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When Angels Fear to Tread

It's the lack of exits that's a problem amid the deadly clamp of panic throughout the economy - a far cry from the irrational exuberance that drives entrepreneurs (and their investors) and which brings us trouble and fraud as well as greatness and "slumdog millionaires".

No matter how much we bailout the auto industry, there'll be less jobs making cars next year than there are this year – in fact cutting jobs is a condition of the bailout funds. There are going to be less bankers a year from now, too. New jobs will come from new industries, not from the ones on life support. So it is essential that there be some source of funds for entrepreneurs so that they can do what they do best (when they succeed) – create good jobs for future markets.

Tom Friedman suggested bailout money for VCs; Fred Wilson articulately pointed out that only the incompetent VC firms would take the money and that skilled VCS actually do have money and can raise more. Entrepreneurs pointed out in comments on Fred's post that there IS a shortage of money from entrepreneur's POV. In a comment on my post on the subject, Fred suggested tax breaks for angels.

Angels are motivated by fear and greed just like everyone else – angel investors, that is, who, in better times, are a source of funds for entrepreneurs launching the businesses of their dreams. Angels (I've occasionally been one) are just as perverse as all other investors; we're more likely to invest at market tops when everybody else is and less likely to invest in scary times like the present even though there's greater opportunity now.

There is a way to get angel money flowing again but it's not by subsidizing angels – even with tax breaks. Angels are claustrophobic; don't like going into investments without exits.

Angels generally step aside (but don't get cashed out) when a company gets its second round of financing. Often VCs step in with money, advice, and contacts for the next round of a company's growth. The angels and VCs (and entrepreneurs) generally get some reward when the company is either bought or goes public. But companies aren't getting bought or going public right now.

The result is a logjam. The VCs are concentrating their time and attention on companies which would have – in better times – been long out of their portfolios. It's true, as Fred said, that the good VCs can raise more money; but they can't clone themselves. Fred can only serve on so many boards at a time. That means that venture funds can't take responsibility from angel investors at the rate they used to – they have last years' hatchlings still in the nest.

An angel looking at a potential new investment not only confronts the risk of failure – that's always been there – but also the risk that he or she will be in an active role with the company – and perhaps its only source of capital –for a long time to come. We angels, like the VCS, still have the companies that we previously incubated in the nest. So we're not looking for new investments either. We're scared and there are no exits.

Only greed (the dream of an outsized return) can conquer fear. Tax breaks don't do it; you need to have some gain before you can use them.

An opinion piece in the Wall Street Journal today by Tom Hayes and Michael Malone entitled "Entrepreneurs Can Lead Us Out of the Crisis" suggests not only tax breaks for angels and entrepreneurs but also eliminating Sarbanes-Oxley to make it easier to be a public company. This has the virtue of appealing to greed (the IPO dream) and opening up exits; but even I'd agree that, in the dotcom generation, companies went public much too soon – eventually to the detriment of the companies as well as their investors.

We investors have to give up the dream of a QUICK outsized return. We can dream but we have to dream the patient dream. We probably even have to wait for companies to be profitable before we can make any money. That's OK; we can live with that as long as we can have the dream.

Turns out there is something government can do, however, to get investor juices flowing again: invest in infrastructure that creates opportunity rather than subsidizing zombie companies which are blocking the way. When the Erie Canal was built (funded by private investors buying government bonds), private money flowed to boat people and businesses all along the canal. Same kind of thing when the railroads with built with healthy doses of land grants and other subsidies – fortunately government DIDN'T elect to subsidize the canal boats which the railroads put out of business. DARPA (government) had a lot to do with inventing and funding the Internet; the Internet enabled and encouraged a wave of privately funded innovation.

I wish more of the bailout were focused on infrastructure – especially new enabling infrastructure. If transmission lines actually do get built, "alternative" power'll flourish with much less government intervention than is planned. The government does have a role in building those power lines. If the United States can become an e-nation with every citizen having access to a highspeed persistent connection whether at home or on the road, that infrastructure of connectivity will light the exuberance lights for a new generation of connected services. Government's role there is to create telecommunications competition we don't have today and to subsidize the last five or ten percent of connections as we did with rural electrification and telefonication because the network as a whole gains value when it is universal.

We investors and entrepreneurs have to relearn patience. Fair enough. We'll come back into the game once we can't stand to be on the sidelines any longer and when we see a future – almost no matter how distant – in which there is an exit.

