VentureBlog

Don't Be Conservative

The finance guy in a pitch I heard today used the old line, "these numbers are conservative." He went on to explain to us why it was that we should not believe his numbers because he was going to outperform his own projections. I always wonder why it is that companies insist on claiming that their numbers are "conservative." I would rather know what the company really thinks it is going to be able to achieve, rather than what it thinks it will be able to outperform. Ultimately, the key to meaningful financials is meaningful assumptions. And if a pitch is interesting enough, we'll push on those assumptions to try to determine if the projections are realistic or not. Saying that they are "conservative" won't change how we view those assumptions. But it will probably make us more skeptical to start.

Cash Is King

In a recent back and forth with fellow board members about a compensation issue, one of the board members wrote:

We are back to Al Shugart's 3 Rules of Entrepreneurship: each rule reads "cash is more important than your mother."

I couldn't agree more. There is no greater commodity for startups in this economy than cash. And there is no better-received trait by venture investors than frugality.

Be Different

I'd say that at least half of the pitches I see include a slide comparing the presenting company's product to the products of its competitors. You've probably seen the slide... it lists the product names in columns at the top and the product attributes running down the left hand side of the slide. Each product gets some sort of score for each of the product attributes (a check or a filled in circle or a value). Not surprisingly, the product of the presenting company gets all the checks or circles or best metrics and its competitors don't. And for some reason the presenting company's checks always get to be in bold or a special color. I've even seen them animated.

Now I don't object to the slide. I actually think it can be a very effective way of pointing out the comparative strengths of a company's product with that of its competitors. The pitfall I see frequently is the attempt by a company to distinguish its product from a competitor's on bogus grounds. They'll list a handful of important features against which the competitors stack up favorably. But then they will list a number of less relevant factors simply so they can give themselves check boxes while leaving their competitors wanting (e.g., 5 USB Connectors, LCD Display, Accounting Expertise, Product Named After A State Bird, etc.).

While it may give the visual impression of greater differentiation, I strongly recommend you err on the side of conservatism. If it wasn't an important enough attribute to discuss when you were describing your product and its benefits, it isn't sufficiently important to put in this slide either. The things that differentiate your product should truly be different and those will be the things a venture investor will focus on. The other stuff is window dressing and it very rarely helps your cause.

At What Cost?

I met with a company yesterday that is trying to launch a new consumer product. The product was pretty cool and the software made some sense but most of our conversation revolved around the simple question "does it make sense for a startup to launch a consumer device?"

The number one reason given by the company for pursuing the market themselves, rather than seeking design wins and simply being the underlying technology for a new class of consumer devices, was their ability to extract higher margins by selling the product themselves. But can they really? If you dig into the true costs of selling a product yourself, it turns out that your high margins are often illusory.

Look at the instance of a consumer device -- there's the cost of the retail channel, there's inventory cost, there's marketing, there's breakage, there's returns, there's support, there's obsolete inventory, and the list goes on. When push comes to shove, a whole host of costs eat away at the otherwise appealingly large margins of consumer direct sales. It's just another example of how powerful it is to already have a channel and why startups are often best served by leveraging other people's channels rather than building their own. And it is a good reminder that costs come in all shapes and sizes and it is incredibly important when you're building a business to know precisely what all of those costs are and what knobs can be turned to impact the bottom line.

Free Legal Advice

Gone are the days when the demand for good lawyers well outstripped the supply. Lawyers in the late '90s not only routinely turned away potential clients that they did not believe brought the requisite cachet, but often demanded large equity stakes (as well as high hourly rates) in connection with representation of those clients they did take on. Those days have passed. While the supply of lawyers has normalized to a certain degree (few law firms in the Bay Area escaped some form of downsizing), there remain a large number of qualified lawyers with free time on their hands. This is good news for startups on a number of accounts:

Don't Get Bitten By Your Own NDA

I just received a newsletter from Perkins Coie LLP. The topic of the newsletter was a recent Federal Appeals Court ruling concerning Non-Disclosure Agreements (NDAs). The gist of the case was that a company hired a consultant under a written NDA. According to the terms of the NDA drafted by the company, the confidentiality of the information exchanged during the consulting arrangement expired after 5 years. The 5 year period lapsed before the consultant utilized the information he had gained in the consulting engagement but the company sued him anyway. The Company argued that California law protected the confidentiality of the information forever and, therefore, the fact that the NDA had expired did not matter.

The Company LOST. The Federal Appeals Court ruled that because the Company had entered into an express contractual relationship, the terms of that contract overrode the general terms of California law when it came to proprietary information. Therefore, since the Company said the information was no longer confidential after 5 years, it didn't matter what a generic statute said about it. In this particular instances, the Company would have been better protected if it had never entered into an NDA with its consultant.

This isn't to say by any means that you shouldn't enter into NDAs when engaging in business (whether in California or elsewhere). It's just worth pointing out that in the law, things aren't always as they would appear.

Is Google the Next Microsoft?

