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

Sun Microsystem co-founder and chairman shares his life and business lessons

By VatorNews

Back in the 80’s, Scott McNealy and Vinod Khosla founded a company called The Data Dump, which Scott told me was a “huge disaster.” But as one idea failed, another took off. That other was Sun Microsystems. Together with Vinod, Andy Bechtolsheim, and Bil Joy, the foursome raised about $200,000 to start Sun Microsystems. Scott served as CEO from 1984 to 2006, and brought Sun public in 1986.

In this “Lessons learned” segment, Scott advises entrepreneurs to “hang out with really smart, innovative, super bright, off-the-charts people and stay at the party as late as they do and become their best friends.” Apparently, it worked for Scott, who spent late nights with Vinod at many parties.

Besides hanging with the right crowd, Scott also advises entrepreneurs to “break the rules of business.”

Look for ideas that are “off the beaten path of conventional wisdom,” and not “intuitively obvious.” 

The more people it’s not obvious to, he said, the better chance you have. 

At the same time, Scott says don’t “cut corners on legal and moral issues.” 

“Break the rules of business,” he said. “but not the rules of the land.” 

Additionally, Scott said not to worry too much about raising capital. “Bill Joy says there’s never been a successful well-funded startup. If you’re well-funded, you’ll do it the old way.  If you don’t have a lot of money, you’ll find a new and efficient way… Don’t look too hard for too much money - it’ll force you to do things the wrong way.”

Finally, Scott suggests that entrepreneurs wait to get married. Scott got married at 39 years old. He also talks about why your decision about a spouse is far more important than any business decision you’ll ever make.

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From Innovation Economy by noreply@blogger.com (Scott Kirsner)

We had a great dinner gathering last night at Henrietta’s Table… the discussion was titled “Secrets of the Serial Entrepreneurs,” and it was a sort of warm-up to the annual Future Forward conference later this fall.

I asked each of the entrepreneurs to share the best piece of advice they’d ever gotten.

Sonia Khademi of Proxilliant Systems said, “Cash flow positive equals happiness.” When you’re cash flow positive, or even cash flow neutral, you don’t get pressured into doing bad deals.

Don Bulens, most recently CEO of EqualLogic, said, “Don’t love something that doesn’t love you back.” A lot of times salespeople, engineers, or CEOs get too enamored of a deal or a technology or a strategy that just isn’t working out — but they have a hard time letting go.

Hilmi Ozguc, most recently CEO of Maven Networks, said, “Pigs get fat; hogs get slaughtered.” What he meant was that a lot of times when start-ups are negotiating to be acquired, they hold out for irrational terms — and the deal winds up fizzling. Ozguc sold his latest start-up to Yahoo in January for $160 million cash. Just under $30 million went in. And the acquisition didn’t require him to stick around for a year…in fact, he mentioned that he left Maven two weeks ago.

Cheng Wu, currently chairman of Azuki Systems, said, “A company is bought — not sold.”

(You can tell that we wound up talking a lot about M&A… Bulens mentioned that his company was getting ready to go public when they got a $1.4 billion all-cash offer from Dell last year. I asked him if there was much debate about what to do, and he said there was. They looked at the market cap of a competitor, Riverbed, that had recently gone public and was doing well. But ultimately the cash in hand was too alluring. Inevitably, that led to some discussions about why New England start-ups seem to sell rather than remaining independent. VCs and entrepreneurs got about equal blame from the folks I spoke with over dinner…)

Vinit Nijhawan offered up a nifty metaphor from the peanut gallery… finding the right business model for a start-up, he said, is like “hunting around for the radio station before you turn up the volume.” You don’t want to accelerate spending until you know that the business model works.

One nice story that Jay Batson shared…. at last year’s pre-Future Forward dinner, people were griping (as usual) about how risk-averse VCs are. But Batson met an investor there from Sigma who ended up funding his company.

Invites for the 2008 Future Forward gathering, coming up on Nov. 19th, just went out by mail. If you’re not already on the list, you can request one here. (As an FYI: the audience consists entirely of entrepreneurs, CIOs, CTOs, and investors.)