A VC Says No to VC bailout

"Thanks but no thanks" is Fred Wilson's prompt response to Tom Friedman's column suggesting that $20 billion in bailout funds be made available to the top 20 VC funds so that they can invest in the future rather than the past of failed banks and auto manufacturers. Fred says:

"…the top 20 firms in the venture capital business are the least in need of a bailout of any group I've ever thought about. These firms, the Sequoias and Benchmarks and Accels and Kleiner Perkins [Fred modestly didn't add his own Union Square Ventures but could have] etc etc can raise a fund anytime they want. Accel raised a ton of money last fall in the midst of the worst global financial meltdown in my lifetime…

"The worst firms, on the other hand, will gladly accept government money. And that is what is going to happen with all of these government efforts to pour more money into the "innovation sector". That money will go to bad investors and weak entrepreneurs and management teams for the most part. It's a problem of adverse selection."

If anything, Fred is understating the danger in flooding the venture market with government money. It's a corollary of Gresham's law that bad investment drives out good. Suppose you're thinking about investing in software or green tech or something else…. and suppose you know the government's about to dump a lot of dumb money in the field, well then you don't invest because someone who's good at grants but probably not good at software or green tech or whatever is likely to wipe out the market for whatever you were going to invest in. If you're going to invest at all, you try to figure out who's going to get the government money and you put your money there. In other words, the smart money ends up front running the dumb money. Not good.

Of course the damage from government "investment" isn't limited to venture funding. Governments around the world have carefully been "investing in" the very banks which should get out of business and out of the way of better run and smaller (and less dangerous) banks. The better and smaller banks can't get investor money in this climate because the investor money would be competing with government money. Same, of course, in the manufacturing sector.

There is one part of Fred's post where he and I do have a slightly different POV: "… the venture capital business, thankfully, does not need any more capital. It's got too much money in it, not too little. Just ask the limited partners who have been overfunding the venture capital business for the past 15-20 years what they think." From an entrepreneur's POV, we like the VCs to be what they consider over-funded – more chance for entrepreneurs to get funded themselves on better terms than otherwise even though we then run the risk that our competitors will get funded as well. But neither as an entrepreneur nor as a limited partner in VC firms would I want to see government money poured or even dribbled in at the top. "Thanks, Tom Friedman, but no thanks."



An Innovator’s Dilemma – License or Manufacture?

Dash Express, the GPS with GPRS communication for automatic pooling of real-time traffic reports and a truly open application API, is one of the coolest products I've ever owned; it clearly points the way to not only the future of not getting lost but also the next stage of mobile communication and crowd-sourced data. Dash Navigation, the company behind it, recently laid off 65% of its workforce, according to Eric Shonfeld on TechCrunch, and has had to make radical and perhaps fatal alterations to its business plan.

Dash Navigation invented a radical mating of wireless and GPS technology. Existing GPSes like those from Garmin are closed systems, so Dash to built and distributed its own hardware to provider consumers a way to buy its clever technology. They made their platform open so that outside developers could add value to this cool device. They raised a significant amount of venture capital from first tier VC firms Kleiner Perkins and Sequoia. They got excellent product reviews.

But now they're in trouble. They've announced that they will no longer be a manufacturer (although you can still buy the device as I did); they will concentrate on licensing to GPS manufacturers, mobile phone providers, PDA makers etc. in order to get wider distribution. They haven't announced any licensing deals since the press release with their change of approach – although that was only a month ago. They're not doing any hiring according to their website, not surprising given the layoff they just had. They are still supporting their product as I can testify from a user POV.

Licensing is unfortunately NOT a good strategy for innovation. The licensees usually won't budget enough for the consumer education needed to sell innovation; they don't live or die by your success; they may just be covering a bet. They don't change their hardware to fit your software. You as the licensor don't have retail margins to support retail advertising since those margins go the builders and distributors of the retail product.

On the other hand, manufacturing and getting good distribution for a manufactured product is incredibly expensive and hit or miss. You run the risk of just doing enough to show fast followers how to add your features to their hardware. They don't even have to be as good as you if they have better distribution.

This is the innovator's dilemma and there's no good answer except lots of luck or lots and lots of capital. In a great economy, there's a flood of innovation and it's easy to get money but hard to get attention. In a poor economy, money is hard to come by; your VCs suddenly remember the old adage about throwing good money after bad and say they hear their mothers calling if you happen to corner them in a corridor.

