Professor Raiton’s Inside Perspectives: Entrepreneurship, Creativity, Innovation

From Lessons Learned blog by Eric Ries

Every company will need to pitch itself from time to time. Usually we think of pitches in the context of raising money, but that is only one of many pitch situations. We pitch to potential partners, vendors, publishers, conferences, employees, and even lawyers. It’s different from selling a product, because it is not part of our regular business practice, is not something that relates to our core competence, and tends not to happen in a repeatable and scalable way. (I’ll exclude those non-lean startups who basically exist for the purpose of raising bigger and bigger sums of money. You’re not one of those are you?)

Most of the times I have seen pitches fail, it is not because they are poorly written, or that the entrepreneur lacks passion. It is because they don’t answer the right question. My favorite example of all time comes from students in an entrepreneurship class. Their idea was to build a next-generation autonomous robot, that could be used by defense and security agencies around the world. The whole pitch was about how valuable robots could be in the future. They even included a slide with The Transformers on it. Now there was nothing wrong with their analysis: anyone who invents a technology as sophisticated as The Transformers is definitely going to make a lot of money. But these students completely failed to address the one and only question on their audience’s mind: can you three guys really build the robots of the future? (Turns out, they were incredibly well-credentialed graduate students who had, in fact, developed some interesting new robotics technology. But you wouldn’t have known that from their pitch.)

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From Get Venture by Mark Davis

 In my post, The J-Curve: The Evolving Value Of A VC Portfolio, I describe the two factors that create the perception that a VC’s portfolio loses value before demonstrating value creation: unsuccessfully companies shutting down quickly and a delay in re-valuing successful companies. However, it appears that the companies poised to fail aren’t shutting down as quickly as they have in the past.

The speed at which they close shop is partially a function of the VC market. When capital is easier to acquire companies can be kept on life support for longer periods of time. However, as the venture capital market continues to cycle in and out, the companies don’t appear to be failing as quickly.

My assumption is that this phenomenon is tied to the declining cost of technology. Technology costs have continued to decline as open source software has become more robust and widely available, and the costs of bandwidth and storage have plummeted. During the boom every startup owned servers. Hosting is now outsourced to companies that realize the benefits of scale and can provide those services at much lower rates. Similarly, writing code was at one point done in 1’s and 0’s, but has now been simplified by languages and platforms that expedite programming.

As tech cost have dropped, startups have been able to maintain lower and more flexible burn rates. When times get tough, startups strip down to their core teams and make the money last much longer.

This behavior ends up impacting the J-curve. If poor performers don’t close their doors relatively quickly, the value of VC portfolios may not decline before the successful portfolio companies have their valuations marked to market through a subsequent investment round. This appears to be flattening out the bottom of the curve, creating more of a hockey stick shape.

Unfortunately, changing the shape of the J-curve probably won’t affect actual returns much (unless a second chance is really all some of the would-be-failures really need). However, it does point to an important operational consideration for VCs; they may sit on the boards of companies that will eventually fail much longer than they used to.

A record level of venture capital is pouring into cleantech despite a global economic downtown and credit crunch that’s hitting more established players in the industry.

U.S. venture capital investment in cleantech climbed to a record $1.6 billion in the third quarter of 2008, a 55-percent jump from the $979.3 million spent during the third quarter of 2007, according to an Ernst & Young report released Thursday.

The firm’s research, based on data from Dow Jones VentureSource, shows seven of the top 10 venture capital deals in the solar industry, which recently hit the governmental jackpot when President Bush approved an eight-year extension of investment tax credits.

Investors pumped $990 million into solar during the quarter, bringing the year’s running total to $1.7 billion with three months of data left to include.

John de Yonge, Ernst & Young’s Americas research director of cleantech and venture capital, said the cleantech industry is seeing a cohort of companies funded a few years ago that are now reaching the capital-intensive commercialization stage.

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Key ideas from the Harvard Business Review article by Daniel Yankelovich and David Meer

The Idea

Fifty-nine percent of recently surveyed companies executed a major market-segmentation initiative in the previous two years. Yet only 14% derived real value from the exercise. What’s wrong with market segmentation?