During the DEMO Conference a few weeks back, Google announced its acquisition of Pyra Labs, the makers of Blogger. Since everything Google does these days results in a pile of buzz, it is no surprise that the acquisition was the talk of DEMO for much of the day. And during that day there was a panel of luminaries, including Dan Bricklin, Founder & CTO, Trellix Corporation, Mitch Kapor, Chair, Open Source Applications Foundation, John Patrick, President, Attitude LLC and Les Vadasz, Executive VP, President, Intel Capital, Intel Corporation (Les has the distinction of being the only person to have attend every DEMO conference -- he noted that this was the first one in which they had gotten him the right size shirt -- I myself ended up with a shirt the size of a small boat sail). The panelists spoke with confidence of the continuing vibrancy of the technology world (which was a general theme of the conference as a whole -- the technology world is starting to feel better; not great, but better).

During a question and answer period, the panelists were asked an interesting question. A conference attendee asked if they thought that "Google was the next Microsoft" with respect to being the serial acquirer-of-choice in the technology world. I frankly don't recall the panelists' answer but it struck me as a very interesting observation. There are so few potential acquirers out there these days with sufficiently valuable currency as to make an acquisition proposal particularly compelling. Even Microsoft, while maintaining a very stable currency for acquisitions, can no longer claim the sort of stock performance that made nearly every acquisition in the 90's worth well more than the price actually paid by Microsoft at the time of purchase. With speculation abounding, Google is using the wild optimism of many, to its great advantage as it acquires interesting technology companies. In what feels to me like the last of the bubble companies, Google is getting more value out of its illiquid currency than many large profitable companies with liquid stocks (or even cash) are able.

So, is Google the next Microsoft when it comes to acquisitions? It may be for the time being. As long as Google is able to leverage the immense buzz around the company, it will be able to continue to court potential acquisition targets with the promise of untold (and presently unmeasurable) value. This may be one of the reasons Google has chosen to not yet go public -- I suspect when the market starts to price Google, while it may be accorded an extraordinary initial value, it will not be able to maintain the promise of exponential growth that fueled the acquisition machine of Microsoft (and many other technology powerhouses during the late '90s).

Know When You're a Loser

I recently attended the DEMO Conference in Scottsdale, Arizona. Rather than a bunch of bleeding edge consumer devices and web applications being unveiled this year, DEMO was loaded with enterprise apps. In particular, there were a number of companies dealing with email management (search, sorting, filtering, etc.). And of particular interest to the DEMO audience was Spam filtering.

A centerpiece of Monday's program (2.17.03) was a "Spam Challenge" between two spam-fighting startups, MailFrontier and Cloudmark. The two anti-spam startups agreed to allow representatives of NetworkWorld Mangazine to independently test the effectiveness of their respective products. The good folks at Network World determined that MailFrontier was decidedly more effective than Cloudmark at achieving a high filtering rate while maintaining a relatively low false positive rate. What was most interesting to me wasn't the fact that Cloudmark got spanked � it was more the fact that Cloudmark didn't seem to know that they were going to get spanked. Moreover, because Cloudmark was directly involved in NetworkWorld's testing, it gave that reasearch Cloudmark's own imprimatur despite the negative outcome for the company.

The Spam Challenge reminded me a bit of an independent study that was jointly commissioned some time ago by two competing photo printing websites, Ofoto and Shutterfly. Ofoto and Shutterfly split the cost of an InfoTrends study on photo print quality among 5 leading online print sites. It turned out to be a great deal for Ofoto. InfoTrends determined that 75% of people surveyed found Ofoto's prints the highest in quality, compared to the mere 10% who chose Shutterfly (the second highest in the test). Worse yet for Shutterfly, they had validated the study by co-commissioning it with their biggest competitor.

Both these independent studies beg the question, didn't the losers know they were going to lose? And if they didn't, why not? The first thing a young prosecutor learns about cross examining a witness is to never ask a question to which she don't know the answer already. I would think the same should apply here. Never endorse an independent comparison of your product with a competitor's unless you are absolutely certain that you will come out on top.

I'm a VC. Who The Hell Are You?

I continue to be amazed that perfectly smart entrepreneurs can get 15, 20, 30 minutes into a pitch without introducing themselves or their team. Earlier this week we had yet another couple of experienced entrepreneurs run through their latest, greatest idea and not introduce themselves until their very last slide. Jeez. Even my waiter at Denny's starts off with "Hi. I'm Dawn and I'll be your server." It's not a bad model. "Hi. I'm Dawn and I'm a serial entrepreneur."

It just seems like common sense to me that you'd start off with your backgrounds and move on from there. Entrepreneurs are the context around which great companies are built. Its important to know that you've built a great company before, or have been part of a dramatic failure in the space and learned from it, or are the leading expert in some fundamental technology, or have massive domain expertise in the area you're seeking to reengineer, or are a good friend of a good friend of mine, or . . . . All of that stuff matters. And it will inform the rest of your presentation.

So next time you're creating that PowerPoint, start with who the hell are you. It will save me interrupting and saying "so can you give me your background?"