The Apple Macintosh wouldn't have worked as licensed software for the PCs of its day. It needed hardware designed for its strengths; it needed large margins to support a large ad budget and initially short production runs (compared to DOS machines). Steve Jobs decided to tightly bundle the hardware and software and they've never been teased apart since. When things are going well for Apple, this is considered brilliant strategy. When things weren't going well, everyone knew this was a mistake; he should've licensed it. Now Apple has its own capital and can continue with integrated hardware and software innovation like the iPod and the iPhone. The model works when you're rich and brilliant.

Tivo was an incredibly innovative product. I still haven't seen a competitor eight years later which is even as good as the first Tivo device. Tivo has gone back and forth at least once between a manufacturing and a licensing model. It can't compete with the distribution advantage of the networks. Somehow it survives but doesn't really prosper (disclosure: I own a small amount of Tivo stock even though I don't currently own the device because the features I want don't work with DirecTV).

The Israeli company VocalTec was THE early innovator in VoIP (when VoIP was still in the carrier network and not in the home or office). Their engineering skill was in VoIP software development. They felt, probably correctly, that they had to sell VoIP devices to the carrier market to get the margins they needed and to deliver a "turnkey" solution.  But once Cisco and other became interested in delivering their own boxes, there was no longer a way for VocalTec to compete. Should they have licensed from the beginning? Easy to say with hindsight but they might well have not gotten traction nor sufficient margins nor been able to raise capital by going public if they had.

Back in the distant past my company Solutions, Inc. developed fax software for the Macintosh. We licensed it to fax modem manufacturers; we made a modest living but squandered most of it trying to promote our software (which was only available bundled) at trade shows. "You're selling what?" people would ask. At best, we made a dollar or so on each modem our licensees sold. Should we have had our own modem? Didn't have the capital. Eventually we licensed the software to Apple who used it as an upgrade to their own inferior software. Not a bad outcome but not what we were dreaming of.

I hope Dash Navigation finds a way through this innovator's dilemma. Their device IS going to shape the future. It'd be nice if they could benefit from it.

A Time Without Exits

Marooned on an island; adrift on a ship; locked in a seedy, spooky deserted mansion; lost in a cave – these are all staples of fiction. And these are all descriptions of the times we live in from an entrepreneur or VC point of view.

All the exits are shut. No IPOs for the foreseeable future. Google and Microsoft and Yahoo and Cisco aren't buying. Even the successive waves of VC capital at ever-increasing valuations are no longer there to float the stranded ships off the beach.

What to do?

VC Fred Wilson suggests that the rules which govern public sales of stock be loosened. He posts that even those willing to invest in these troublesome times are legally precluded from investing in the Union Square Ventures portfolio companies"

"I've written extensively that we need a secondary market for privately held shares of venture backed companies that want or need to stay private. This is already happening with Facebook shares and it's going to happen with the shares of other privately held companies going forward. The public markets have failed to solve this problem so it's going to get solved in some other way.

"We also really ought to find a way for small investors who know what they are doing to place a small bet on a company they really like. And companies like Boxee and Twitter [nb. USV-backed companies] could really benefit from that too.

"This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen."

Fred is defying current conventional wisdom by suggesting less regulation rather than more. But Fred knows well that laws likes Sarbanes-Oxley, which were well-meant to protect investors from frauds like Enron, have instead restricted the ability of young companies to grow and made it impractical for many of them to tap public markets even when the public markets were still open. Fred knows that an SEC which focuses on the minutiae of every public statement a public company makes (which IS their job) somehow missed the fact that publicly traded banks were insolvent and their financial statements (with hindsight) meaningless.  Fred knows that the all the enormous amounts of money which public companies spent on "independent" outside auditors cut into the capital available for growth and still didn't expose the fact that some of the country's top financial institutions were naked emperors.

What Fred didn't say – but I will – is that the appearance of regulation may have lulled investors into a false sense of confidence in the wrong institutions.

What do you think? Has regulation succeeded in locking all the exit doors with investors trapped on the wrong side? Or do we need even more regulation? Or different regulation?

The answers' not easy. Getting it right may be crucial to our economic future.



