking at in recent private and IPO deals. Take a look at the high ROI multiple for LinkedIn VC rounds (as compared with my long term Standard ROI earned by VCs over decades of deals):

Then look at how those multiples translated to ROI measured as percent per year. Here you can see the VCs got ROIs all around 100% p.a. (interest equivalent of 100 percent per year in the bank).

 

In other words, today's VCs are seeking tiny startups that can become giants of tomorrow as measured by ultra high ROI ambitions. Their return on investment target is the equivalent of 100% per year interest rate. The corresponding multiple per year will decline as the IPO date arrives because the risk reduces over time as the company grows larger, generates profit and turns cash flow positive, but the price per share for each deal will be set to earn a very high percent per year ROI.

Yes, that sounds terribly high. But it is what happens during such feeding frenzies.

As I've blogged before, the startups that get early money have convinced investors that the business is "scalable" (huge market, open, growing, no dominant Gorilla blocking the way), has "traction" (showing rapid adoption by end users and customers) and has "WOW!" in its offering (highly compelling to end users). Lacking one of those will put your finance raising efforts far behind other startups.

BOTTOM LINE: Entrepreneurs can take advantage of the current flurry of VCs eager to finance the next great Gorilla. The numbers needed in your plan must convince the people with the money that your deal will generate for at least early investors the equivalent of a very high return on investment, in the order of a 100% interest rate. Those thin air, high altitude numbers are the result of a fresh wave that is heading toward the beach. VCs are determined to ride it to riches beyond measure. It's up to you to get them to pick your startup to ride. Serial entrepreneurs know how to do that. It's part of what made them skilled at building unfair advantages.

I wish you The Best on your Adventure!

STARTUP DUD: Find a new use for the engine/technology

"What do you do when you launch your app and end up with 100 users?" That's the central discussion point of my talk this morning with a budding, bright entrepreneur.

What should be done next seems obvious at first to many observers: Stop.

• But if you've put in two years of no-for-pay work with two other guys, giving up is not easy.
• So when should you stop?
• What should you do with what you've built?
• What can be done to succeed in spite of the dud on launch?

Yes, even the best, the world-class pros launch products that are duds. Dead on arrival. Go nowhere. Get slammed by the bloggers. Get Twitted to death, mercilessly.

For a touching example, so you get the picture, look at a story about the film Conan the Barbarian (dud). It was sent to me by a serial entrepreneur I greatly respect (Thanks KT). Read and think a moment about how the lead writer went through the post-launch-blues. Download Conan Writer Describes His Emotions to a Boxoffice Failure.

1. So the first lesson is: Expect less than a spectacular win. Remember, startups are statistically going bankrupt (i.e. over 60% of venture backed new enterprises go out of business). Good news: you are not alone. There are a lot of others you can learn from out there, they'll help you step on fewer startup landmines. Start talking to them.
2. Next: Start thinking about what you could do different (VERY different) with what you have built. Here is a metaphor I often use with techies: "Okay, let's admit the idea is a dud. So what do you have to work with? Technology you say? Well,think about it as an engine. Then start looking for what vehicle you could put that engine into: passenger sedan, SUV, light truck, spare generator, green machine, and so on." Here is where you have to have guts, think boldly, take whacks on the sides of your heads, brain storm, do out of the box. Often the Second Time Around produces something Great.
3. After this, test each New Idea for how much "WOW!" it has (compelling reason for the end user to use/buy). This is classical startup work fron here on. I'll not dwell on it here.

My point for the day is simple: Even the Hollywood greats launch duds. So do serial entrepreneurs. You can use such events to make a decision about what to do next.

Sometimes it's best to close shop and find a job (e.g. wife expecting second child, parents aging needing closer attention, have less than 6 months rent in the bank).

More likely it is time to intensely search for something very different, something to apply what you have built, something to solve a Really Big Problem (that others have overlooked - see my August 22 blog on Flanking).

All of this is part of being lost in The Wilderness of Undistinguished Startups. Your Core Team now has to have the courage to know you are lost and screw up the guts to think boldly to find a way out.

BOTTOM LINE: Launching a dud is common. When it hits you, get through the emotional process of accepting reality and depression and recovery. Then you can start to get creative and figure out what to do with what you have built. That's how serial entrepreneurs think and behave. It's part of their DNA, what they use to build unfair advantages.

I wish you The Best on your Adventure!

STARTUP IDEA: Move into uncontested new space (Flanking)

"The market is flooded, a gorilla already exits, what should we do instead?" is a question I often am asked.

Let's pick that conumdrum apart to generate a simple answer and get you out of The Wilderness of Undistinguished Startups.

