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From BQF Innovation blog
Here is a great little video clip on a favourite theme of mine. We should welcome failure. It is a natural part of the innovation process and not something to be feared or avoided. Many of the people and products that we now applaud as great successes were once seen as failures.
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The current economic crisis marked the end of the Web 2.0 era and the comeback of the “Business Model”. Having a business model is no longer enough: it better be solid if the company wants to survive the current downturn. Even with millions of users, Facebook and YouTube still struggle to monetize their traffic.
So when does a good business model translate to a tangible investment?
As the venture capital pool dries up, I recommend start ups to get the mindset of an investor. Suppose you were a venture capitalist considering an investment in a company that offered:
– a clearly specified product or service (and I can’t stress “Clearly specified” enough)
– with a large potential number of paying customers (paying doesn’t have to be through a direct purchase, but you still have to make money somehow)
– at a price well above what it would cost to produce and had the know-how and means to deliver this product/service at a handsome profit (meaning that you would earn more than you spend while getting customer satisfaction)
Would that be enough to make an investment decision? What else do you need to know?
You would probably need a good business model. One that offers genuine choices of:
1) Who is the target customer? Why was that segment chosen?
2) What is the product? What would the company consider as a conversion? Is it registration or click on an ad? the choices a start up makes in the product development process are critical, and they need to be aligned with the company’s strategy
3) How is the company planning to deliver the product and maximize margins? Would you be interested in a road map? Does the company have a marketing plan? How is money allocated? This step goes even deeper, to the hiring decisions and business development efforts that the start up is planning to take.
Answers to all of these questions should be easily found in the company’s business plan. An investor doing due diligence would probably go one step further. First, make sure you can pass the ‘narrative’ test - meaning that your product choices coincide with the brand and customer, creating consistency across the brand. Then, only after everything else seems to ‘make sense’ you will have to pass the ‘numbers’ test. Investors will look for consistency here as well, and even though cash flow numbers are only projections, they will verify that the financial statements in the business plan add up. External consistency is needed as well, so make sure you’ve got the latest market knowledge. Plan your projected sales numbers conservatively, and base them on research reports from eMarketer, Forrester, PEW, Hitwise, Gartner, etc. Finally, a business model alone is not enough, it must be part of a strategy, that also addresses competition, differentiation and barriers to entry.
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- Eye Opener - Redfin Model Numbers vs. Reality Guy Kawaski posted an insightful post comparing Redfin’s financial valuation…
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Fundraising by U.S. venture capital firms declined 21.4 percent in 2008, a new report has found, driven down by a sharp decline in the fourth quarter as the global financial crisis throttled the industry that bankrolls much of Silicon Valley’s innovation.
The report, issued Monday by the National Venture Capital Association and Thomson Reuters, found that $27.9 billion was raised in 211 funds in 2008, compared with $35.5 billion in 247 funds in 2007. Fundraising in the fourth quarter totaled $3.37 billion, down more than $5 billion from the previous quarter and nearly $8.3 billion less than the amount raised in the fourth quarter of 2007.
The news was by no means unexpected. VCs and their limited partner investors — pension funds, university endowments and other large financial institutions — have all embraced a more conservative strategy in the uncertain economy. Industry analysts expect the pace of fundraising and deal-making to remain relatively slow through at least the first half of 2009.
Monday’s report augments VC investment data released Saturday by Dow Jones VentureSource. Whereas the Thomson Reuters report tallied money going into venture funds, VentureSource tallied money going from funds into deals.
Its report found that VCs had placed $5.5 billion in 554 deals during the fourth quarter, down 30 percent from the $7.9 billion invested in 718 deals during the same period in 2007.
Overall, VentureSource tallied $28.8 billion going into 2,550 deals for U.S. companies for 2008, a decline of 8 percent from the previous year, when $31.4 billion was invested in 2,823 deals.
“Many venture capital firms are circling the wagons to weather the downturn and are focusing more on the health and vitality of current portfolio companies rather than new investments,” Jessica Canning, director of Global Research for Dow Jones VentureSource, said in a press release.
The financial crisis wasn’t the only reason for the decline in fundraising, said National Venture Capital Association President Mark Heesen. Many VC firms, he said, “raised money in the last two years and are focused on deploying those funds.”
“With some notable exceptions, we can expect this slower pace to continue well into 2009,” he added.
One bright spot for VC investments is clean technology. VantagePoint CleanTech Partners, based in San Bruno, raised a fund of $435.3 million in the quarter. That fund was surpassed only by two distinct funds raised by Accel Partners, based in Palo Alto.
Accel Partners announced more than $1 billion in fundraising, with $480 million into its new “growth” fund administered in Palo Alto, and a separate $525 million for the Accel London III fund, focused on investment in Europe and Israel.
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Video of Dan Ariely talking about his research into our “predictably irrational” behavior. The clip is from the EG conference late last year.
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I am currently helping with the Entrepreneurship Academy and then will be on vacation until after Labor Day. There will not be much posting until September 5.
Jack Raiton
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More wisdom from Randy Komisar’s The Monk and the Riddle:
Passion
“So why were they doing this? Why was it worth their time? I am always amazed that venture capitalists don’t ask that question. Perhaps at this point everyone assumes it’s obvious: to get rich.
“Passion and drive are not the same at all. Passion pulls you toward something you cannot resist. Drive pushes you toward something you feel compelled or obligated to do. If you know nothing about yourself, you can’t tell the difference. Once you gain a modicum of self-knowledge, you can express your passion…
“[Passion] is the sense of connection you feel when the work you do expresses who you are. Only passion will get you through the tough times… It’s the romance, not the finance that makes business worth pursuing.”
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by Tom Peters
Tom asks, “If not excellence, what?” What else should you be doing with your time, your life? He agrees with Thomas Watson, Sr., the talented early leader of IBM, that you should make a personal commitment never again to do anything that is not excellent.