Invent, Baby, Invent

Tom Friedman says we ought to be chanting "Invent, Baby, Invent" rather than "Drill, Baby, Drill". Forget that this is a false dichotomy (or read this post), invention IS a good idea. I've spent most of my career inventing both technology and business models - successfully and unsuccessfully, have a handful of patents, better stuff I was too dumb to patent, and an interesting career and comfortable life to show for it so am all in favor of innovation. Unfortunately neither cheerleading nor government subsidies are very effective in stimulating invention.

Inventor invent because they can't help it – just like writers write even when no publishers'll publish. What matters to society is how many good inventions actually can be deployed. The deployment rate of invention has a lot to do with capital (and a lot to do with marketing – I've been lucky to have Mary to promote my inventions). Government capital, however, is usually harmful to the innovation process (some exceptions below). Let's take a look at energy which is what Tom Friedman is talking about.

Corny ethanol is the greatest achievement of the latest round of government-stoked energy innovation; it's a bipartisan boondoggle made inevitable by the position of Iowa in the primary calendar. It has succeeded in adding a great deal of ethanol to our fuel mix. It's dubious whether it's led to a significant reduction in either oil imports or CO2 emissions since so much energy is required to grow, transport, and process the corn and much of that energy comes from oil. It certainly has added to commodity inflation (I have no idea how much). The subsidies paid to ethanol producers tilt the scales AGAINST other less-favored forms of energy innovation. Private capital likes to bid with and not against government capital so bad choices made by government are followed and then encouraged by private capitalists who benefit from them. VCs who bet on corny ethanol and were rewarded with subsidies like to picture themselves as green – it's only become recently clear that this particular shade of green is the color of money.

The next round of private investment in solar and wind generating capacity is waiting breathlessly to see when and whether Congress gets around to passing some subsides and what those subsidies are for. If there weren't a prospect of subsidies, more of that private investment would have already been deployed. Moreover, without subsidies the capital gets deployed better because the return is determined by base economics and good execution, not whose lobbyists do the best job writing the rules for subsidy. Let's do a thought experiment: do you think Congress is hesitating on the next round of alternative energy subsidies because our representatives are diligently trying to understand the science and economics involved?  I didn't think so.

BTW, it's not that private investors are prescient or infallible. Most private investment in innovation is in dead ends. But, when the government isn't tipping the scales, private investment fans out across the landscape and the good stuff inevitably gets funded along with a lot of what turns out to be junk. Government as an investor concentrates on what'll pay the highest political dividend and, even worse, drags the private investment in the same direction and discourages diversity of investment.

Let's talk about cars. Both major Presidential candidates are in favor of $25 billion of subsidized loans to American car manufacturers; have you noticed that Michigan is a critical swing state? Is innovation, especially radical innovation likely to come from the major manufacturers? Of course not. Are innovators who aren't major manufacturers going to be able to raise the capital they need to bring their innovations to market; very difficult seeing that their competitors are getting these big gobs of taxpayer subsidy. The result of these loan guarantees will be to decrease the likelihood that America will turn the energy "crisis" to the energy "opportunity".

There is a role for government capital in enabling infrastructure – the power grid which creates a way for even yet-uninvented energy sources to distribute is, perhaps a good example. Keeping taxes low doesn't make inventers invent – they'll do that anyway – but it does help convince the investors the inventers need to invest. Taxing capital out of the private market and having government "invest" it is pretty much the worst way to encourage innovation.

Too Much Revenue, Not Enough Growth

Jeff Jarvis posted a comment on my post In Praise of Revenue:

"I'd also like to see you reprise your lesson (from the Union Square event some time ago) on extracting minimal value from the network you create so the network grows as large as possible and the value you've created and can extract in the end is greater than if you had tried to extract more value at the beginning. Did I get that right? I quote you to that effect all the time. Did it just the other day with a big publisher whose blog ad network is taking too high a cut. I told him to just cover his costs for the first year - or less - and he'd end up growing something bigger that would be more valuable to each member, thus bigger, thus more valuable to him. Eh?"

Jeff remembers quite accurately that I advocated optimizing for growth rather than revenue – in the extreme forgoing revenue. Jeff's advice to the publisher was right on. If you simply solve for maximizing revenue, you can end up with little growth – and little future revenue opportunity. Note, though, that Jeff did not advocate forgoing revenue; in fact, he did advise the publisher to cover costs, presumably so that growth can occur without needing to raise more capital or so that there will be a solid basis for raising capital when it can be put to good use.

