Tripping Points Blog

Tripping over Doomsayers

White Space Strategy — 2009-06-09T09:19:24-07:00

There's been more than enough doom said about venture funding these days. And to be sure, venture funding ain't what it used to be. But, a little deeper look at the numbers shows that the changes are neither quite as dramatic overall, or quite as arbitrary and many have implied.

Multiple articles quoting various aspects of the Q1 Money Tree report in April painted a doom and gloom picture of how Q1 VC investment plummeted. However, some more rational heads took a look at the numbers and came up with a bit less Doomsday-esque interpretation in blogs such as this one - "VC Investment in Internet Deals DId NOT Fall Aff a Cliff" - which points out that "VC Investment in internet Starups is up 100% from the last downturn".

It's all in the headlines. Basic truth be told, in Q1 2009, 34 internet specific seed and early-stage companies got funding to the tune of an aggregate $138 million invested. That's not as good as the 55 deals and $196 million invested in Q4 2008, but it's a far cry from falling off a cliff (at least any of the cliffs I'm familiar with.) In short, there's still money being invested, and yes the bar may be higher, but the money's there and early stage deals got done in what was probably the most dismal quarter of this recessionary experience that we're all sharing.

My point in all this is that many of the entrepreneurs that I've talked to over the last several months have just thrown up their hands and yielded to the headlines. "Nobody's Investing", "VC is off a Cliff" and "Nobody can get money" are all too commonly heard refrains of unfunded companies today. The numbers above tell a different story. The key is to have a compelling, investable proposition and to get it in front of the right VC's in the right way.

A better approach is to ignore the doomsayers, take stock of what's really happening beneath the headlines and not trip over the doom and gloom. Rather, do the homework and make a conscious, strategic decision to either get funded and how, or operate in bootstrap mode and get on with it.

A few tips for funding strategies in today's environment:

Know your funding options and choose them wisely and judiciously, i.e. - Don't use a shotgun, use a rifle and aim at the right VC's or angels.
Aim at the funders who know the market space you're aiming at, who make investements in companies at your stage of development, and who are indeed actively investing
Make your Investment Proposition truly compelling - Don't make the mistake of thinking you're buidling a "VC Pitch" to show off your whizzy new shiny thing -- you're building an investment proposal that you want a VC or angel to buy.
Make your proposal appropriate for the times - this is the day of the lean start-up, be lean and mean from the get-go and show it.

Next blog entry will talk about Investment Proposal structure and how to do it better. See you then.

Arbitration Angst

White Space Strategy — 2009-04-28T08:23:19-07:00

Sorry for the delay in a new post, but I've been a little tied up in a tripping point of my own that points out one of the legal "curbs" that start-ups and start-up employees should avoid tripping over at all costs - Arbitration!

Allbusiness has a very objective entry on arbitration that points out the pros and cons of arbitration in legal disputes, and that the purpose of arbitration was to speed up decisions on contract disputes while minimizing the time and expense of dispute resolution. However, the intent and the reality of arbitration, in my experience have diverged significantly.

Perhaps the most important single element of agreeing to arbitration is that one gives up the right to the recourse built into the legal system, and instead agrees to be bound by the decision of a panel of arbitrators without recourse to the normal appeal process and the right to a trial by jury. Although at first, this may seem to be expedient, the reality is that it can be just as lengthy, as much or more costly, and has far less checks and balances than the legal system. And, just to show where the power lies, enforcement of an arbitration decision is still dependent on the following premise. "An arbitration award can be entered as a judgment [only] after being confirmed by a court of competent jurisdiction."

In short, arbitration as a solution to dispute resolution seems to combine the worst of the court system with the disadvantages of a "private dispute resolution" process that's less rigorous, more convoluted and less built on checks and balances than litigation. Whenever you encounter an arbitration clause in a contract, bear in mind that the purported "ease of resolution" can in fact become a quagmire of "informal discovery", extended process, and no recourse that results in a much less desirable outcome than normal litigation.

Like the decisions about counsel that I mentioned in my previous post, the decision about when to agree to arbitration needs to be weighed against the potential losses to be incurred, and measured not only in dollars and cents, but in the impact of waiving the normal protections of our legal system. My advice - just DON'T do it.

How To Run Your Business on the Cheap - Be Very, Very Smart About Resources

White Space Strategy — 2009-04-24T06:37:26-07:00

How To Run Your Business on the Cheap

Last night I had the opportunity to attend Edith Yeung's SF Entrepreneur MeetUp Group Session on "How to Run Your Business On the Cheap" with some great panelists - Gary Swart of oDesk, Mark Friedler of GameDaily and Hazel Grace Dirksen of Socialbees. The discussion surfaced a plethora of tripping points that cause companies to run out of cash. One of the thorniest, and most easily overlooked tripping points discussed there was that of using only as much of a precious (read "cash consuming") resource as you need to get the job done.