Start with a quick read of today's blog from TechCrunch about Vidyard.

Note the following:

• Market for videos dominated by YouTube
• Alternatives to YouTube are expensive
• New uncontested (no Gorilla yet) market is open: "an affordable way for businesses to host videos that can be viewed either on a landing page or via an embeddable player."
• New market has huge potential (number of businesses)
• Business model (monetization) is simple and proven: "To monetize, Vidyard is using a freemium model"
• Vidyard focuses on a single weakness in the Gorilla: "Basically, Vidyard is offering a service that’s very similar to YouTube, but without that link to a third-party portal." Yes, there are other features, but this is the weakness that is difficult for the Gorilla to quickly overcome, thus giving the startup an opening.
• Technology team can deliver what marketing team wants (Vidyard hopes).

I don't know enough yet about the experience of the Core Team, but the above is enough to make my point for the day: When the market is flooded, when a Gorilla dominates, then find an overlooked (often related market) and put everything you have into pursuing it. That's what world-class marketing minds call The Flanking Strategy. It avoids the Gorilla, appeals to a large market, and gives the startup a great chance of becomming its Gorilla.

BOTTOM LINE: Look for large overlooked markets when you face a Gorilla dominating a major market. Focus all you have on something the Gorilla cannot respond to quickly, something customers are begging for, and then go for it. Serial entrepreneurs do it. So can you. It's how most great startups become great, building their unfair advantages.

I wish you The Best on your Adventure!

IS YOUR NEW ENTERPRISE LOST IN THE "WILDERNESS OF UNDISTINGUISHED STARTUPS?" What to do? Try a simple technique to get to The Land of "Wow!"

Got an email this morning that is all too common: "We launched and found the market very crowded. Any suggestions what to do from here?"

Then I got a call from a New York City entrepreneur seeking a bit of advice. He was dispondant that his business would not scale, was not standing out, was not compelling without a lot of selling time.

Both are lost in the Wilderness of Undistinguished Startups.

That is a terrible malady. Can lead to terminal startup illness.

Symptoms:

1. Elevator Pitch is very long. "When the customers 'get it' we get some business from them."
2. Are taking business from anyone. "We have a lot of different customers."
3. Not in a New Category. "We are in the XYZ (everybody is there) market/business."
4. Marketing Message is not compelling. "Our story needs a lot of work."

Cure:

Get your Core Team together and try this simple technique (call it "The 5 Q Technique") in a short working session. I do it for the startups I coach and find it gets leaders onto the right track, very fast.

1. "Who is your Ideal Customer?"
2. "How are our First Three Bowling Pins?"
3. "What is the name of the New Category we are going to seek to dominate?"
4. "What is the Big Problem we are solving for our Ideal Customer?"
5. "What is the Message that is compelling to our Ideal Customer?"

Try that in a half hour session. Then stop. Send the Core Team back to whatever work they were doing. Next week repeat the session. Continue until you are excited about the responses. Then just do it.

BOTTOM LINE: It is common for startups to get lost in The Wilderness of Undistinguished Startups. But do not despair, you can find a way out. Your goal is to find The Land of "Wow!" where you are the Rock Star of the New Category. Using the simple 5 Q Technique above can help you find the path without spending a ton of wasted time. It is what serial entrepreneurs do instinctively. It's part of their DNA. It's how they build their unfair advantages.

I wish you The Best on your Adventure!

STARTUP MANAGEMENT: Example of how easy it is to get started (but what comes next?)

It is easy to do a startup.

Yes, easy.

Open a web site and you are in business.

Write some software code, post an App on Apple or Amazon and you are ready to start selling, taking in cash.

Starting is easy.

The Big Question is "What do we do next?"

In other words, “How do you make a business out of the new product?" "Should you do a quick sale for cash or strive to construct an enterprise that will endure, prosper and grow to significant size while competing with gorillas and other aggressive new enterprises?"

For a real life example, try this one that I spotted today: Groupchat.tv. It is an app that was created over one weekend by experienced techies participating in a hack gathering in San Francisco. I enjoy seeing such enthusiasm and creativity blosssom. I sense that the team has a chance of coming up with Something Great in the near future.

So let's use this to help your thinking about "What next?"