The case Jeff presents of an ad network is particularly straight forward. It is difficult if not impossible to sell ads which will be seen by only a few number of people. The cost of selling the ads is too high to justify the effort; advertisers are not interested in taking the trouble to investigate a tiny potential market or put any creativity into reaching it. Other than in strictly local markets, there need to be millions upon millions of impressions AND data to do targeting with before advertisers are interested. So it is not practical for any but the very largest blogs to sell their own ad space – and even they usually don't. There is an opportunity for ad networks which aggregate advertisers and advertising on one side and an inventory of space ads can run on the other side. The network matches the ads to the blogs, typically collects from the advertiser, and pays the blogger. Google is the most successful example of an ad network but the ads it aggregates appear in many more places than just blogs. Federated Media, the ad network to which Fractals of Change belongs, is an example of a blog-based ad network.

If you're an ad network, the more page views you have to sell, the more and better the advertisers you can attract. The more advertisers and the higher the rate for page views you can achieve, the more bloggers you'll attract to make their page view inventory available through you. You obviously have to scratch to get started, need to have some credibility or an existing inventory of ads to start with, and are going to lose some money getting going. But now you've got traction: how much of the ad revenue should you share with the bloggers and how much should you keep? Your investors may be pushing for some return on their capital (profits); your compensation might even be tied to your margin on sales rather than just your gross sales. Nevertheless, charging more than you have to, even if you can for a while, is a mistake.

Charging too much stunts growth so you'll have fewer units to charge for in the future. Charging too much opens the door to competition.

The more that bloggers make from your ads, the more space for ads you'll have available as bloggers tell their friends which ad network to use. The more ad space you have, the more ads you'll get and – on the average – the more you'll be able to charge for ads because you'll have better opportunities to target and you'll have more advertisers interested. The more ads you get and the more you can charge for them, the more money bloggers in your network can make.  You want to keep this virtuous circle of growth going as long as you possibly can.

If you are extracting profits before you have to, you're forgoing future growth. In any sort of competitive market, profits attract competitors. Big profits attract lots of competitors. Would-be competitors can point to your profits and easily get funding. Funded competitors can undercut your rates and "steal" your bloggers. Whoops; the circle is now turning in the non-virtuous direction. If you're doing well but running at or close to breakeven, you've made it impossible for anybody to undercut you without running at a deficit which is hard to get funding for – at least in this market. The biggest danger to you is someone who finds a way to substantially cut costs or to deliver a better product. Obviously you've got to be vigilant about that and ought to lose some sleep over these possibilities – but keeping prices down keeps a plague of me-too competitors from cutting off your growth.

This logic goes well beyond ad networks, they just make a good example.

Craig's List has the successful strategy of forgoing revenue for MOST listings it runs and MOST markets that it's in. That strategy helped it attract a critical mass of listings and a critical mass of listings meant a critical mass of ad readers which attracted more ads etc. etc. If Craig now attempted to maximize revenue by charging for a substantially higher percentage of ads, a door would be cracked open for competition. There is no chance at current rates for a competitor to steal Craig's listings (and readers) by charging less. If and when Craig's List is bested, it'll really have to be by something which delivers a better way for listers and readers to communicate.

Unless you are a protected monopoly, high prices are a recipe for losing whatever lead in the market place you have. Low prices are the engine of growth.

The strategy Jeff suggested to the publisher and that I'm recommending here is to keep revenue as low as it can be and still fund growth. No revenue is a different strategy that I'll post more about.

Hold the PowerPoint; Launch the Site

PowerPoint presentations won’t get you into the meeting room of most venture capitalists even though you may need a presentation once you get there. Working software that they can look at before they look at you, on the other hand, seems a great way to start. That’s the result of a very unscientific survey that I sent only to my favorite VCs.

What got me into this was looking at presentations entrepreneur friends were crafting for the dual use of getting an initial meeting and presenting at said meeting. After a while I realized that no one presentation can possibly be good for both standalone use and personal presentation. Standalone presentations are suspect to begin with; they have to be incredibly wordy to introduce a new idea and words don’t make good slides. On the other hand, presentations you deliver in person need to be very sparse with good graphics to SHOW what your words TELL: the shape of your projected hockey stick; the commanding lead you’ve built in the marketplace; the beauty of your website (but why not just show the site?).  If all the detail is on your slides, people won’t be listening to you.