Segmentation typically focuses on consumer “types” (High-Tech Harry, Joe Six-Pack). This categorization may help advertisers strengthen brand identity by developing messages that speak to different consumer groups. But it doesn’t tell companies which products or services consumers might actually buy, so it can’t help firms decide which new offerings to develop.

To get more from segmentation, Yankelovich and Meer suggest several tactics. For example, tailor your segmentation to a strategic decision. (Do you want to reduce customer defections? Extend a brand?) Define segments based on consumers’ actual purchasing behavior (heaviness of use, brand switching) and their likely behavior. And redefine segments as market conditions change.

Apply such tactics, and you respond promptly to rapidly shifting market realities. You gain insight into how to compete. And you extract maximum value from scarce marketing resources.

The Idea in Practice

To segment markets effectively, apply these tactics:

• Identify a strategic decision that would benefit from information about different customer segments. For instance, a fast-food company is considering developing healthier menu alternatives. A personal-care company wants to extend a soap brand into deodorants.

• Determine which customers drive profits. Understand what makes your best customers so profitable, then identify segments that share at least some of those characteristics.

Example: A luggage company finds that many people who buy its highest-margin carry-on bags are international flyers. It thus identifies international travelers as a promising target segment.

• Analyze actual and potential purchasing behavior. Current behaviors (including heaviness of use, brand switching, and channel selection) can help you predict future behaviors using a statistical technique called conjoint analysis. Through such analysis, you present consumers with combinations of product features and ask them how willing they’d be to purchase the product in question if particular attributes were added or removed, or if the price changed. You then segment based on your findings.

Example: A pet food manufacturer used conjoint analysis to determine which features to include on food packaging (such as a resealable opening and a handle on 25-pound bags). It segmented consumers according to their degree of price sensitivity and desire for convenience. It then redesigned its packaging with added features that would maintain existing customers and attract new ones. And it jettisoned features whose cost would have required charging too high an overall price.

• Segment in ways that make sense to senior management. Resist any urge to flaunt your technical virtuosity by dissecting segments into ever finer slices containing improbable combinations of traits. Instead, define segments in ways that make intuitive sense to senior managers. They’ll be more likely to accept your research and to fund resulting initiatives.

• Revise your segmentation as market conditions change. Unlike personality traits, which usually endure throughout life, consumers’ attitudes, needs, and behavior can change quickly with new market conditions, so be willing to redraw your segments to reflect new realities.

Example: At the dawn of the Web, many companies segmented according to consumers’ degree of online experience. “Early Adopters” felt comfortable exploring the Web on their own; “Newbies” sought extensive support. As newcomers became scarcer, companies segmented using other criteria, such as consumers’ concerns about online security and interest in games or parental control devices.

Guy Kawasaki has long been a popular and respected author, blogger, entrepreneur and venture capitalist. His latest book, “Reality Check,” is chock full of advice for any business person looking to outsmart, out-manage, and out-market the competition.

Speaker: Guy Kawasaki, Author, Blogger & Entrepreneur

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Entrepreneurs and investors in Silicon Valley are still shell-shocked from the dot-com collapse, and the latest economic crisis is bringing back memories of the wave of failed start-ups. This time, they have vowed to act quickly to avoid making the same mistakes again. Soon after it became clear that the economy was entering a prolonged downturn, venture capitalists began warning start-ups to cut back and layoffs followed soon after.

On Wednesday, at a crisis roundtable hosted by VentureBeat on how to manage start-ups during the likely recession, venture capitalists and start-up founders discussed how start-ups can survive and what they learned from the last time around.

Much of the advice was practical. John Doerr, a partner at Kleiner Perkins Caufield & Byers, compiled 11 tips from chief executives of his portfolio companies. The list included being frugal by doing things like putting off software purchases and using Web-based programs like Google Docs instead, moving cash into Treasuries, and over-communicating with investors, employees and customers.

Web companies cost a lot less to run than they did in the late 1990s — $200,000 a month versus $750,000 a month on average, said Ron Conway, an angel investor — but start-ups should make sure their money in the bank will last more than a year. Otherwise, “you should wake up every morning and think you will go out of business if you are not proactive.”