Here are some actions you might expect of entrepreneurs who have launched an app that is easy to create:

1. Sell it ASAP! for Quick Cash! Find a company with lots of cash.  Emphasize "Faster time to market" ("Buy it before your competitor does or [copies ours]!"). Sell it for a bit more than their engineering team would cost to build it. Take their cash, pay your taxes, and think about "your next gig." Time Span: 1 - 3 months to cash in the bank, after launch of the new thing.
2. Launch, Grow end user base (demonstrate "traction"), then Sell at a Higher Cash Price. This takes some cash (pay for the servers and related service each month), plus $ to fuel your people (you and a friend or two) who have to have some cash to live on (personal savings most likely, or a girlfriend with a steady job). Time Span: 6 - 9 months including 2-3 months to find the eager buyer and negotiate a reasonable deal.
3. Launch, Grow the user base to a Significant Level (perhaps 1 million users), then Sell at a Significant Price (might include some stock of the Buyer). This will take a lot more cash to get there. You are going to have to starve a long time ("Sweat equity") or find an angel to do a  Seed Round. Time Span: something like 1 to 2 years = 3-5 months to find the angel cash; overlapping will be the 9-18 months to ramp up the end user numbers, plus 3-5 months to negotiate a "good deal".
4. Plan on doing Classical Venture Rounds to win Gorilla status and march on to IPO. This plan begins with a Seed Round, followed by growth cash from a multi-million dollar A Round and most likely a follow-on B Round double the size of the prior round. Time Span: This is the 5 Years to IPO Classic model. 

So pick your plan and go for it. The potential $ ROI for you is "One more zero in value for each of the 4 Alternatives above. For example, if you think you can get $X00,000 for Number 1, expect $X million for Number 2, $XX million for Number 3 and $XXX,000,000 for Number 4.

Here is another way to think about "What do we do next?": Get started with Number 1 and in a few months you may change your mind and do Number 2. And so on it might go for you.

BOTTOM LINE: Thinking about "What do we do next?" with your creation will add realism to your life. Starting a new enterprise is easy. Building it into something great takes a lot more effort, people, cash and risk-taking. Serial entrepreneurs know that. When you do, you can plan on what to do about building an unfair advantage and cashing in on it.

I wish you The Best on your Adventure!

STARTUP MANAGEMENT: Founders share their insider's story

Last evening I enjoyed an entrepreneurial event in San Francisco sponsored by Cornell University. Three founders of growing startups shared stories of their adventures, slogging through the jungle of new enterprises.

Cornell Silicon Valley (CSV) in partnership with the Faculty of Computing and Information Science (CIS) present:

Startup Stories: The Good, Bad & Ugly

Wednesday, August 10, 2011 - San Francisco 

     

                            

ASIDE: If you are interested in learning entrepreneurship and/or one of the world's finest universities, I highly recommend Cornell. Its depth and breadth of startup courses will blow you away. The 18 month Masters of Engineering program is top of the world (check out Computer Science and Electrical Engineering. Amazing professors, all new buildings). And I teach Entrepreneurship for Scientists and Engineers at Cornell whose Johson Graduate School of Management has delivered corporate leaders around the world. Its Entrepreneurship and Innovation Institute is another example. Cornell graduates are among the ranks of world-class venture capital firms and startups that have gone public. End of commercial, time to get back to the point of this blog.

TIPS FROM THE EVENING'S FOUNDERS 

Here is what I heard from the four respected, experienced startup founders:

• It's hard to go solo. Alone is very alone. Best to take more time to find great people to co-found with you, form a Core Team.
• Avoid getting stuck in the startup rat race ("I coded last night until 3:oo a.m., got some sleep, woke at 7, checked emails, was back in the office by 10:00 a.m. Started doing marketing things, expect the day to repeat itself.")
• When looking for co-founders, only select people you trust and know well.
• Determination and "scrap-iness"get you attention from investors.
• You will often be confronted with "This is not going to work out." That's when the hardest decisions are made for a startup.
• Do not be dependent on "key employees". They can hold you hostage to "more cash" and "more stock". (Blackmail).
• Strong personalities in employees leads to confrontations about you, the founder, which can be helpful ("They tell me the truth, especially about me.") yet frightening.
• Founder CEOs get pulled in all directions, all the time. The job is ever changing, shifts radically every six months.
• Big Decision Time -- Black Days -- Depression: "Who do you go to then?" You have to have people to talk to. Mentors and coaches help a lot. Best are peer level people (other founders of startups).
• After launch of first product, expect to shift to half time improving the product and use the other half to build your management team. Managing people becomes number one in rank of importance.
• Pay attention to details. "Where are the legal docs showing you own the company logo?" and other due dilligence questions (from investors) require answers, and thus demand care for details from Day One.
• The Early Days are totally consumed trying to figure out "What is our market? What do customers want, are they the wrong ones to focus on, what in the product has to be changed?" The list goes on and on. Chaos. Expect it.
• Creative actions in the Chaos stage lead to priceless answers. "They came to get their free flashlight and told us a a ton of things we needed to understand." "We listened to five end users and changed our user interface back to the first format (we had "improved the UI and they hated it."). "By accident we discovered we got free PR only after the customers paid for the product -- they did not want it for free!"