So I said make the best presentation you can to deliver personally; DON’T email it; DON’T compromise by making it standalone. Then I began to wonder whether VCs REQUIRE a PowerPoint in advance. Haven’t pitched VCs myself for a while and things change so thought I’d better ask:

“As a VC, what do you expect to see from an entrepreneur whom you don’t know or have a casual introduction to before scheduling time to listen to a pitch?

“A one-pager? A complete pp? A classic business plan or a casual one?


“What’s the pre-pitch norm? what do you get? What do you want?”

Fred Wilson of Union Square Ventures answered:

“A working web site I can play with and engage with others on

“I am dead serious bout that

“Nothing else matters to me at the start of the discussion.”

That’s actually great news for us nerds. Wouldn’t you rather code up some cool AJAX and php than make a PowerPoint presentation? In the old days you needed serious money to get a website hosted but that’s simply not true anymore, especially at small scale.

Rob Shurtleff of Divergent Ventures is looking for the highlights:

“What I think is most useful is a very carefully crafted one page email overview. This should be more then an outline, but focus on the top level “why is this deal interesting” points.  Problem being solved, results to date, team, target raise.  Include links so the reader can dig if they are interested.

“I am looking to see if it pattern matches on prior deals, http://www.shurtleff.org/2008/venture-pattern-matching/. My buddies at Foundry look for deals that fit their theme, http://www.feld.com/blog/archives/2008/03/glue_our_sticky.html.  The bar for getting a meeting from a cold email is pretty high, most meetings come from our networks.  It is completely worth the time investment to try and figure out a personal connection with a partner or associate.

“We get a steady stream of unsolicited physical and email inbound pitches, the most annoying come with an NDA…   Almost all have more information then I want to read through…”

Making a good one-pager can be harder that a whole deck of slides – but it’s much more important. BTW, it should be a well-laid out graphic one-pager chock fill of information but NO mouse print allowed. Don’t miss Rob’s point on how much better it is to have an intro –even a distant one – than not.

Speaking of Foundry Group and Brad Feld,  he not only answered me in email but immediately posted the question and his answer on Ask The VC. You can follow the link there to see all of it but here’s an excerpt:

“While everyone is a little different, I'm pretty simple.  Optimally, I'd like something to play around with (e.g. a simple web site or software demo / prototype.) ….I have no interest in seeing a business plan or a financial model for an early stage company pre first pitch.”

Good luck.

Raising Money in Tough Times

The best time to SUCCEED in raising money is when money is hard to get - like now, for example. When capital is easy to get, your competitors (who are, of course, much less deserving) will have plenty of capital, too. Dumb spending or pricing by them may “force” you to do the same. In the end, easy capital may not give you any advantage at all and you pay for it with part of your company.

Capital is a coward; the sound of popping bubbles sends it burrowing under the mattress for safety. Your tech startup is not in any way related to the sub-prime housing market or to the imploding debt of leveraged buyouts. Nevertheless, if you go out for money now, you are searching for a spooked commodity. You may just be wasting your time. But, if you get the money, it puts you at a huge advantage to unfunded competitors. BTW, your competitors include everyone else jockeying for attention in the new product and service marketplace whether they compete directly with you or not.

There is a fundamental difference in what scared investors look at compared to greedy, bold investors.

Greedy, bold investors (which is what you have while bubbles inflate) don’t worry much about fundamentals; they are too busy making sure they get seats at the table – any table. That strategy actually works at the beginning of bubbles (and Ponzi schemes); those who get in AND OUT early get rich – they really do: that’s what attracts everyone else. Obviously this happens not only in high tech but also in residential real estate and tulip bulbs: it’s a fundamental part of the economic cycle.

But frightened investors (which is what you have when bubbles pop) are worried not only about the fundamentals of the company but also all the external things you, the entrepreneur, don’t control. What if your market implodes through no fault of yours? What if the time comes to raise your next round and, even though you’ve met and exceeded all your objectives, ALL the money in the world is in hiding? Oh, dear.

So, if you’ve decided to raise money now (or have no choice), you have to address these fears. Here’s a few suggestions:

  1. present a plan of reasonably achievable singles and doubles, not home runs. Remember you’re selling against fear, not to greed.
  2. present a plan which is a believable projection of what you (either as a company or as principals) have already achieved.
  3. instead of the automatic assumption that another round of financing’ll be available at a reasonable price when you need it, have a Plan B which includes going forward with NO additional financing.
  4. consider making Plan B above your Plan A. If the market opens up and the company has done as well as you think it will, you can always change your mind.
  5. show the investors how the addition of their money to your already excellent company will create a virtually unassailable position vs. potential competitors.