This video focuses exclusively on early-stage startup advice for aspiring entrepreneurs. Thomas Stocking and David Dennis at GroundWork Open Source walk through the process of starting a company, step-by-step, covering everything from selecting a winning product idea to negotiating VC funding.

David and Thomas start by highlighting the importance of initially brainstorming numerous ideas, and being ruthless with the selection process. They also emphasize that founders should vet these ideas with experts in the field, and they provide advice on how to find people who will provide objective feedback (this may include calling up VCs, analysts, media contacts…even executives of competing companies!) They mention the challenges of covering initial startup expenses, and discuss strategies for successfully closing your first round of venture capital funding, which involve being prepared with a compelling presentation and answers to tough questions.

Thomas and David also communicate that incredible persistence is required to make a startup company succeed, but at the same time, founders must be willing to continually reassess and refocus their business plan…it’s crucial not to become too attached to one idea! The interview concludes with their advice on the skill set required to succeed as a founder or CEO of a startup, and how to direct your career such that you acquire and develop those skills. If you’re thinking about starting a company, then this is the episode for you!

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People are going to be more conservative,” says venture capitalist Fred Wilson in a video interview with Tech Confidential about the impact of the crisis in the capital markets on the technology industry.

“Everyone’s going to think harder about writing a check for anything,” says Wilson, whose Union Square Ventures backs microblogging firm Twitter Inc. and other Web 2.0 startups. “There are times when people want to take risks and times when people don’t want to take risks. Clearly, no one’s going to want to take risks right now.”

For entrepreneurs, that means it will be harder to raise money. But not impossible. “Good ideas are still going to get funded,” says Wilson, who squeezed in a quick chat with us at  Web 2.0 Expo between giving a presentation and watching one by Maria Thomas, new CEO of his portfolio company Etsy Inc.

One major reason Internet companies are less vulnerable today than a decade ago: They cost less than one tenth to operate than they did then.

“Most companies back then had million-dollar-a-month burn rates,” Wilson says. “Today, Union Square’s portfolio companies are spending $50,000 to $70,000 a month, or $600,000 to $700,000 for the whole year. In this environment, that’s a much healthier place to be.”

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By Tim Keane, Angel Investor, Golden Angels Network 

Here are nine simple thoughts about entrepreneurial ventures that apply to most startups.  (Things like cash flow strategy, of course, apply more or less depending on the nature and type of company.)

1.    Use your business model to build an early warning system

A business model reveals how the business plans to make money.  It incorporates all of the assumptions you are making about your business.  You can easily check frequently to make sure the timing and amount of your assumptions are accurate.  Those assumptions include:
a.    How much you will spend to make your product and whether this is a big investment or a vended activity;
b.    How much margin you will make on each sale;
c.    What price you will charge relative to others in the market;
d.    What your operating expenses are;
e.    Your operating income.
f.    The timing of all of these activities – how long to make; how fast to get orders; the customer repeat rate, and so forth.
g.    A break-even calculation that tells you how many units you must sell to have neutral (or break-even) cash flow.

From this data you can chart the amount and timing of cash requirements. This is the central financial management skill in both startups and growing ventures.

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And, why ideas aren’t worth much, but teams are worth tons 

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From SmallFuel Marketing blog 

 From Altgate blog

Someone asked a question about this on TheFunded and here’s (my expanded) response.  First, let me say that the reason VCs come across as entirely pessimistic is because most companies that come in to pitch in reality don’t measure up to their claims.  Their objections are an imperfect process for testing the claims.  It’s tough on both sides.  So anyway, here is my list of the top 10 VC objections and some tips on how to overcome them:

10. We think your market is too small (or will take forever to mature). Dealing with this feedback from a VC has mostly to do with understanding the constraints of venture capital.  You can either broaden what you consider your target market, explain why you see the market as bigger than they do or go talk to a VC with a smaller fund.
9. You are too early stage. This could be real feedback or it could be a platitude.  VCs usually develop a comfort zone with a particular stage of company, but all but the most adventurous shy away from companies where the product is not yet in the market.  Most VCs like to see some revenue and depending upon the industry they maybe want to see close to $1MM in revenue for early stage deals.  Respond to this one is tough, because you are where you are.  Best thing to do if confronted with this is find out where their comfort zone is and potentially come back when you reach that (I’ve actually seen that result in funding).
8. The valuation is too high. This usually means the VC thinks your company is okay and they might consider investing if you were giving it away at a couple million pre. It also can be used as a platitude. Sometimes it’s a reference to companies that have raised a lot of money and have to do a flat or down round because they’re running behind plan/expectations.
7. You are too late stage. This is really a variant of #8.  Any early stage VC would love to own 20% of your late-stage business.  This typically happens in Series B rounds or Series A rounds where the CEO/founders have an existing track record of success.
6. Google/Microsoft/Yahoo/AOL is already (or about to or could) do this. This is a push back on competitive landscape and your relative positioning.  The key to thwarting this objection is to have more market knowledge than the VC you’re talking to (which is an uphill battle given the information flow they get).  You have to do your homework.
5. We think your projections are unrealistic (or alternatively: you have no business model).  If you haven’t spent enough time preparing your financial model, you can get caught flat-footed.  Best thing to do on a financial model is to be very conservative.  You want the VC commenting, “Oh, I think you’ll get customers faster than that.”  There are also a lot of comparables out there so no need to reinvent the wheel.
4. We’d like to see more market traction before moving forward. This is typically a blow-off or a legitimate variant of #9.  A close cousin of this one is when the VC says, “we’re interested, but we need to know who else is interested to know if we’re really interested.”  If you get that response, you’re wasting your time…just get up a leave.
3. Company is a “feature” or “product” but not a business. This is really a variant of #10.  Best thing to do is to try and step back and take a broader view of the opportunity and what it could be.  �
2. You have to ask yourself…what about India and China? I’ve only gotten this objection once.  It’s a dumb question so it’s hard to give advice on how to respond.  Maybe just make a reference to snoman.
1. B- or C-level team. Actually, Most VCs won’t tell you this and instead you get one of the other platitudes.  That makes it one of the hardest objections to respond to.  I think the best way to overcome this is not to say that you have an A-level team (if in fact you don’t) but rather to say something along the lines of, “here’s our staffing plan for success…”

Overall, the best policy is honesty and candor. In fact, your best bet is to address these objections before they come up. And if, for example, a VC asks if the market may be too small you can respond, “you are probably right, but here’s what would have to be true if that were not the case…”  You want to turn it away from a “in-order-for-me-to-be-right-you-have-to-be-wrong” conversation.

From The Startup Lawyer by Ryan Roberts

When should a founder be replaced as CEO of a venture-backed company? The topic is obviously a touchy one for a startup founder that brought early success to a company.

But while a founder might have been successful leading the startup to a funding event, can the founder also lead the startup to a liquidity event?

Startup company founder and CEO are two completely different roles. And although founders can handle both roles, that seems to be the exception rather than the rule. Startup founders tend to be young and thus lack true CEO experience necessary to bring the company to a liquidity event.

So when is the right time to fire a startup company founder-CEO and transition to a more polished CEO?

Fred Wilson, a venture capitalist and principal of Union Square Ventures, recently gave the following advice on his “A VC” blog concerning the optimal timing of the startup founder-CEO transition:

I’ve learned that nothing can replace the entrepreneur’s passion and vision for the product and the company. If you rip that out of the company too early, you’ll lose your investment. I think it’s best to wait until the initial product has succeeded in obtaining a critical mass of users and a business model has been developed that works and make sense for the business and is scaling. Then, if its warranted, you can sit down and have the conversation about bringing in experienced management.

(Read Fred Wilson’s “The Human Piece Of The Venture Equation” here.)

I also believe gaining traction with the startup’s user base and model should occur before replacing the founder CEO. If you replace the founder CEO before that happens, you probably removed the founder before the startup company fully-utilized the founder’s enthusiasm.

Of course, a founder’s incarceration would warrant removal earlier than the startup’s enjoyment of a scalable model. But that’s a topic for another post.