Use the Right Resource for the Right Job
We're all tempted to settle on a general approach to staffing and using outside resources - we hire to get a specific job function done and we contract with an outside firm for that expertise the we don't have in house and can't justify on a full time basis. For new start-ups for example, accounting and legal services jump to top of mind. The panel at last night's presentation, however, brought up a few subtleties that we'd all do well to keep in mind.

(1) Not all resources are created equal - Using a bazooka to hunt squirrels is both overkill and way too expensive - The top-tier Silicon Valley law firm costs double or more than the mid-tier solo practitioner or small firm. And hiring an employee to accomplish a specific project is much more costly than using a freelance contractor with equivalent skills. We need to evaluate carefully to decide which approach is really needed and what armament is appropriate.

(2) Not all problems are created equal - Sometimes you need a bazooka, other times a trap will do. Legal problems that require a high level of expertise - Incorporation, Employment Contracts and legal matters that can cost you a lot of money if done incorrectly deserve the attention (and cost) of your top tier firm. However, routine partnering agreements, simple purchase agreements, even simple NDA's and the like can just as well be handled by a solo practitioner or small firm at a fraction of the cost. Projects with defined time horizons, specific skill requirements and clear outcomes may not require hiring a new employee, but rather fit very nicely into a project for a contractor.

(3) There's a wealth of resources to choose from today - Part time resources from companies like oDEsk, eLance and even LegalZoom can suffice to accomplish a lot of tasks and projects. There are a plethora of part-time resources available today to get specific job functions done, so it's no longer necessary to hire an employee, or use a top tier service provider to accomplish a project that has a clearly defined time horizon and clearly defined result.

The "How to Run Your Business On the Cheap" session surfaced a number of other useful "Tripping Points" which we'll cover in future posts, but choosing and using costly resources is clearly at the top of the list. We all need to evaluate every task and project we undertake in a new start-up and ask "What's the best, risk-minimizing and cash-minizing way to get this done?" to avoid tripping over unnecessary cash drains.

Tripping over Funding Advice

White Space Strategy — 2009-04-22T10:39:47-07:00

There are literally thousands of ways to trip over advice on how to get your start-up funded, but one in particular seems to account for quite a few "NO"s from the VC Community, and that is how to ask for what you need. The popular advice these days seems to be "ask for more than you need because you don't know if raising more will even be possible". In the past there have been other arguments like "ask for less than you need" and "show that you can run lean", or "give away as little equity as possible because equity's dear", or "give away as much equity as it takes, because a little part of a big pie is more valuabe than a big part of a little pie".

Hundreds of discussions with start-up clients, VCs and some of my great mentors and friends indicate that the concept of a "Rolling Exit Strategy" (for which I thank Kyle Mashima) is, if not the best way to present your funding requirements, at the least on of the most understandable and compelling.

The Rolling Exit strategy is a simply elegant concept that advocates "ask for just exactly what you need" to create the next milestone of value in your company. The best way to demonstrate that you understand both how you create value, and that you plan to minimize investor's risk by creating a potentially saleable/monetizable entity at each stage of funding is to tie your funding requirements to clear "value milestones". These value milestones essentially say to the investor, give me $XX dollars and I will create YY monetizable amount of value in my company. For example, $500,000 to get to a demonstable alpha product, $2.0 million to get to market beta with 1000 customers, and so on. Be sure that you're asking for just what you need, no more no less, and that the "Value Milestones" will actually deliver something valuable enough to have the potential for exit and you'll be making a "hard to refuse" investment proposal.

The Strategy Paradox - A Tripping Point for Everyone and the Time to Face It

White Space Strategy — 2009-04-01T11:14:24-07:00

The Strategy Paradox, as defined by Michael Raynor, in his book of the same name, illustrates a major tripping point that we all face over and over again whether we're a start-up or an established enterprise. Raynor's book points out that in order to "win big" we have to make major strategic commitments in the face of an uncertain future. For those with the good fortune to make the "correct" strategic commitments for the future that unfolds, the result is generally stratospheric success, while for those whose strategic commitments do not jive with the future scenario that evolves, the result is abject failure. As Raynor very powerfully points out, the strategic similarities between success and failure are much stronger than those between the former two and companies that just survive. In his words "the opposite of success [then] is not failure, but mediocrity.

In short, those companies that strive to be great by making major strategic commitments must also accept the risk of abject failure. And those companies that are content to merely survive and choose the "safe" path of not making the major strategic commitments required to truly succeed are in effect dooming themselves to average survival at best and mediocrity at the worst.

The examples in Raynor's book - the success of Toyota during the oil crisis of the mid-70's and the failure of Sony's betamax in the early 70's to name just a few - point out both the challenges and the vagaries of managing strategic uncertainty, Neither Sony, nor the US automakers at the time did anything other than what one might expect of strategically driven and committed companies - yet both met with failure as a result of exogenous forces that simply made their strategic bets the wrong ones to have made.

Raynor's prescription for the stategy paradox consists of two key concepts:

Requisite Uncertainty - managing strategic uncertainty with respect to strategic commitment at each appropriate level of the organization.
Strategic Flexibility - anticipating potential scenarios that account for all the relevant uncertainties, formulating optimal strategies for these scenarios, accumulating real options, and exercising or abandoning them as needed to address unfolding realities.