There is money out there; it’s just hiding. There are venture funds which have commitments for funds they’d dearly like to put to work. Credit is cheap for the most credit worthy (which doesn’t usually include startups), because credit is unavailable for everyone else and banks have to put their money somewhere. The terms you’ll get now are not as good as the terms you can get when there’s more money than ideas; but the money may be worth much more if you get it.

Good luck.

See a related post by my friend VC Rob Shurtleff on the perils of Bridges to Nowhere - on the perils of funding rounds that are too small to cross a chasm with.

Outside Chair

Longtime friend Rob Shurtleff, now a VC among many other endeavors, has started blogging. I take some of the credit for that which is only fair since he gets all the credit for my having gone to Microsoft a million years ago. Rob has interesting things to say: he recently posted that a board of directors should evaluate the CEO and give her or him feedback after each board meeting.

“…who should deliver the review? In my experience this is best done by the Chairman/women of the board, aka the Chair. In my experience the Chair can provide a key mentoring and organizing role that makes a CEO’s job easier.”

Implicit in Rob’s recommendation is that there IS a Chair of the Board separate from the CEO. Thinking back on having been both CEO and Chairman of my own startups, I think I would have done better with a separate Chair once the companies took in outside money even though I probably would have fiercely resisted the suggestion that I not hold both roles at the time.

A separate Chair makes reviews possible; everyone needs to be reviewed.

By necessity, a CEO provides most of the content of a board meeting; that’s a good reason why he or she should NOT also be moderating the meeting. A good Chair can assure that there’s a good agenda for meetings; that materials are distributed beforehand; and that time is left for important discussions. Moderation of a meeting is best done by someone who is NOT doing most of the talking.

A separate Chair provides an instant (if not long term) successor or replacement for the CEO in case of emergency.

A non-executive Chair can be more effective in getting other Board members to fulfill Board responsibilities and NOT try to manage the company than the CEO can. If the CEO is also Chair, she or he is effectively managing the Board which is oxymoronic although common.

The non-profit boards I’m on now and the Vermont Telecommunications Authority of which Mary is Chair have separate Chairs and CEOs. They function well this way, I think. The tension between CEO and Chairman is largely constructive. Here I think the private sector has something to learn from the public sector.

Obviously doesn’t make sense to have separate CEO and Chair when you’re a one person band and also the janitor, plumber, and receptionist. But the roles should split at the time you expect to have Board with real fiduciary responsibility which is presumably when there’s money in the venture besides your own. At that point you’ll have a better Board and a better company if you’re not the Chair (unless you want to be the Chair and have someone else be the CEO – that can work although founder/Chairs deserve a post of their own).

Rob’s post was in response to a post by Seth Levine on CEO reviews with lots of how-to in it.

VCs Follow Entrepreneurs


Both Brad Feld and Fred Wilson have recent posts on their blogs about the availability of a Google CSE for the Venture Capital Network of blogs.  It’s a good idea.  Not to boast but this capability has been available for My Way, The Entrepreneur’s Network since last November.  To use it you either go to the top of the left sidebar of Fractals of Change (you can do it by clicking the “search blog” link at the bottom of each post if you read the blog with a feedreader or in email) or you go to the custom landing page for My Way.

Of course entrepreneurs have to be over-achievers so we also have a little more functionality in OUR search: not only can you use it to search all the blogs in My Way, you can also choose to use it to search blogs which My Way bloggers think are a good extension to the topics covered in My Way.  Just use the radio buttons to decide which kind of search you want.

Note to blogger nerds: We entrepreneurs believe in groovy stuff like open source. Maybe you want to create an option of searching not just your blog or website but some other relevant collections of websites. If that’s the case, you are welcome to the snippet of HTML  I put in the template for my sidebar to implement this feature. The trick was to use a table of radio buttons where the value associated with each radio button is the ID of a different Google CSE. You’ll want to put the IDs of your own CSEs in, of course.  Also note that this code is slightly TypePad specific but I don’t think you’ll have any problem modifying it for whatever blog platform you use.

Full disclosure:  I have copied innumerable features from Fred’s and Brad’s blogs. That’s why I’m delighted to have been ahead of them in this case (not that entrepreneurs and VCs are competitive, of course).

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