Re-negotiate contracts like leases, advised Mr. Conway, who said he spent a lot of his time during the bust negotiating with the landlords who owned his start-ups’ offices.

Do not hire too many people — no more than five until the company makes money — said Toni Schneider, chief executive of Automattic, which is his sixth start-up. One of his previous companies, Uplister, died in 2002 in part because he had hired 25 people, he said.

If you make that mistake and must lay people off, let them go all at once, so as not to create a “culture of everyone waiting for the ball to drop,” said Jason Calacanis, chief executive of Mahalo.com. That was a lesson he learned when he ran Silicon Alley Reporter magazine, where he did four excruciating rounds of layoffs.

By Alain Sherter, The Latest from VC Ratings

Like their Silicon Valley brethren, China’s venture capitalists are bearish about the prospects for entrepreneurial activity, according to a new survey by the University of San Francisco. For the third quarter, USF’s China Venture Capitalist Confidence Index fell to its lowest reading in the 3.5 years it’s been kept (worth noting that the “index” is more of a casual tracking poll, given that it’s based on an October survey of only 14 VCs on the Mainland and in Hong Kong.)

The main reason Chinese VCs are blue: No exits. “The global economic depression, especially the decline of the capital markets, will influence the exits of local VC investment in the short term,” says Matrix Partners’ David Zhang in a statement.

True that. Of course, such gloom won’t stop major VC players from continuing to invest in China, where cleantech, Internet and software firms are blooming fast. To that end, Intel Capital on Tuesday announced three investments in the country, including a $20 million round for Trony Solar Holdings Co. Ltd., a maker of thin-film solar energy technology

The following is from Ask The VC, where Brad Feld and Jason Mendelson of Foundry Group answer questions related to venture capital investment and startups:

Q: I am part of a tech start-up that’s in a slight conundrum.  In order to place our product in its market, we’ve had to provide it to customers free of charge.  Now, the majority of our revenue model is based on advertisement fee’s and service fee’s collected after the product has already been placed, so normally such a move would not be a problem; however we are finding it hard to raise the money to produce and install our first product. 

To date we’ve raised money from angel investors.  When we approve VCs, we get the same reply, “let’s first see a market reaction, and then we can talk about investment.”  But, without VC money, we can hardly demonstrate a proper market reaction.

Should we concentrate on finding more angels, or should we look harder into the VC option?

A: (Brad) Concentrate on finding more angels.  You are in a classical circular discussion with the VCs you are talking to.  Without knowing the details, my guess is the VCs you are talking to are basically saying no to you, without saying no directly.  You can waste a lot of time continuing to go in circles with them, or you can focus your time and energy on getting enough angel money to get to the next step of your business.

It is equally important that you re-evaluate exactly what you are trying to accomplish with the angel money.  Assuming you believe you’ll ultimately need more capital for your business, at some point you will use up your sources of angel money, or you’ll get to a place where you need a larger capital infusion that angel investors won’t be able to provide.  Given the feedback you are currently getting from VCs, you should rethink the approach you are taking to enter the market to demonstrate the elusive “market reaction” the VCs are looking for.  If you feel like you’ve developed a good relationship with at least one of the VC firms, see if you can enlist them to give you direct feedback on what they’d need to see (other than the generic “market reaction”) to take you more seriously.

From VentureBeat by MG Siegler 

At VentureBeat’s Downturn Roundtable event this morning, Kleiner Perkins’ John Doerr came prepared with a list of the top things that start-up CEOs should do. He surveyed 18 of Kleiner’s companies, and here’s what they suggest [update: Doerr has since added an eleventh point]:

1. Act now. Act with speed. Raise money. Get a loan, secure financing. Focus, cut or sell.
2. Protect the vital core of the business. But use a scalpel not an ax. Be surgical. Protect the vital core of the company. Cut once, deeper than you think.
3. Make sure you have at least 18 months of cash. Or more — on a conservative revenue forecast.
4. Defer facility expansions. Don’t spend money on tech infrastructure, such as new software or computers. Doerr noted that Andy Bechtolsheim’s new startup, Arista uses Google Docs (free web office software).
5. Reevaluate your R&D priorities.
6. Renegotiate any contracts that you can. Everything is negotiable.
7. Remember, everyone in the organization should be selling, from the receptionist to the engineers.
8. Offer people equity instead of cash e.g. in place of bonuses. (You can do this with outside vendors as well).
9. Secure your cash. Treasuries, or treasury backed securities, are more secure than money market funds.
10. For your revenue plan, develop and obsess on leading indicators — e.g. bookings, unique visitors, conversions.
11. Over-communicate with everyone – employees, investors, partners and particularly customers. Don’t sugar coat things, communicate your resolve.

Angel investor Ron Conway added a key twelfth point: Be open-minded to mergers and acquisitions. Always a good tip.

Following in the footsteps of several other VC firms recently, Intel Capital has broadcast some advice on grappling with the crappy economy to its portfolio companies. The message from Arvind Sodhani, president of the world’s largest corporate venture arm: We won’t leave you out in the cold, but we’d also like you to “adapt your strategies and business models to the new economic realities.”

“Many companies have expressed concerns about the availability of funding for follow-on rounds from other VCs in 2009,” Sodhani wrote in a letter sent to Intel Capital portfolio companies Tuesay (the full text is pasted at the bottom of this post). “Intel Capital remains committed to investing in technology innovation globally. We are not wavering.”

Accentuating that point, Intel Corp.’s [INTC] venture arm Tuesday announced three investments in China, including a $20 million round for Trony Solar Holdings Co. Ltd., a maker of thin-film solar energy technology. It also said it would invest in electricity storage system developer NP Holdings Ltd. and Viewhigh, a healthcare software and services provider. No terms were announced for those two deals.

Intel Capital also released its YTD investment numbers. From Jan. 1 through Sept. 27, the VC arm invested in 121 deals worth $429 million. In the third quarter it invested in 41 deals worth $189 million. That compares to 44 deals and $157 million in the second quarter.

Intel Capital said that last year it invested $639 million in 166 companies.  If it keeps up its current pace this year,  it will just miss that level of dollars and dealflow, but just by a little — unless of course this quarter forces Intel Capital to waver, despite Sodhani’s assurances. - Olaf de Senerpont Domis

See Oct. 28 press release on new China investments from Intel Capital
See Oct. 10 post on Sequoia’s advice to portfolio companies from Tech Confidential

Sodhani’s Oct. 27 letter:

To: Intel Capital Portfolio Company CEOs

As the events over the past few months have played out, the global economy has been in turmoil. We are likely to see a recession in many parts of the world and a slowdown in emerging countries in 2009. The market is likely to remain unstable, with limited visibility to the depth and duration of the downturn. The environment has become extremely capital constrained and the investment community will be largely unwilling or unable to take risks in 2009. Funding will become difficult if not nonexistent; many of you remember that after the dot.com bubble burst in 2000, a number of VCs stopped investing. Recently, many companies have expressed concerns about the availability of funding for follow-on rounds from other VCs in 2009.

We invested in your company because you demonstrated a compelling value proposition that should be attractive to customers even during a downturn. History does repeat itself and we learned from history that great technologies and products will win in an economic downturn. Innovation does not stop during slowdowns. Nor should you! Innovation attracts customers. New technologies are the drivers of change that help lead economies back to prosperity. Business and consumers seek value and innovation and will prioritize their spending for compelling products and solutions.

Intel Capital remains committed to investing in technology innovation globally. We are not wavering.

Intel Capital is also here to help you refine your strategies and build your customer base. One of the unique benefits of Intel Capital is the opportunity to participate in events such as Intel Capital Technology Days and the annual Intel Capital CEO Summit to introduce your company to marquee customers globally. These events are designed to present your products and services directly to key decision makers from Global 2000 enterprises.

I strongly encourage you to work with Intel Capital investment directors to adapt your strategies and business models to the new economic realities and offer innovative technologies and cost competitive value-added products and services to outperform your competition.

Best regards,

Arvind Sodhani
President, Intel Capital
Executive Vice President, Intel Corporation