This simple framework applies equally well to both start-ups and enterprises intent on creating real success, and the detail presented behind them in Raynor's book is critical reading for anybody "hell bent on greatness". Entreprenurs and enterprises alike need to read and heed this prescription, and then build the concepts into their business plans, management structures and day-to-day operations.

Now, why am I writing about this particular tripping point at this particular point in time? Because in the face of our current economic crisis the natural tendency is to take the middle of the road, to avoid the major strategic commitments and risks that they entail in favor of the safer route. However, that is not what's going to pull us out of our economic malaise. Only the creation of major new jumps in value delivered, the successes of more iPods and iPhones, and twitters and Googles and Facebooks and Kindles will be sufficient to re-start the economy fast and hard. Our salvation lies in taking the strategic risks required to be great, accepting the potential for equally great failure, and swinging for the fences once again. A generation of mediocre companies who "played it safe" isn't going to help.

Don't Trip Over This Nasty Bit

White Space Strategy — 2009-03-09T00:08:19-07:00

This is a woulda-coulda-shoulda time! At this point in my life I've experienced at least a dozen of them, as have my enlightened entrepreneur and VC friends. The overwhelming majority all vote for the "ask for forgiveness, not permission" doctrine in times like these. Unfortunately all too many didn't pursue it and now in hindsight wish they had.

This is the time to be aggressive, not foolishly, but passionately. This is the time to take the risks of defying the "minimize all risks" advice that is so prevalent in the doomsday scenarios, but rather to minimize the risks that are context to your mission, and passionately accept the risks that are core to what you set out to do. Starting a new company, pursuing a passionate new need to create value, changing the world has never been without risk.... only sometimes without conservative board members.

Get aggressive, take the risks, change the world.... and ask forgiveness later.

Those Nasty Bits

White Space Strategy — 2008-05-29T13:34:00-07:00

Just read a great blog entry from Jon Fox about the early decisions one makes in building code. Those Dreadful Early Decisions is an excellent overview of some serious technology based tripping points that's well worth reading, as he points out what decisions ought to be made quickly and what decisions can haunt you and should be given a little extra time. Similar principles apply to business and strategy decisions and will be the topic of a later blog here.

Tripping Points

White Space Strategy — 2008-05-19T11:54:38-07:00

After years of advising emerging companies, I�ve observed a clear pattern of developmental challenges that track amazingly well with revenue levels. Although we�ve all seen these transition points in a company�s growth, there�s precious little prescriptive advice available for management teams facing the issues that occur as these �tripping points� are reached.

Most companies find themselves challenged at several levels of revenue growth in a number of ways. The most general �tripping points� are at:
� $1 Million
� $5 Million
� $10 Million
� $25 million
� $50 Million
� $100 Million

Each of these �tripping points� represents critical levels of revenue and growth that require review and potential revision in key areas of the company�s operations. Important and often difficult decisions are required in seven key areas:
� Strategy � Is our strategy right for the next phase of growth?
� Style � Are we operating with the right core value discipline for our business going forward, e.g. operational excellence, customer intimacy, product leadership or mastery of discontinuous change?
� Structure � Do we have the right organizational structure and operating units in place for new growth?
� Systems � Do we have the needed systems and infrastructure in place to support current and planned strategy and growth?
� Skills � What skills are needed to execute the next stage of strategy and tactics?
� Staffing � Are staffing levels appropriate and what should be the staffing strategy for new growth?
� Shared Values � Perhaps most importantly, do all of the above decisions and leadership come together to create a strong, coherent set of shared values that can lead the company forward?

For each tripping point, certain areas can generally be expected to be leading issues:

� $5 Million � Refining beginning Strategy, Structure, and Skills
� $10 Million � Evolving strategy, structure, skills and
� $25 million � Beginning infrastructure, style and staffing plans
� $50 Million � Key areas of infrastructure, staffing, skills and systems scalability, Style
� $100 Million � Scalability in all areas, Shared Values, Style

At each �tripping point� alliance strategy comes into play as well, as a part of both strategy and structure. Tripping point priorities influence key BD decisions such as:
� How to acquire skills (acquire or grow within)
� Structure for whole product (build or ally)
� Develop strategy for competitive advantage (technology, alliances, customers or offers)

In future posts, we�ll examine specific tripping points in more detail and discuss prescriptions to avoid TFO � Tripping and Falling Over � a major cause of critical start-up injuries. We�re also assembling a series of case studies for an article and potentially a book on �tripping points� and welcome suggestions for company case studies.

Welcome to the Tripping Points Blog

White Space Strategy — 2008-05-14T07:11:59-07:00

This blog is all about Tripping Points - the common challenges facing all start-ups where many trip and stumble, and some fall as a result of these commonly shared challenges. The blog topics will vary from day to day as we find interesting, topical Tripping Points to write about. We hope you enjoy.