Those are some of the highlights. Note the human factors emphasis on responses to questions from the audience. That in itself is a Tip: As one founder CEO put it, "You don't get much training on how to manage people when you are coding 18 hours a day."

Note also the urging of budding entrepreneurs to start connecting with other active entrepreneurs. Such networking takes time but is worth it, some would say it is vital to success.

BOTTOM LINE: Listening to othe founder CEOs talk about their adventure in the jungle of new enterprises is where you begin your journey. Gathering tips, connecting with real people and thinking creatively lead to momentum. Career focus on how to manage people along the way will make you stand out to potential employees and investors by the time you are ready to do your first startup.

All of that can be done anywhere around the globe. You can be in Dubai, Mumbai, Shanghai, or Mami and do all of it. You don't have to be in Silicon Valley (but if you can, it's a great place to learn entrepreneurship from real people).

So think about the tips above and digest them. Work on your personal plan to move on from where you are, using the Tips to speed your time to market and reduce your risk of failure. That's what serial entrepreneurs do. It's how they build their unfair advantage. You can do the same.

I wish you The Best on your Adventure!

STARTUP IPO MANAGEMENT: New CEOs and VPs decorate the prospectus

Should founder CEOs expect to be CEO when the startup goes to initial public offering?

Most first timers say "Of course!"

Serial entrepreneurs say "Maybe."

The startup veterans have learned that a CEO for a post-IPO company ("a public corporation") has very different skills than the founder CEO.

• Founder CEO skills demand awesome abilities to change quickly while racing to become the gorilla on top of the emerging mountain of a huge new market category.
• Post-IPO corporate skills demand the ability to deliver both high (slower) growth with predictable Sales and Net Income numbers quarter after quarter.
• Risk Maximization shifts to Risk Reduction.
• Different strokes for different folks, as the adage goes.

This is one reason to beware of talking about "My company". Once you have outside investors, they will decide if you are the one to take the startup through IPO into the public corporation phase of the company's life. Yes, I know of those (few) famous startup founder CEOs who do exist as founder at IPO (reporters love to blog about them when they run out of good stories to write), but such careers are so rare that you cannot expect to realistically plan your life expecting that to happen to you. I suggest your objective should be to help convert your idea into a world-class enterprise, not planning on preserving your title as CEO.

EXAMPLE: There is an excellent article in today's Wall Street Journal with several examples of startups making changes recently in top management as they get ready to go IPO. Study it and think about your own startup's management. It will save you from shock and disappointment when you "hit the wall" with your skills and your board of directors tells you it's time for new leadership. Note also how additional vice presidents and chief operating officers are adding to layers of management and increasing the complexity of managing a fast growing organization.

I have found that management successor plans are rarely done formally. Instead, replacement of founder CEOs is assumed to be a likely possibility at some unknown time in the future. And that goes for VPs and other titles as well. I've watched boards of directors work hard to avoid making top leadership changes, far preferring to work with the known persons -- especially the founder CEO -- even as the company's growing complexity and related tough issues begin to overwhelm the founder CEO and his/her ability to continue delivering the best for the startup.

As I've blogged in the past, there is now a clear pattern of startup management changes that venture financed companies go though in three distinct phases:

• Chaos = from idea to first significant product ready for launch
• Launch = start selling the first product in ever larger quantities and start building an increasingly organized company
• IPO = convert to early profitability while modulating the growth rate and swinging into financial predictability to entice and soothe Wall Street.

All three phases call for different skills, similar to the "specialty teams" in American football (e.g. Kickoff, Offense, and Defense). That metaphor may help you see what this is all about for a startup.

BOTTOM LINE: First time founder-CEOs should not see their replacement as a failure. Replacement means your startup has grown so fast and so complex that the company needs a new specialty leader for the next phase of growth.

Serial entrepreneurs find they love one of the above mentioned phases and are bored with the next. Think a bit about which you would enjoy the most, are the most able to lead.

Often successful large public corporate executives move down in size to the pre-IPO startups as the next step in their careers. They want the new kind of challenge, as well as its risk, potential financial reward and fame. Perhaps that is better for your career right now than trying to be a founder CEO.

If you are a founder CEO or early Vice President, then you can begin to prepare psychologically for your eventual replacement. In other words, give management successor planning some thought for a bit. Then return to growing your business to greatness. That's how the serial entrepreneurs do it. They know it's part of building an unfair competitive advantage.

I wish you The Best on your Adventure!